-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CLN3y7EiydsvCbKmu2QuwilbFO1imx/op2CmCg27FCXWWPKDYXI4WOj+yTZMkbma tgvOyXNAWFpI9bxFIGKEjA== 0000912057-00-025395.txt : 20000518 0000912057-00-025395.hdr.sgml : 20000518 ACCESSION NUMBER: 0000912057-00-025395 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 20000517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRANSGENOMIC INC CENTRAL INDEX KEY: 0001043961 STANDARD INDUSTRIAL CLASSIFICATION: LABORATORY ANALYTICAL INSTRUMENTS [3826] IRS NUMBER: 911789357 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-32174 FILM NUMBER: 639057 BUSINESS ADDRESS: STREET 1: 5600 SOUTH 42ND ST CITY: OMAHA STATE: NE ZIP: 68107 BUSINESS PHONE: 4027385480 MAIL ADDRESS: STREET 1: 5600 42ND ST CITY: OMAHA STATE: NE ZIP: 68107 S-1/A 1 FORM S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 17, 2000 REGISTRATION NO. 333-32174 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------ TRANSGENOMIC, INC. (Exact name of Registrant as specified in its charter) DELAWARE 3826 91-1789357 (State of incorporation) (Primary standard (I.R.S. employer industrial identification no.) classification code number)
5600 SOUTH 42ND STREET OMAHA, NEBRASKA 68107 (402) 738-5480 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) COLLIN J. D'SILVA Chairman and Chief Executive Officer 5600 South 42nd Street Omaha, Nebraska 68107 (402) 738-5480 (Name, address, including zip code, and telephone number, including area code, of agent for service) Please address a copy of all communications to: STEVEN P. AMEN, ESQ. ROBERT B. WILLIAMS, ESQ. Kutak Rock LLP Milbank, Tweed, Hadley & McCloy LLP 1650 Farnam Street One Chase Manhattan Plaza Omaha, Nebraska 68102 New York, New York 10005 (402) 346-6000 (212) 530-5000
-------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable on or after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ X ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ] CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE Common Stock, par value $0.01 share......... 9,110,888(1) $14.00(2) $127,552,432(2) $33,674(3) Warrants for purchase of Common Stock(4).... 152,450
- ------------------------------ (1) Includes 600,000 shares of Common Stock that the Underwriters have the option to purchase solely to cover over-allotments, if any, and 4,510,888 shares of Common Stock to be sold by selling stockholders. Also shall cover any additional shares of Common Stock which may become issuable with respect to the securities registered hereunder by reason of any stock dividend, stock spilt, recapitalization or other similar transaction effected without the Registrant's receipt of consideration, which results in an increase in the number of the Registrant's outstanding shares of Common Stock. (2) Estimated solely for the purpose of calculating the registration fee. (3) Of which, $17,002 has previously been paid. (4) Warrants for the purchase of shares of Common Stock included in the 4,510,888 shares being registered hereby for sale by selling shareholders. ------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EXPLANATORY NOTE This Registration Statement covers the registration of 4,600,000 shares of Common Stock, $0.01 par value per share, of Transgenomic, Inc. ("Transgenomic") to be issued to the public (the "Offering Registration"). This Registration Statement also covers the registration of up to an additional 4,510,888 shares of Common Stock of Transgenomic that may be sold by selling stockholders to the public from time to time (the "Shelf Registration"), subject to lock-up agreements between our underwriters and the selling stockholders, where applicable. The prospectus relating to the Offering Registration (the "Offering Prospectus") immediately follows this explanatory note. Following the Offering Prospectus are certain pages relating solely to the Shelf Registration. These pages, together with the remainder of the Offering Prospectus modified as indicated below, are referred to as the "Shelf Prospectus." The Shelf Prospectus differs from the Offering Prospectus in the following manners: - different cover page and table of contents; - the information in the prospectus summary under the heading "The Offering" is replaced by information under a new heading entitled "Shares to be Sold by Selling Stockholders;" - the information under the headings entitled "Use of Proceeds" and "Dilution" is deleted; - additional information under a heading entitled "Selling Stockholders" has been added under the section heading entitled "Principal Stockholders;" and - the information under the heading entitled "Underwriting" is deleted and is replaced by information under a new heading entitled "Plan of Distribution." All other sections of the Offering Prospectus will be used in the Shelf Prospectus. Each of the alternate or additional pages for the Shelf Prospectus included herein has been labeled "Alternate Page for Shelf Prospectus." If required, each of the prospectuses in the forms in which they are used after the registration statement becomes effective will be filed with the Securities and Exchange Commission pursuant to Rule 424(b) of the General Rules and Regulations under the Securities Act of 1933, as amended. SUBJECT TO COMPLETION, DATED MAY 17, 2000 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BECOMES EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS 4,000,000 SHARES [LOGO] COMMON STOCK This is an initial public offering of common stock by Transgenomic, Inc. We are selling 4,000,000 shares of common stock. The estimated initial public offering price is between $12.00 and $14.00 per share. -------------- Prior to this offering, there has been no public market for our common stock. We have applied for listing of our common stock on the Nasdaq National Market under the symbol TBIO. --------------
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 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 , 2000 The 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 is performed at lower temperatures. Mutant DNA is separated at intermediate temperatures where DNA is partially denatured or melted. Single strand DNA and RNA are separated at higher temperatures. DETECTION AND ANALYSIS DNA fragments flow from the DNASep Column directly into a detection and measurement device. The type and amount of DNA material is identified using two different detection measurements. UV detection is used for most applications. Fluorescence detection is used when measurement of very small amounts of DNA is desired. COLLECTION If desired, highly purified DNA can be collected by our fragment collector. Purified DNA can be used for cloning, sequencing or in any process where purified fragments of DNA are needed. Cloning, for example, is much more efficient if a highly purified fragment is used in the cloning process. TABLE OF CONTENTS
PAGE -------- Prospectus Summary.......................................... 1 Risk Factors................................................ 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........ 57 Underwriting................................................ 61 Legal Matters............................................... 63 Experts..................................................... 63 Where You Can Find More Information......................... 64 Index to Financial Statements............................... F-1
THIS PROSPECTUS CONTAINS REFERENCES TO OUR REGISTERED TRADEMARKS WAVE-REGISTERED TRADEMARK- AND DNASEP-REGISTERED TRADEMARK-. WAVEMAKER-TM-, WAVE OPTIMIZED-TM- AND THE TRANSGENOMIC NAME AND THE TRANSGENOMIC LOGO ARE OUR TRADEMARKS FOR WHICH REGISTRATION APPLICATIONS HAVE BEEN FILED WITH THE UNITED STATES PATENT AND TRADEMARK OFFICE. ALL OTHER TRADEMARKS OR TRADE NAMES REFERRED TO IN THIS PROSPECTUS ARE THE PROPERTY OF THEIR RESPECTIVE OWNERS. PROSPECTUS SUMMARY THE SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL THE INFORMATION YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS" AND OUR CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL STATEMENTS AND THE NOTES TO THOSE FINANCIAL STATEMENTS BEGINNING ON PAGE F-1, BEFORE MAKING AN INVESTMENT DECISION. TRANSGENOMIC OUR BUSINESS We provide innovative research tools to the genomics segment of the life sciences industry. These tools enable researchers to discover and understand variation in the human genetic code, or genome, in order to accelerate and improve drug development and diagnostics. We believe our WAVE System, which incorporates our proprietary DNASep separation column and associated software, 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, with a high degree of accuracy and consistency. The WAVE System is based on our proprietary micro-bead technology. Our patented micro-beads are packed into our proprietary DNASep separation column, which is the key component of our WAVE System. Each micro-bead has specific surface chemistry that interacts with DNA molecules. The DNA molecules are then selectively separated from the micro-beads with a mixture of our liquid reagents. This process is automated by our proprietary WAVEMaker Software for analysis and interpretation. CUSTOMERS As of March 31, 2000, we have sold over 250 WAVE Systems in 20 countries to core laboratory facilities, academic research centers, medical institutions and biopharmaceutical companies. Our customers include Harvard University, Stanford University, Baylor University, University of Chicago, Fred Hutchison Cancer Research Facility, Mayo Clinic, National Cancer Institute, National Institutes of Health, Institut Curie, University of Cambridge, Wellcome Trust-Oxford University, Institut Gustave Roussy, SmithKline Beecham, Bristol-Meyers Squibb, Millennium Pharmaceuticals, Merck & Company, Novartis and Eli Lilly and Company. 1 OUR STRATEGY We intend to be the leading provider of technology platforms which enable life sciences researchers to discover and understand variations in the human genome, in order to accelerate and improve drug development and diagnostics. Key elements of this strategy include: - FOCUS ON THE GENETIC VARIATION DISCOVERY MARKET; - ESTABLISH THE WAVE SYSTEM AS THE INDUSTRY STANDARD; - INCREASE CONSUMABLE SALES; - PENETRATE NEW MARKETS; 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. We have recently entered into an agreement to sell the assets related to our non-life sciences instrument product line and expect this sale to close prior to the closing of this offering. 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 you should rely only on the information contained in this prospectus in deciding whether to invest in our common stock. 2 THE OFFERING Common stock offered........................................ 4,000,000 shares Common stock to be outstanding after this offering.......... 20,053,200 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 March 31, 2000 plus 2,728,200 shares available for issuance upon the assumed conversion as of that date 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 300,000 shares that will be issued at $5.00 per share upon the exercise of warrants that will expire at the closing of this offering. The number of shares to be outstanding after this offering does not include the following: - 152,450 shares issuable upon exercise of outstanding warrants with an exercise price of $5.00 per share; - 6,000,000 shares that we could issue under our employee stock option plan. As of the date of this prospectus, we have issued options to purchase 3,707,050 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 2,292,950 additional shares of our common stock under this plan; - 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; and - 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. ---------------------------- UNLESS OTHERWISE INDICATED, INFORMATION IN THIS PROSPECTUS: - ASSUMES THAT THE UNDERWRITERS DO NOT EXERCISE THEIR OVERALLOTMENT OPTION; AND - ASSUMES THE INITIAL PUBLIC OFFERING PRICE OF OUR COMMON STOCK WILL BE $13.00 PER SHARE. 3 SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA The summary consolidated historical financial data for our 1997, 1998 and 1999 fiscal years 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: Working capital........................................... $ 1,845 $ 3,494 $ 2,643 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. 4 SUMMARY 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 (Transgenomic as adjusted) and the issuance of 300,000 shares of common stock at $5.00 per share upon the exercise of warrants that will expire at the closing of this offering, as if each had occurred on January 1, 1999, and the assumed conversion at $5.00 per share of our outstanding convertible notes and accrued interest into 2,728,200 shares of common stock (the number of shares issuable assuming conversion at March 31, 2000) as if the conversion had occurred on March 23, 1999, the date the convertible notes were issued. The summary unaudited pro forma balance sheet data reflects these transactions as if each 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. 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 ADJUSTMENTS SCIENCES FOR TRANSGENOMIC INSTRUMENT TRANSGENOMIC CONVERTIBLE (HISTORICAL) PRODUCT LINE AS ADJUSTED NOTES PRO FORMA ------------ --------------- ------------ ----------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net sales................... $ 6,944 $2,171 $ 4,773 -- $ 4,773 Gross profit................ 3,113 738 2,375 -- 2,375 Operating expenses.......... 6,142 1,408 4,734 -- 4,734 Loss from operations........ (3,029) (670) (2,359) -- (2,359) Other expense............... (469) -- (469) 326 (143) Loss before income taxes.... (3,498) (670) (2,828) 326 (2,502) Net loss.................... $(3,498) $ (670) $(2,828) $326 $(2,502) ======= ====== ======= ==== ======= Basic and diluted loss per share..................... $ (0.27) $ (0.22) $ (0.16) ======= ======= ======= Basic and diluted weighted average shares outstanding............... 13,008 13,008 16,036 ======= ======= =======
5
YEAR ENDED DECEMBER 31, 1999 ----------------------------------------------------------------------- ADJUSTMENTS FOR SALE OF NON-LIFE ADJUSTMENTS SCIENCES FOR TRANSGENOMIC INSTRUMENT TRANSGENOMIC CONVERTIBLE (HISTORICAL) PRODUCT LINE AS ADJUSTED NOTES PRO FORMA ------------ --------------- ------------ ----------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net sales................... $23,035 $8,794 $ 14,241 -- $14,241 Gross profit................ 10,945 3,869 7,076 -- 7,076 Operating expenses.......... 17,829 3,576 14,253 -- 14,253 (Loss) income from operations................ (6,884) 293 (7,177) -- (7,177) Other expense............... (1,198) -- (1,198) 1,009 (189) (Loss) income before income taxes..................... (8,082) 293 (8,375) 1,009 (7,366) Net (loss) income........... $(9,827) $ 293 $(10,120) $1,009 $(9,111) ======= ====== ======== ====== ======= Basic and diluted loss per share..................... $ (0.76) $ (0.78) $ (0.59) ======= ======== ======= Basic and diluted weighted average shares outstanding............... 13,000 13,000 15,334 ======= ======== =======
AS OF MARCH 31, 2000 ---------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital............................................. $ 2,643 $ 5,072 $51,932 Total assets................................................ 18,830 21,078 67,938 Long-term debt, less current portion........................ 12,781 35 35 Stockholders' equity (deficit).............................. (4,615) 10,381 57,241
6 RISK FACTORS YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS AND ALL OTHER INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE PURCHASING OUR COMMON STOCK. INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. ANY OF THE FOLLOWING RISKS COULD HARM OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND COULD RESULT IN A COMPLETE LOSS OF YOUR INVESTMENT. RISKS RELATED TO OUR BUSINESS OUR LIMITED OPERATING HISTORY AS A COMPANY FOCUSED ON LIFE SCIENCES TECHNOLOGIES AND APPLICATIONS SUBJECTS US TO RISKS INHERENT IN THE DEVELOPMENT OF A NEW BUSINESS ENTERPRISE AND TO THE RISK THAT WE MAY NOT ACHIEVE PROFITABILITY. We have a limited operating history as a company focused on life sciences technologies and applications and are at a relatively early stage of development in this business. Our future financial performance will depend on the growth in demand for automated DNA separation and analysis enabling technologies. The genomics market is new and emerging, is rapidly evolving, is characterized by an increasing number of market entrants, and will be subject to frequent and continuing changes in standards, customers' preferences and technology. As a result, our business is subject to all of the risks inherent in the development of a new business enterprise, such as the need: - to develop a market for our products; - to obtain enough capital to support the expenses of developing and commercializing our products; and - to attract and retain qualified management, sales, technical and scientific staffs. We expect that it will be a number of years, if ever, before we will achieve profitability from the sale of our products. Our future operating results will depend on a number of factors, including the market acceptance of our products, the introduction of new products by our competitors, our ability to adapt our technology to the commercial needs of our customers and to developments in the genomics industry, and the timing and extent of our research and development efforts. Our limited operating history in the life sciences industry makes accurate prediction of future operations difficult. If our operating results fail to meet the expectations of securities analysts or investors, our stock price could decline. WE HAVE A HISTORY OF OPERATING LOSSES AND EXPECT TO INCUR LOSSES IN THE FUTURE. We experienced losses from operations of $3.0 million during the three months ended March 31, 2000, $6.9 million in fiscal 1999, $2.0 million in fiscal 1998 and $3.2 million in fiscal 1997. These losses were mostly due to research and development expenses and sales and marketing expenses related to the development and marketing of our WAVE System. As of March 31, 2000, we had an accumulated deficit of $15.8 million. In order to continue to enhance our WAVE System and related products, develop new products, increase the pace of installations and expand our marketing, sales and customer support service staffs, we expect to incur significant increases in our expenses over the next several years. As a result, we could continue to incur losses for the forseeable future and may never be profitable. OUR TECHNOLOGY AND PRODUCTS ARE RELATIVELY NEW AND MAY NOT GAIN MARKET ACCEPTANCE AMONG GENOMICS RESEARCHERS. Our WAVE System and other automated DNA separation and analysis products are relatively new products. Market acceptance of our products is dependent upon factors, some of which are not in our control, such as continued growth in the genomics industry, the availability and price of competing products and technologies, the success of our sales efforts, and the acceptance of our product by the 7 academic and research community, such as biologists, geneticists and biochemists, who are more familiar with the existing, traditional methods of DNA separation and analysis. Our products must compete against well-established techniques, such as gel and capillary electrophoresis and sequencing-based technologies. We cannot be certain that our products will replace or compete successfully against existing products or that our products will achieve market acceptance. If our products do not achieve market acceptance, we may not 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 enhancements to its capacity and software in order for it to be adapted to commercial applications such as diagnostic research and drug development. The adaptation of the current WAVE System for these commercial applications will require additional research and development work that may be expensive and time-consuming. We cannot assure you that we will be able to make the necessary improvements to the WAVE System for use in commercial applications. If we are unable to complete the further development of the WAVE System we may not be able 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 markets for our products, which could limit our future revenues. WE HAVE A LIMITED SALES FORCE AND LIMITED EXPERIENCE WITH DIRECT MARKETING OF OUR PRODUCTS WHICH COULD LIMIT OUR ABILITY TO EFFECTIVELY PENETRATE NEW MARKETS. Our direct sales force may not be sufficiently large or knowledgeable to successfully penetrate the market. We may not be able to expand our direct sales force to meet our commercial objectives. In addition, our sales force may not be able to address complex scientific and technical issues raised by our customers. Our customer support personnel may also lack the broad range of technical expertise required to adequately service and support our products in the field. THE SALE OF OUR PRODUCTS INVOLVES A LENGTHY SALES CYCLE WHICH MAKES OUR REVENUES DIFFICULT TO FORECAST. Our ability to obtain customers for our WAVE System and related accessories depends in large part on the perception that our products can help accelerate basic genomics research, diagnostic testing and related applications such as drug discovery and development efforts. 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, the sales cycle is often three to six months long due to the need to educate potential customers as to the benefits and use of our WAVE System. We also need to effectively communicate the benefits of our WAVE System to a variety of constituencies within potential customer groups, including research and development personnel and key management. We may expend substantial funds and sales effort with no assurance that a sale will result. Due to the lengthy sales cycle required, our revenues could be difficult to forecast. 8 OUR BUSINESS MAY EXPERIENCE LONG COLLECTION PERIODS WHICH COULD HAVE A NEGATIVE IMPACT ON OUR LIQUIDITY. We have experienced in the past, and may experience in the future, collection periods of up to a year or more in connection with sales of our WAVE System. Some customers delay payment due to the large capital outlay associated with a purchase of the WAVE System. Other clients in the academic and research fields are accustomed to longer payment periods than commercial buyers. In general, our overseas customers pay less promptly than is customary in the United States. In addition, because we are in the early stages of commercialization of the WAVE System, we sometimes agree to provide extended payment terms in order to make a sale. Longer collection periods may have a negative impact on our liquidity. As of March 31, 2000, our accounts receivable equalled $5.1 million. 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 acceptance of our products and technologies; - the level of our sales and marketing expenses; - expenditures in connection with alliances and license agreements and in acquiring new businesses and technologies; - costs incurred in enforcing and defending our patent claims and other intellectual property rights; and - the cost of financing the purchase of additional capital equipment and development tools. We may need to raise the additional capital in the future through bank financings or strategic investments. Additional financing may not be available to us when we need it, or, if available, we cannot assure that we will be able to obtain such financing on terms favorable to us or our stockholders. If we raise additional capital by issuing equity securities, the issuance of such securities would result in ownership dilution to our stockholders. OUR WAVE SYSTEM INCLUDES HARDWARE COMPONENTS AND INSTRUMENTS MANUFACTURED BY A SINGLE SUPPLIER AND IF WE WERE NO LONGER ABLE TO OBTAIN THESE COMPONENTS AND INSTRUMENTS OUR ABILITY TO MANUFACTURE OUR PRODUCTS COULD BE IMPAIRED. We currently rely on a single supplier, Hitachi Instruments, Inc., to provide the basic instrument used in our WAVE System. While other suppliers of instrumentation and computer hardware are available, we believe that our arrangement with Hitachi offers strategic advantages. If we were required to seek alternative sources of supply, it could be time consuming or expensive or require significant and costly modification of our WAVE System. Also, if we were unable to obtain instruments from Hitachi in sufficient quantities or in a timely manner, our ability to manufacture our products could be impaired, which could limit our future revenues. 9 OUR CHROMATOGRAPHIC COLUMNS, A CORE COMPONENT OF THE WAVE SYSTEM, ARE MANUFACTURED AT A SINGLE FACILITY WHICH IS LOCATED IN AN EARTHQUAKE-PRONE AREA. All of our proprietary DNASep columns are manufactured at our manufacturing facility in San Jose, California, which is located in an earthquake-prone area. In the event our manufacturing facility or equipment was affected by man-made or natural disasters, we would be unable to manufacture our products for sale or meet customer demand or sales projections. If our manufacturing operations were curtailed or ceased 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 marketing resources and more experience in research and development and commercialization than we have. Moreover, some of our competitors have greater name recognition than we do and provide more conventional technologies and products with which some of our customers and potential customers may have more familiarity or experience. In order to effectively compete against alternative technologies we will need to demonstrate the superior performance, speed, capabilities and cost effectiveness of our WAVE System. The genomics industry is characterized by extensive research efforts and rapid technological progress. To remain competitive, we will be required to continue to expand and enhance the functionality of our DNA separation and analysis equipment and to offer comprehensive DNA analysis, and complimentary applications and solutions, with greater ease of use. This will include the need to increase the WAVE System's capacity and to develop new instrumentation, software and application kits to allow the system to provide a broader range of DNA and RNA separation and analysis applications. New products may require additional development work, enhancement, testing, or further refinement before they can be made commercially available and, therefore, we could experience significant delays in the development and manufacture of our products. Even after new products are made commercially available, unforeseen technical difficulties could arise, requiring additional expenditures by us to correct such difficulties and possibly resulting in further delays. We cannot be certain that new products will be successfully developed at all. If our products have performance, reliability or quality shortcomings, then we may experience reduced orders, higher development costs, delays in collecting accounts receivable and additional warranty and service expenses, and our reputation as a reliable provider of quality products could be harmed. In addition, new developments are expected to continue in DNA analysis, and we cannot assure you that our WAVE System will not be made obsolete by more effective or less expensive technologies. Because of rapid technological change, we may be required to expend greater amounts in the development of new products, which in turn will require greater revenues to recoup such expenditures. We cannot assure you that we will be able to make the necessary enhancements to our technology or products to compete successfully with new technologies that may emerge. WE ARE IN THE PROCESS OF SELLING THE ASSETS RELATED TO OUR NON-LIFE SCIENCES INSTRUMENT PRODUCT LINE WHICH HAVE HISTORICALLY GENERATED MOST OF OUR REVENUES AND EARNINGS. In addition to our DNA separation and analysis products, we have produced and sold various non-life sciences products. Until 1999, most of our revenues and profits came from these non-life sciences products. We have recently decided to focus our resources on our new automated DNA separation and analysis products and technologies and have entered into an agreement to sell the assets related to our non-life sciences product line. Upon completion of the sale, we will no longer generate revenues from the sale of these products. The future growth of our company will be entirely dependent on the sale of our WAVE System and associated DNA separation products and technologies. You should keep this fact in 10 mind when reviewing our financial statements. Because of the change in our product offerings, our historic financial statements will not necessarily indicate our future financial performance. WE MAY EXPERIENCE DIFFICULTY IN COLLECTING ACCOUNTS RECEIVABLE FROM CUSTOMERS OF OUR NON-LIFE SCIENCES INSTRUMENT PRODUCT LINE AFTER ITS SALE. We have entered into an agreement to sell assets related to our non-life sciences instrument product line prior to the completion of this offering. The agreement for the sale of these assets provides that we will retain accounts receivable equaling approximately $1.8 million that arose from sales of these products prior to March 31, 2000. After the sale, 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. Our business and competitive position are dependent upon our ability to protect our proprietary technology. While we currently hold a number of domestic and foreign patents and licenses, the issuance of a patent is not conclusive as to its validity or enforceability, nor does it provide the patent holder with freedom to operate without infringing the patent rights of others. Our patents or licenses could be challenged by litigation and, if the outcome of such litigation were adverse to us, our competitors could be free to use our technology. As a result, the invalidation of key patents owned by or licensed to us or non-approval of pending patent applications could increase competition 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. Patent law relating to the scope of claims in the technology fields in which we operate is still evolving. The degree of future protection for our proprietary rights is uncertain. Furthermore, we cannot be certain that others will not independently develop similar or alternative products or technology, duplicate any of our products, or, if patents are issued to us, design around the patented products developed by us. In addition, we could incur substantial costs in litigation if we are required to defend ourselves in patent suits brought by third parties or if we initiate such suits. WE CANNOT BE CERTAIN THAT OTHER MEASURES TAKEN TO PROTECT OUR INTELLECTUAL PROPERTY WILL BE EFFECTIVE. We rely upon trade secret protection, copyright and trademark laws, non-disclosure agreements and other contractual provisions for some of our confidential and proprietary information that is not subject matter for which patent protection is being sought. Such measures, however, may not provide adequate protection for our trade secrets or other proprietary information. If they do not protect our rights, third parties could use our technology and our ability to compete in the market would be reduced. While we 11 require employees, academic collaborators and consultants to enter into confidentiality and/or intellectual property assignments where appropriate, any of the following could still occur: - proprietary information could be disclosed or others may gain access to such information; - others may independently develop substantially equivalent proprietary information and techniques; - we may not have adequate remedies for any breach; or - we may not be able to meaningfully protect our trade secrets. WE ARE DEPENDENT UPON OUR LICENSED TECHNOLOGIES AND MAY NEED TO OBTAIN ADDITIONAL LICENSES IN THE FUTURE TO OFFER OUR PRODUCTS AND REMAIN COMPETITIVE. We have acquired or licensed key components of our technologies from third parties. If these agreements were to terminate prematurely or if we breach the terms of any licenses or otherwise fail to maintain our rights to such technology, we may lose the right to manufacture or sell 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. We have sold approximately 50% of our WAVE Systems to customers located outside the U.S. The patent and other intellectual property laws of some foreign countries may not protect our intellectual property rights to the same extent as U.S. laws. We may need to bring proceedings to defend our patent rights or to determine the validity of our competitors' foreign patents. These proceedings could result in substantial cost and diversion of our efforts. Finally, some of our patent protection in the U.S. is not available to us in foreign countries due to the laws of those countries. OUR PRODUCTS COULD INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS WHICH COULD REQUIRE US TO PAY SUBSTANTIAL ROYALTIES. There are a significant number of U.S. and foreign patents and patent applications submitted for technologies in, or related to, our area of business. As a result, any application or exploitation of our technology could infringe patents or proprietary rights of others and any licenses that we might need as a result of such infringement might not be available to us on commercially reasonable terms, if at all. This may lead others to assert patent infringement or other intellectual property claims against us. We may have to pay substantial damages, including treble damages, for past infringement if it is ultimately determined that our products infringe on another party's intellectual property rights. We could also be prohibited from selling our products before we obtain a license, which, if available at all, may require us to pay substantial royalties. Even if a claim is without merit, defending a lawsuit takes significant time, may be expensive and may divert management attention from other business concerns. Any public announcements related to litigation or interference proceedings initiated or threatened against us could cause our stock price to decline. WE DEPEND ON ATTRACTING AND RETAINING KEY EMPLOYEES. We are highly dependent on the principal members of our management staff and research and development group, including Collin J. D'Silva, our Chief Executive Officer and a co-founder, 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 12 individuals 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 assurance that we will 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 growth may place a strain on our management and operations. Our ability to manage our growth will depend on the ability of our officers and key employees to continue to implement and improve our operational, management information and financial control systems and to expand, train and manage our work force both in the U.S. and abroad. We may be required to open non-U.S. offices in addition to our current U.K., Japan and satellite European offices, which could result in additional burdens on our systems and resources. Our inability to manage our growth effectively could affect our ability 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. Our research and development and manufacturing activities involve the controlled use of hazardous materials and chemicals, including acetonitrile. We are subject to federal, state and local 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 cannot assure you that accidental contamination or injury will not occur. Any such accident could damage our research and manufacturing facilities and operations, resulting in delays and increased costs. RISKS RELATED TO THIS OFFERING WE ARE CONTROLLED BY A SMALL GROUP OF OUR EXISTING STOCKHOLDERS, WHOSE INTERESTS MAY DIFFER FROM OTHER STOCKHOLDERS. Our directors, executive officers and principal stockholders and their affiliates beneficially own approximately 79% of the outstanding equity securities, and after the offering will beneficially own approximately 64% of our outstanding equity securities. Accordingly, they collectively will have a significant influence in determining the outcome of any corporate transaction or other matter submitted to the stockholders for approval, including mergers, acquisitions, consolidations and the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control. The interests of these stockholders may differ from the interests of the other stockholders. PROVISIONS IN OUR CHARTER MAY INHIBIT A TAKEOVER, WHICH COULD LIMIT THE PRICE INVESTORS MIGHT BE WILLING TO PAY IN THE FUTURE FOR OUR COMMON STOCK. Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change in control or changes in our management that stockholders consider favorable or beneficial. If a 13 change of control or change in management is delayed or prevented, the market price of our common stock 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 common stock. An active public market for our common stock may not develop or be sustained after this offering. We and the underwriters, through negotiations, will determine the initial public offering price. The initial public offering price is not necessarily indicative of the market price at which the common stock will trade after this offering. 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 sales of substantial amounts of our common stock in the public market after the closing of this offering or the perception that substantial 14 sales could occur. These sales also might make it difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. After this offering, we will have outstanding 20,053,200 shares of common stock, assuming conversion of our convertible notes and accrued interest on such notes and the exercise of warrants to acquire 300,000 shares of common stock that will expire at the closing of this offering. This includes the 4,000,000 shares of common stock that we are selling in this offering and which may be resold in the public market immediately. A total of 14,071,200 shares will be subject to lock-up agreements and will become available for sale 180 days after this offering. The remaining shares will become available for sale at various times following the date of this offering. The purchaser of our non-life sciences assets will finance the purchase price for these assets through the issuance of a $2.0 million promissory note and a borrowing of 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 1,200,000 shares of our common stock has been pledged by the sole stockholder of the purchaser in order to secure 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. 15 USE 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 $4.5 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 POLICY We have never declared or paid any cash dividends on our capital stock and we do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently expect to retain all earnings, if any, for investment in our business. In addition, the terms of our current credit facilities prohibit us from paying cash dividends without our lenders' consent. Dividends on our common stock will be paid only if and when declared by our board of directors. The board's ability to declare a dividend is subject to limits imposed by Delaware corporate law. In determining whether to declare dividends, the board may consider our financial condition, results of operations, working capital requirements, future prospects and other relevant factors. 16 CAPITALIZATION 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, the assumed conversion at $5.00 per share of $12.0 million aggregate principal amount of our convertible notes plus accrued interest into 2,728,200 shares of common stock and the issuance of 300,000 shares of common stock at $5.00 per share upon the exercise of warrants that will expire at the closing of this offering as if each had happened as of March 31, 2000; and - on a pro forma as adjusted basis reflecting the sale of the common stock offered by us at an assumed initial public offering price of $13.00 per share after deducting the underwriting discounts and commissions and estimated offering expenses. You should read this table together with the consolidated financial statements and the related notes and our unaudited pro forma financial information and the related notes appearing at the end of this prospectus and the information under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Use of Proceeds."
AS OF MARCH 31, 2000 ------------------------------------- PRO FORMA ACTUAL PRO FORMA(1) AS ADJUSTED -------- ------------ ----------- (IN THOUSANDS) Long-term obligations, less current portion................. $ 35 $ 35 $ 35 Convertible notes payable................................... 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; 16,053,200 shares issued and outstanding pro forma; and 20,053,200 shares issued and outstanding pro forma as adjusted(2).................. 130 161 201 Additional paid-in capital.................................. 11,724 25,940 72,760 Other capital items......................................... (627) (627) (627) Accumulated deficit......................................... (15,842) (15,094) (15,094) -------- -------- -------- Total stockholders' equity (deficit)...................... (4,615) 10,380 57,240 -------- -------- -------- Total capitalization...................................... $ 8,167 $ 10,415 $ 57,275 ======== ======== ========
- ------------------------ (1) We have the right to cause the 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 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. 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. 17 (2) On April 25, 2000, we amended our certificate of incorporation to increase the 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 the date of this prospectus, we have issued options to purchase 3,707,050 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 2,292,950 additional shares of our common stock under this plan; - 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; and - 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. 18 DILUTION 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, the assumed conversion at $5.00 per share of our convertible notes and accrued interest into 2,728,200 shares of common stock, and the assumed issuance of 300,000 shares of common stock at $5.00 per share upon the exercise of warrants that will expire prior to the closing of this offering was approximately $8.3 million, or approximately $0.52 per share. We have calculated this amount by: - subtracting our pro forma total liabilities from our pro forma total tangible assets; and - then dividing the difference by the total pro forma number of shares of common stock outstanding. If we give effect to our receipt of the net proceeds from our sale of 4,000,000 shares of common stock at an assumed public offering price of $13.00 per share, after deducting estimated underwriting discounts and estimated offering expenses, our pro forma as adjusted net tangible book value at March 31, 2000 would have been approximately $55.1 million, or $2.75 per share. This represents an immediate increase in pro forma net tangible book value of $2.23 per share to existing stockholders and an immediate dilution of $10.25 per share to new investors. The following table illustrates this dilution on a per share basis: Assumed initial public offering price per share............. $13.00 Actual net tangible book value per share as of March 31, 2000, before this offering and pro forma adjustments.... $(0.66) Increase per share attributable to the sale of assets related to our non-life sciences instrument product line(1)................................................. 0.20 Increase per share attributable to the assumed conversion of convertible notes and accrued interest, and exercise of warrants............................................. 0.98 ------ Pro forma net tangible book value per share as of March 31, 2000................................................ 0.52 Pro forma as adjusted increase in net tangible book value attributable to this offering........................... 2.23 ------ Pro forma as adjusted net tangible book value per share after this offering....................................... 2.75 ------ Dilution per share to new investors......................... $10.25 ======
- ------------------------ (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, on a pro forma as adjusted basis, as of March 31, 2000, the total number of shares of common stock purchased from us, the total consideration paid and the average price per share paid by existing stockholders and to be paid by the new investors in this offering at an assumed initial public offering price of $13.00 per share, before deducting estimated underwriting discounts and offering expenses.
SHARES PURCHASED TOTAL CONSIDERATION --------------------------- ---------------------- AVERAGE PRICE PRO FORMA NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------------- -------- ----------- -------- ------------- Existing stockholders............... 16,053,200 80.1% $24,663,822 32.2% $1.54 New investors....................... 4,000,000 19.9 52,000,000 67.8 13.00 ---------- ----- ----------- ----- Total........................... 20,053,200 100.0% $76,663,822 100.0% ========== ===== =========== =====
If the underwriters exercise their over-allotment option in full: - the number of shares of common stock held by existing stockholders will decrease to approximately 77.7% of the total number of shares of our common stock outstanding; and 19 - the number of shares held by new investors will increase to 4,600,000 shares, or approximately 22.3% of the total number of our common stock outstanding. 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 $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." 20 SELECTED FINANCIAL DATA The statement of operations data for the years ended December 31, 1997, 1998 and 1999 and the balance sheet data as of December 31, 1998 and 1999 are derived from our historical consolidated financial statements and notes thereto included elsewhere in this prospectus, which have been audited by Deloitte & Touche LLP, independent auditors. The statement of operations data for the years ended December 31, 1995 and 1996 and the balance sheet data as of December 31, 1995, 1996 and 1997 are derived from our audited historical consolidated financial statements which are not included in this prospectus. The statement of operations data for the three months ended March 31, 1999 and 2000 and the balance sheet data as of March 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 read in conjunction with our consolidated financial statements and the related notes thereto appearing elsewhere in this prospectus and the information under "Management's Discussion and Analysis of Financial Condition and Results of Operations."
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: Working capital (deficit)............... $1,272 $ 324 $(1,669) $ 1,845 $ 3,494 $ 2,643 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 prior to July 1, 1997 is that of our predecessor corporation, CETAC Holding Company, Inc. and its subsidiaries. (2) See Note A of notes to our consolidated financial statements for an explanation of the determination of the number of shares used in computing per share data. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS. OVERVIEW Before July 1, 1997, we manufactured and sold instruments and other products used in the non-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 purpose of developing, 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 have recently entered into an agreement to sell the assets related to our non-life sciences instrument products. Financial information for periods ending before July 1, 1997 is that of CETAC 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 a percentage of 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 SOLD Q3 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 46
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 incurred in research and development, marketing and sales, and from general and administrative costs associated with our operations. We expect to continue to incur substantial research and development, marketing and sales, and general and administrative costs. 22 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. This increase in cost of goods sold as a percent of net sales is due to an increase in material costs. 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 of our staff 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 with operating a 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. Research and development expenses 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 personnel costs of 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 costs in the year in which they are incurred. The increase in these expenses is attributable to an increase in our staff. Research and development personnel increased 20%, from 49 in 1999 to 59 in 2000. Compensation, benefits, hiring expenses and other direct personnel costs, plus costs of contracted services, accounted for 50% of the total increase. The remaining increase is attributable to the costs associated with the expanded activities of the staff. We expect research and development spending to increase significantly over the next several years as we expand our development efforts. 23 OTHER EXPENSES. Other expenses, which consist of net interest expense, increased from $93,000 in 1999 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. The income tax benefit in 1999 was $635,000, while in 2000 no income tax benefit was provided due to our cumulative losses in recent years, expected losses in future years and an inability 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. As of December 31, 1999 and March 31, 2000, we had deferred tax assets of approximately $180,000. The net deferred tax asset at March 31, 2000 has been offset by a valuation allowance of $5.8 million due to our cumulative losses in recent years, expected losses in future years and inability to utilize any additional losses as carrybacks. YEARS ENDED DECEMBER 31, 1999 AND 1998 NET SALES. Net sales increased 22%, from $18.9 million for the year ended 1998 to $23.0 million for the year ended 1999. Sales from our life sciences products increased 91%, from $7.4 million in 1998 to $14.2 in 1999. Total revenues from sales of WAVE Systems increased 107%, from $5.4 million in 1998 to $11.2 million in 1999. 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 consumables and began including sales of these products in our revenues. These sales, along with an increase of $662,000 in sales 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. Cost of goods sold increased from $9.6 million in 1998 to $12.1 million in 1999 due to increased sales. Cost of goods sold as a percentage of sales remained relatively constant from 1998 to 1999, increasing from 51% in 1998 to 52% in 1999. GENERAL AND ADMINISTRATIVE EXPENSES. 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 anticipate general and administrative expenses to continue to increase over the next several years to support our growing business activities and costs 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 accounted for 42% of the total increase. The remaining increase is attributable to higher indirect personnel 24 expenses associated with marketing and sales activities. We expect these expenses to continue to increase over the next several years as we expand our marketing and sales efforts. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased 99%, from $3.2 million in 1998 to $6.3 million in 1999. These expenses represented 17% of net sales in 1998, versus 27% of net sales in 1999. Research and development expenses 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 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 are incurred. The increase in these expenses was attributable to an 84% increase in research and development personnel, from 31 in 1998 to 57 in 1999. Compensation, benefits, hiring expenses and other direct personnel costs accounted for 62% of the total increase. The remaining increase is attributable to the costs associated with the expanded activities of the research and development staff. We expect research and development spending to increase significantly over the next several years as we expand our research and product development efforts. OTHER EXPENSES. Other expenses, which consisted mainly of net interest expense, increased 125%, from $532,000 in 1998 to $1.2 million in 1999. This increase was related to interest expense on our placement of $12.0 million of convertible notes in March 1999. INCOME TAXES. The income tax benefit in 1998 was $930,000, while in 1999 income tax expense was $1.7 million. A valuation reserve of $4.5 million was recorded in 1999 due to our cumulative losses in recent years, expected losses in future years and an inability 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 a valuation reserve against deferred tax assets. To the extent we begin to generate income in future years and determine that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized. As of December 31, 1999, we had federal net operating loss carryforwards of approximately $11.6 million. We also had federal research and development tax credit carryforwards of approximately $131,000. The net operating loss and credit carryforwards will expire at various dates from 2012 through 2019, if not utilized. We also had state income tax loss carryforwards of $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 million and $4.7 million, respectively. The net deferred tax asset at December 31, 1999 has been offset by a valuation allowance of $4.5 million due to our cumulative losses in recent years, expected losses in future years and an inability to utilize any additional losses as carrybacks. The net deferred tax assets were $2.0 million and $180,000 as of December 31, 1998 and 1999, respectively. Deferred tax assets relate primarily to net operating loss carryforwards. YEARS ENDED DECEMBER 31, 1998 AND 1997 NET SALES. Net sales increased 64%, from $11.6 million in 1997 to $18.9 million in 1998. Of the $7.3 million increase, $5.1 million was due to increased sales of our WAVE System and related consumable products. 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 that sales of WAVE Systems accounted for a greater percentage of our total sales in 1998 than they did in 25 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 million of mezzanine 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 financed our operations 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. 26 On May 16, 2000 we signed an asset purchase agreement with a company controlled by Stephen F. Dwyer, a director and a principal stockholder of ours, under which we have agreed to sell the assets related to our non-life sciences instrument product line for a total purchase price of $6,000,000. The purchase price is subject to adjustment for changes in the value of inventories and accrued vacation from December 31, 1999 and for expenses paid by us after March 31, 2000 that relate to this group of products. A total of $4,000,000 will be paid in cash at the closing and $2,000,000 will be 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 sale of these assets was approved by our stockholders at our annual meeting on March 30, 2000 and is expected to close prior to the completion of this offering, subject to customary closing conditions. The purchaser intends to finance 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 1,200,000 shares of our common stock owned by Mr. Dwyer will be pledged to us as security for the notes and will be held in an escrow account. 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. See "Shares Eligible for Future Sale." The asset purchase agreement also provides that we will retain all accounts receivable outstanding as of March 31, 2000 relating to this product line. Our accounts receivable from the product line were approximately $1.8 million at March 31, 2000. After the sale, we may experience difficulty in collecting 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. Our operating activities resulted in net outflows of $2.6 million in 1997, $3.4 million in 1998 and $8.7 million in 1999 and $2.5 million for the three months ended March 31, 1999, respectively. The operating cash outflows for these periods resulted from significant investments in research and development, and sales and marketing, which resulted in operating losses. Net cash provided from operating activities was $93,000, for the three months ended March 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 due to the need to educate potential customers prior to the purchase of the WAVE System and to communicate the benefits of our products to a variety of constituencies within potential customer groups. We may need to expend substantial funds and sales effort with no assurance that a sale will result. The need to penetrate new markets may entail extension of our terms of sale. As a result, we may experience collection periods of up to a year or more in connection with sales of our WAVE System. Net cash used in investing activities was $470,000 for the year ended December 31, 1997, compared to net cash used in investing activities of $1.5 million in 1998 and $3.5 million in 1999. These year-to-year increases were due to increased purchases of property and equipment and the purchase of technology rights related to our non-life sciences product lines. Purchases of computer, production and research and development equipment accounted for 96% of property and equipment additions in 1998 and 74% of additions in 1999. During the year ended 1999, we acquired technology rights from an affiliated company to intellectual property which is used in our non-life sciences product line. This technology was purchased for net cash of $888,000. Net cash used in investing activities decreased from $596,000 for the three months ended March 31, 1999 to $412,000 for the three months ended March 31, 2000. The decrease was due to our purchase of Kramel Biotech International, Limited for $187,000 during the first quarter of 1999. 27 Net cash provided by financing 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 to the issuance of convertible notes which netted $11.4 million and net other borrowings of $760,000. The increase in 1998 was due to the sale of common 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 proceeds from the sale of stock. We also increased 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 due to the 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 interest based on the prime 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. Based on First National Bank of Omaha's historical willingness to do so, we expect the term of the facility to be extended for at least one year. Substantially all of our assets and life insurance policies for our executive officers are pledged as collateral to secure borrowings under this facility. The loan agreement relating to this facility contains a number of restrictive covenants, including a prohibition on the payment of dividends, the repurchase of our stock, and the redemption of stock options and warrants, among other things, without the written agreement of the lender. As of December 31, 1999, 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. Our capital expenditures budget for 2000 is approximately $5.0 million. Capital expenditures for the current year are expected to relate to facility and equipment improvements related to our life sciences business. Our capital requirements depend on a number of factors, including the level of our research and development activities, market acceptance of our products, the resources we devote to developing and supporting our products, and other factors. 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 INFLATION We do not believe that price inflation had a material adverse effect on our financial condition or results of operations during the periods presented. 28 RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS AND FOR HEDGING ACTIVITIES" (SFAS No. 133). This statement, which is effective for fiscal years beginning after June 15, 2000, requires the recognition of all derivative financial instruments as either assets or liabilities in the statement of financial position and measurement of those instruments at fair value. Management is in the process of determining the effect, if any, SFAS No. 133 will have on our financial statements. In 1999, we adopted Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1) which, on a prospective basis, revised the accounting for software development costs. SOP 98-1 requires capitalization of certain costs related to internal use software once certain criteria have been met. The adoption of this statement did not have a material impact on our financial statements. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we invest in may have market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the principal amount of our investment will probably decline. To minimize this risk in the future, we intend to maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities. The average duration of all of our investments in 1999 was less than one year. Due to the short term nature of these investments, we believe we have no material exposure to interest rate risk arising from our investments. Therefore, no quantitative tabular disclosure is presented. FOREIGN CURRENCY RATE FLUCTUATIONS Approximately 50% of our net sales have been to customers in the United States. While we do sell products in many foreign countries, most of these sales are made in U.S. dollars. Therefore, we do not have a material exposure to foreign currency rate fluctuations. 29 BUSINESS OVERVIEW We provide innovative tools for DNA separation and analysis to researchers seeking to discover and understand variations in the human genetic code and the relationship of these variations to disease. Prior to the formation of Transgenomic, Inc., we conducted our business operations through an Iowa corporation known as CETAC Holding Company, Inc. and its various subsidiaries. CETAC Holding Company, Inc. designed, manufactured and sold several different types of non-life sciences instruments that prepare samples of material so that they may be more easily analyzed by, and efficiently introduced into testing apparatus. We also manufactured and sold chromatography products 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 formed to develop, 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 used in 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 RESEARCH The human 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 used in the cell as the template for the production of proteins, and it is these proteins that direct cell function that are ultimately reflected in the individual traits of the person. Each gene is 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. 30 IMPORTANCE OF THE DISCOVERY OF GENETIC VARIATION There are a variety of mutations known to occur in DNA sequences. The most common form of genetic mutation involves a change in a single nucleotide 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 the discovery of mutation and other genetic variations. As these methods have been modified for use in SNP and other mutation analysis, several limitations have become clear. Current 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, 31 from a very large array of candidate DNA sequences. The chip primarily identifies sequences which are known prior to analysis. - MASS SPECTROMETRY. Mass spectrometry is a technique that applies a charge to the sample and introduces the ionized sample into a chamber that measures the mass per charge of each type of molecule. The mass of the sample and various fragments produced 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 suited to the analysis of sequence mutations. The limitations of current methods include the following: - GEL ELECTROPHORESIS. Gel electrophoresis is a time-consuming, labor intensive process. Sample introduction, pouring of gels, separation, identification of bands, and recovery of DNA must all 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 difficult to control 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 32 samples 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 understand variations in the human genetic code, or genome, in order to accelerate and improve drug development and diagnostics. Key elements of our strategy are as follows: - FOCUS ON THE GENETIC VARIATION DISCOVERY MARKET. Our current focus is to promote the use of our WAVE System by researchers involved in the discovery and analysis of genetic variation. 33 The investment in genomics research is large and growing, and the corresponding need to analyze genetic variations has led to increased demand for new technologies such as the WAVE System. We believe the WAVE System significantly increases research productivity and may accelerate drug development and diagnostics. - ESTABLISH THE WAVE SYSTEM AS THE INDUSTRY STANDARD. We are focusing our initial marketing efforts on large well-known academic and commercial research institutions to establish the WAVE System as the industry standard for mutation analysis. We believe we are the first to bring high performance DNASep micro-bead technology to the market and have sold instruments to key genomics researchers to gain validation of our technology, which has resulted in the publication of over 60 articles in numerous scientific journals discussing the WAVE System. A key component of our strategy is to maintain a worldwide sales organization that provides technical support on a local level. We plan to increase the number of our sales teams composed of sales personnel, application scientists and technical support persons. In addition, because we believe that a major factor in ensuring the success of our products is to provide qualified technical support on a local level, we expect to increase the number of technical support representatives and application scientists. - INCREASE CONSUMABLE SALES. We expect that our expanding base of installed WAVE Systems will result in recurring sales of our associated consumable products which include our proprietary columns and reagents. Sales of our consumable products over the next five years should increase as a proportion of our net sales. In order to support the expected increase in consumable sales, we have dedicated manufacturing facilities in California, Nebraska and the U.K. - PENETRATE NEW MARKETS. 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. 34 OUR 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] 35 The 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. The following diagram presents a sample screen taken from our WAVEMaker Software. 37 [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 principal consumable products used with the WAVE System are the DNASep columns and the chemical reagents that are used to carry the DNA samples though the WAVE System. Other consumables include filters and other replacement parts of the WAVE System. The DNASep columns are essentially small metal tubes which are packed with microscopic polymer beads, each of which is approximately two microns in diameter. A micron is one millionth of a meter. The surface of these micro-beads has a special chemical makeup that causes DNA molecules to adhere 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 columns in order to cause DNA molecules to release their chemical bonds to the micro-beads under the correct conditions. Although most of these reagents are similar to those that can be obtained from various suppliers, we have developed formulas for these 38 reagents that have been specially developed to be used in the WAVE 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 the U.S., the U.K. and most countries in Western Europe with a direct sales staff of 18 persons. For the rest of the world, we also sell our products to dealers and distributors located in local markets. We also maintain regionally-based technical support staffs and applications scientists to support our sales and marketing activities throughout the U.S., Europe and Japan. See Note O, "Sales and Product Information," to our consolidated financial statements for 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 geneticists in academic and commercial research institutions. 39 CUSTOMERS As of March 31, 2000, we have sold over 250 WAVE Systems to customers in 20 countries. Our customers include numerous core laboratory facilities and a number of other leading academic and medical institutions in the U.S. and abroad, including Harvard University, Stanford University, Baylor University, University of Chicago, Fred Hutchison Cancer Research Facility, Mayo Clinic, National Cancer Institute, National Institutes of Health, Institut Curie, University of Cambridge, Welcome Trust-Oxford University and Institut Gustave Roussy. Customers also include a number of large, established U.S. and foreign pharmaceutical and biotech companies including SmithKline Beecham, Bristol-Meyers Squibb, Millennium Pharmaceuticals, Merck & Company, Novartis and Eli Lilly and Company. No single customer accounted for more than 3% of our sales in 1999. MANUFACTURING We manufacture all of our consumable products including our proprietary DNASep separation columns and liquid reagents. We also incorporate our own modifications into the basic liquid chromatography instrument that we use in our WAVE System. Our manufacturing facilities are located in San Jose, California, Omaha, Nebraska, and Crewe, England. We obtain the basic liquid chromatography instrument for our WAVE System from Hitachi Instruments, Inc. This relationship allows us to use Hitachi's significant manufacturing capability to meet potential future increases in demand for the WAVE System without investing in expanding our own manufacturing capacity. Although our relationship with Hitachi has existed since 1997, we have recently entered into a new supply agreement with Hitachi under which they will cooperate with us in the co-development of a modified instrument for use in our WAVE System. Under the agreement, we have the exclusive right to market any co-developed products for DNA analysis and purification using our DNASep technologies. In addition, the agreement will provide for fixed pricing of the liquid chromatography instruments for our WAVE System. Our agreement with Hitachi has no fixed term and we have retained the right to work with other vendors for liquid chromatography instruments. Under the agreement, there will be no transfer of intellectual property rights without a specific agreement to do so. LEGAL PROCEEDINGS We are not a party, nor are any of our assets or properties subject, to any material legal proceedings. INTELLECTUAL PROPERTY To establish and protect our proprietary technologies and products, we rely on a combination of patent, copyright, trademark and trade-secret laws, as well as confidentiality provisions in our contracts. We have implemented an aggressive patent strategy designed to provide us with freedom to operate and facilitate commercialization of our current and future products. We currently own 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 foreign issued patents and have 31 foreign patent applications pending. We hold an exclusive license for components of the DNA separation technology used in our WAVE System under an agreement with the inventors. This license terminates in 2013. We have also entered into a non-exclusive license agreement with a U.S. university relating to DNA detection technology. 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 systems and related processes are 40 covered by U.S. Patents 5,772,889, 5,997,742, 5,972,222, 6,017,457, 6,024,878 and 6,056,877, along with a corresponding foreign patent application pending. Additional patent applications for the DNA compatible column and system are pending in the U.S., Europe and Japan. Future products including disposable nucleic acid separation systems are covered by U.S. Patent 5,986,085 and pending U.S. and foreign patent applications. Generally, U.S. patents have a term of 17 years from the date of issue for patents issued from applications filed with the U.S. Patent Office prior to June 8, 1995, and 20 years from the application filing date or earlier claimed priority date in the case of patents issued from applications filed on or after June 8, 1995. Patents in most other countries have a term of 20 years from the date of filing the patent application. Our issued United States patents will expire between 2009 and 2017. Our success depends to a significant degree upon our ability to develop proprietary products and technologies. We intend to continue to file patent applications as we develop new products and technologies. Patents provide some degree of protection for our intellectual property. However, the assertion of patent protection involves complex legal and factual determinations and is therefore uncertain. The scope of any of our issued patents may not be sufficiently broad to offer meaningful protection. In addition, our issued patents or patents licensed to us may be successfully challenged, invalidated, circumvented or unenforceable so that our patent rights would not create an effective competitive barrier. Moreover, the laws of some foreign countries may not protect our proprietary rights to the same extent as do the laws of the United States and Canada. In addition, the laws governing patentability and the scope of patent coverage continue to evolve, particularly in areas of interest to us. As a result, there can be no assurance that patents will issue from any of our patent applications or from applications licensed to us. In view of these factors, our intellectual property positions bear some degree of uncertainty. We also rely in part on trade-secret protection of our intellectual property. We attempt to protect our trade secrets by entering into confidentiality agreements with third parties, employees and consultants. Our employees and consultants also sign agreements requiring that they assign to us their interests in patents and copyrights arising from their work for us. All employees sign an agreement not to compete unfairly with us during their employment and after termination of their employment, through the misuse of confidential information, soliciting employees, soliciting customers and the like. However, it is possible that these agreements may be breached or invalidated and if so, there may not be an adequate corrective remedy available. Despite the measures we have taken to protect our intellectual property, we cannot assure you that third parties will not independently discover or invent competing technologies, or reverse engineer our trade secrets or other technologies. Therefore, the measures we are taking to protect our proprietary rights may not be adequate. We do not believe that our products infringe on the intellectual property rights of any third party. However, third parties may file claims asserting that our technologies or products infringe on their intellectual property. We cannot predict whether third parties will assert claims against us or against the licensors of technology licensed to us, or whether those claims will be found to have merit. If we are forced to defend against such claims, whether they are with or without any merit, whether they are resolved in favor of or against us or our licensors, we may face costly litigation and diversion of management's attention and resources. As a result of such disputes, we may have to develop costly non-infringing technology or enter into licensing agreements. These agreements, if necessary, may be unavailable on terms acceptable to us, or at all, which could seriously harm our business or financial condition. COMPETITION The market for our products is highly competitive. Our principal competitors include those entities that provide alternative technologies and products for the separation and analysis of DNA in the areas of sample amplification, analysis process, sample separation and mutation detection and correlation. They include Affymetrix, Inc., Agilent Technologies, Amersham Pharmacia Biotech AB, Bio-Rad 41 Laboratories, Inc., BioWhittaker Molecular Applications, GeneTrace Systems, Inc., Invitrogen Corporation, PE Corporation, Sequenom, Inc. and Varian Associates Inc. Moreover, competitors have greater name recognition than we do and provide more conventional technologies and products with which some of our customers and potential customers may have more familiarity or experience. In many cases, in order to compete against existing and alternative technologies, we will need to demonstrate the superior performance, speed and capabilities of our WAVE System, including our proprietary DNASep column and micro-bead technology. We cannot assure you that we will be able to make the necessary enhancements to our technology or products to compete successfully with newly emerging technologies. EMPLOYEES As of March 31, 2000, we had 220 full-time employees. Of these employees, 163 were in life sciences and the remaining 57 were employed in non-life sciences line product. Of these 220 employees, 41 hold Ph.D.s. Upon closing of the sale of the assets of our non-life sciences instrument product lines, the non-life sciences instruments employees will become employees of the purchaser. The following sets forth the number of persons employed in the principal areas of our operation:
NON-LIFE SCIENCES CONSOLIDATED LIFE SCIENCES INSTRUMENT ------------ ------------- ---------- Manufacturing.............................................. 54 26 28 Sales and Marketing........................................ 77 67 10 Research and Development................................... 59 46 13 Administration............................................. 30 24 6
Our future success depends on our continuing ability to attract, train and retain highly qualified technical, sales and managerial personnel. Competition for these personnel is intense. Due to the limited number of people available with the necessary technical skills, we can give no assurance that we can retain or attract key personnel in the future. None of our employees is represented by a labor union. We have not experienced any work stoppages and consider our relations with our employees to be good. PROPERTIES We do not own any real property. We currently lease office and manufacturing space in the following locations:
LOCATION SQUARE FOOTAGE ANNUAL RENT LEASE TERM EXPIRES - -------- -------------- ----------------- ------------------ Omaha, Nebraska(1)................................. 71,799 $308,000 2000 San Jose, California............................... 13,660 $213,000 2002 Crewe, England..................................... 7,400 L70,000 2006 Cramlington, England............................... 8,200 L26,000 2001 Tokyo, Japan....................................... 1,000 Y7,293,000 2001 Cambridge, Massachusetts........................... 2,500 $54,000 2002 Gaithersburg, Maryland............................. 2,294 $35,000 2004 Dallas, Texas...................................... 240 $11,000 2000 Houston, Texas..................................... 2,760 $24,000 2003
- ------------------------ (1) In connection with the proposed sale of the assets of our non-life sciences instrument product line, the existing lease for the Omaha, Nebraska facility will be assigned to, and assumed by, the purchaser. We recently entered into a new seven-year lease agreement for a new, 17,400 square-foot headquarters and administrative 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. 42 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS Our executive officers and directors, positions held by them and their ages, are as follows:
NAME AGE POSITION - ---- -------- -------- Collin J. D'Silva......................... 43 Chairman of the Board, Chief Executive Officer and Director William P. Rasmussen...................... 48 Chief Financial Officer 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 Director
COLLIN J. D'SILVA. Mr. D'Silva has served as our Chairman of the Board and Chief Executive Officer since 1997 and is also a Director. Mr. D'Silva, a co-founder of Transgenomic, has worked for Transgenomic and its predecessors since 1988. Prior to that time, Mr. D'Silva was employed by AT&T from 1980. At AT&T, he held various positions in engineering, materials management, sales support and business development. His last position at AT&T was Business Unit Manager and Engineering Manager for a network distribution products division. Mr. D'Silva holds a B.S. degree and a M.Eng. degree in industrial engineering from Iowa State University and an M.B.A. from Creighton University. WILLIAM P. RASMUSSEN. Mr. Rasmussen joined us on October 1, 1998 and currently serves as our Chief Financial Officer and Treasurer. Prior to joining us, Mr. Rasmussen was Chief Financial 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 Principle Accounting Officer for Applied Communications, Inc. from 1979 until 1984. Applied Communications, Inc., now known as Transaction Systems Architects, Inc., is a software 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 Research and Engineering, Director of Research for Wescan Instruments, and President and Director of Research & Development for Sarasep, Inc. Sarasep, which Dr. Gjerde co-founded, was acquired by us in 1996. Dr. Gjerde has authored 12 patents and has more than 40 journal publications, primarily focused on separation technology. Dr. Gjerde received his B.S. in chemistry in 1976 from Minnesota State University, Mankato, Minnesota, and his Ph.D. in analytical chemistry in 1980 from Iowa State University, Ames, Iowa. JOHN E. DOYLE. Mr. Doyle has been with our company since September 1997, initially focusing on operations and process improvement. In 1999, Mr. Doyle assumed responsibility for sales, again focusing on process as well as improvements in staffing. Prior to joining Transgenomic, he was with Supelco Inc. for 20 years, serving as Chief Executive Officer when it was a Sigma-Aldrich company; Business Unit Vice 43 President when it was a subsidiary of Rohm and Haas Corporation; and International Vice President when it was privately held. Mr. Doyle received his engineering degree from Pennsylvania State University. KRAIG MCKEE. Mr. McKee has served as our Vice President of Sales for the United States since July 1999. Prior to joining us, he was the Sales Director from 1997 to 1999 for Bayer Diagnostics. From 1987 through 1997, he held a number of positions in the sales organization of Chiron Diagnostics. His last position at Chiron was National Sales Director, ACS Reagent Systems. He received a Bachelor's degree in marketing from Texas Tech University. WILLIAM WALKER. Mr. Walker joined us in 1998 as Vice President of Intellectual Property. Mr. Walker is a corporate attorney with an emphasis in intellectual property law. Mr. Walker served as Director of Patents and Licensing for Syntex Corporation (1970-1981) and subsequently provided intellectual property counseling to new and emerging companies. Mr. Walker has a law degree from Georgetown University Law Center, a B.S. degree in chemical engineering from the University of Tennessee and a MFCC degree in psychology from Santa Clara University. He is a member of the California Bar and is active in numerous professional organizations. MITCHELL L. MURPHY. Mr. Murphy joined us in 1992. His current duties include the overall administration of our finance and accounting functions. Prior to joining Transgenomic, he held accounting and financial management positions for companies involved in manufacturing, steel distribution and rebar fabrication for 15 years. He spent over two years as an auditor for the Omaha, Nebraska office of Deloitte, Haskins & Sells (now Deloitte & Touche LLP) working in a broad range of industries. Mr. Murphy graduated with honors from Creighton University in 1978 with a B.S. degree in business administration with an accounting major. STEPHEN F. DWYER. Mr. Dwyer has recently signed a letter of intent to acquire the assets associated with our non-life sciences instrument product line, which will be operated as a separate business. Mr. Dwyer is a director and was a co-founder of Transgenomic. From 1996 until March 2000, Mr. Dwyer was employed by Transgenomic and its predecessor company, most recently as Vice Chairman. In 1966, Mr. Dwyer started Sasco Inc., which produced laboratory animals used in disease research. In 1986, Mr. Dwyer sold Sasco to Charles River Labs. He continued to run Sasco as a Charles River Labs subsidiary for the next eight years. JEFFREY SKLAR, M.D., PH.D. Dr. Sklar is professor of Pathology at Harvard Medical School, where he has been on the faculty for more than five years. He also serves as Director of the Divisions of Diagnostic Molecular Biology and Molecular Oncology, department of Pathology Brigham and Women's Hospital. Dr. Sklar serves on the Editorial Boards of Numerous Journals in the area of Pathlogy and Cancer and on Scientific Advisory Committees to the Dana-Farber Cancer Center, Boston, MA; the Fred Hutchinson Cancer Center, Seattle, Washington; the New England Regional Primate Center; Harvard University; and the National Institutes of Health. He is a director of Dianon Systems, Inc., and has served on the scientific advisory boards of numerous companies in the biotechnology field. Dr. Sklar holds an M.D. and Ph.D. from Yale University and an M.A. (honorary) from Harvard University. PARAG SAXENA. Mr. Saxena is the Chief Executive Officer of INVESCO Private Capital, Inc. ("IPC") and has held that position for more than five years. As a founding member of IPC, 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. 44 GREGORY 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 from The Wharton School, University of Pennsylvania, in 1963 and a J.D., CUM LAUDE, from the University of Pennsylvania School of Law in 1966. SCIENTIFIC ADVISORS We consult with several leading scientists from around the world, as part of our ongoing research and development efforts. These advisors assist us in formulating our research, development, and commercialization strategies. Some of these advisors include: - Dennis R. Burton, Ph.D., Professor of Immunology, The Scripps Research Institute, La Jolla, California. - R. Alan North, Ph.D., Professor and Director of the Institute of Molecular Physiology, the University of Sheffield, Sheffield, U.K. - Eric Hoffman, Ph.D., Director, Research Center for Genetic Medicine, The Children's National Medical Center, Washington, D.C. - Leon Yengoyan, Ph.D., Professor of Chemistry, San Jose State University, San Jose, California. We do not pay cash remuneration to our scientific advisors, but may reimburse them for reasonable expenses they incur on our behalf. We may also award stock options to them under our stock option plan. See "Stock Option and Other Compensation Plans" below. BOARD OF DIRECTORS Our Board of Directors is comprised of seven directors and is divided into three classes. Directors of each class are elected for terms of three years. Class I directors are Parag Saxena and Collin J. D'Silva. Class II directors are Stephen F. Dwyer and Jeffrey Sklar. Class III directors are Douglas T. Gjerde, Gregory Duman and Roland J. Santoni. The current terms of the Class I, Class II and Class III directors will end at our annual stockholders meetings held in 2001, 2002 and 2003, respectively. BOARD COMMITTEES The audit committee consists of Messrs. Duman, Sklar and Saxena, each of whom is an independent director. The audit committee reviews the services provided by our independent auditors, consults with the auditors on audits and proposed audits, and reviews and evaluates our internal auditing procedures and control functions. The compensation committee consists of Messrs. Sklar, Dwyer and Saxena. The compensation committee reviews the compensation arrangements for our executive officers, makes recommendations to the Board of Directors regarding compensation matters and administers our employee stock option plan. See "Stock Option and Other Compensation Plans" below. DIRECTOR COMPENSATION Directors who are also our officers are not separately compensated for serving on the Board of Directors other than reimbursement for out-of-pocket expenses related to attendance at board and committee meetings. Non-employee directors are paid an annual retainer of $12,000. In addition, they receive a fee of $1,200 for attending meetings in person, or $600 for participating in a meeting by 45 teleconference, as well as reimbursement for out-of-pocket expenses related to attendance at board and committee meetings. Our non-employee directors are issued options to purchase 15,000 shares of common stock under our 1997 Stock Option Plan upon initial appointment to the board. These options vest at the rate of 20% per year of service on the board. Additional grants will be made from time to time so that each non-employee director holds 15,000 unvested options at any time. All options granted to non-employee directors have exercise prices that represented 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 to $13.00 per share. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION No member of our compensation committee serves as a member of the board of directors or compensation committee of any other company that has one or more executive officers serving as a member of our board of directors or compensation committee. EXECUTIVE COMPENSATION The following table sets forth the total compensation we paid during the year ended December 31, 1999 to our Chief Executive Officer and our next four most highly compensated executive officers whose salary and bonus for 1999 exceeded $100,000. Also included is the compensation of an executive officer who resigned prior to the end of the year. These executive officers are referred to as the named executive officers elsewhere in the prospectus. SUMMARY COMPENSATION TABLE(1)
ANNUAL COMPENSATION ---------------------------------- OTHER ANNUAL ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION COMPENSATION(2) - --------------------------- -------- -------- ------------ --------------- Collin J. D'Silva................................... $132,440 $ 0 $6,129 $21,587 Chief Executive Officer William Walker...................................... 201,466 0 1,889 5,631 Vice President of Intellectual Property John E. Doyle....................................... 150,645 4,000 3,615 17,893 Executive Vice President of Operations Andrew T. Zander, Ph.D.............................. 117,378 0 2,101 4,695 Vice President of Research and Development(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)
- ------------------------ (1) No long term compensation was awarded or paid to any named executive officer during 1999. (2) Consists of accrued vacation to be taken in the future or paid in cash upon termination of employment. (3) 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 "Stock Option and Other Compensation Plans") and may participate in other employee benefit plans and programs, such as health insurance plans, that we offer to our other employees. 46 OPTION GRANTS IN LAST FISCAL YEAR None of the named executive officers were awarded any stock options during 1999. AGGREGATED OPTION EXERCISE IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES None of the named executive officers exercised any stock options during 1999. STOCK OPTION AND OTHER COMPENSATION PLANS STOCK OPTION PLAN. Our stock option plan allows us to grant options to our employees, directors and advisors which give them the right to buy our common stock at a fixed price, even if the market value of our stock goes up. Our stock option plan is administered by the compensation committee of our Board of Directors and it has the sole authority to set the number, exercise price, term and vesting provisions of the options granted under the plan. Under the terms of the plan, the exercise price of an 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. The committee may also require that an option holder remain employed by us for a specified period of time before an option may be exercised. These "vesting" provisions are established on an individual basis by the committee. The committee will also decide whether options will be nonqualified options or structured to be qualified options for U.S. income tax purposes. Either incentive or nonqualified stock options may be granted to employees, but only nonqualified stock options may be granted to our non-employee directors and advisors. Options for a maximum of 6,000,000 shares may be granted under the plan. To date, we have issued options for 3,707,050 shares of our common stock. All of these 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, may be exercised at the lower of $5.00 per share for 15,000 shares or 50% of the price of our common stock in this offering. See "Director Compensation" above. Under the terms of our stock option plan, if the option holder dies, becomes permanently disabled or retires any options not vested at such time will become immediately vested. If an option holder voluntarily resigns, any options not vested as of the date of resignation will terminate and all rights will cease, unless the compensation committee determines otherwise. In the event an option holder's employment, board membership or status as an advisor is terminated for cause, the option holder's right to exercise an option, whether or not vested, will immediately terminate and all rights will cease, unless the compensation committee determines otherwise. EMPLOYEE SAVINGS PLAN. We have also established an employee savings plan that is intended to qualify as a tax-qualified plan under Section 401(k) of the Internal Revenue Code. This plan allows for voluntary contributions up to statutory maximums by eligible employees. We match a specific proportion of these contributions, subject to limitations imposed by law. We may make additional contributions to the savings plan on behalf of our employees if our Board of Directors decides to do so. During the years ended December 31, 1997, 1998 and 1999, we contributed $92,733, $117,923 and $174,973 to the savings plan on behalf of our employees. LIMITATION OF DIRECTORS AND OFFICERS LIABILITY Our certificate of incorporation provides that no director will be liable for monetary damages for breach of the director's fiduciary duty to the company or its stockholders, except for liability arising from: - breach of the director's duty of loyalty to the company or its stockholders; - acts or omissions not in good faith or involving intentional misconduct or knowing violations of law; - improper distributions to stockholders and improper redemptions of stock; and - transactions from which the director derived an improper personal benefit. 47 This provision of our certificate of incorporation does not eliminate the directors' fiduciary duties, and in appropriate circumstances, equitable remedies including an injunction or other forms of non-monetary relief would remain available under Delaware law. This provision also does not affect a director's responsibilities under any other laws including federal securities laws or state or federal environmental laws. In addition, our bylaws provide that we will indemnify our directors and officers to the fullest extent permitted by Delaware law. We are also empowered under our bylaws to enter into indemnification contracts with our directors and officers and to purchase insurance on behalf of any person we are required or permitted to indemnify. We have obtained directors and officers liability insurance coverage which covers, among other things, liabilities arising under the Securities Act. EMPLOYMENT AGREEMENTS We have entered into employment agreements with our Chief Executive Officer, Collin J. D'Silva, our Chief Financial Officer, William P. Rasmussen, our Chief Scientific Officer, Douglas T. Gjerde Ph.D. and our Vice-President of Intellectual Property, William R. Walker. The employment agreements require our 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. Our executives are not allowed to compete with us during the term of their employment and for a year after they are no longer our employee. Each agreement contains provisions under which our 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 the company except for proper business purposes. Each of the employment agreements with Mr. D'Silva and Dr. Gjerde has an initial term of four years and may be extended unless we or Mr. D'Silva or Dr. Gjerde, 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 of our 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 base salary 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 plus 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. 48 PRINCIPAL STOCKHOLDERS The following table provides information concerning beneficial ownership of our common stock as of May 1, 2000, by: - each of our named executive officers; - each of our directors; - all of our directors and executive officers as a group; and - each stockholder that we know owns more than 5% of our outstanding common stock. The following table assumes (i) the exercise of warrants for 300,000 shares of common stock that will be issued at $5.00 per share immediately prior to completion of this offering, and (ii) the conversion of $12.0 million of aggregate principal amount of our convertible notes plus accrued interest at an assumed conversion price of $5.00 per share into 2,728,200 shares of common stock after the offering. See "Description of Capital Stock--Convertible Notes." Based on information furnished by such owners, we believe that the beneficial owners listed below have sole voting and investment power with respect to such shares.
PERCENT BENEFICIALLY OWNED ------------------- NUMBER OF SHARES BEFORE AFTER NAME BENEFICIALLY OWNED OFFERING OFFERING - ---- ------------------ -------- -------- EXECUTIVE OFFICERS AND DIRECTORS Collin J. D'Silva(1)................................. 4,906,154 36.8% 24.5% William P. Rasmussen(2).............................. 65,000 * * Douglas T. Gjerde, Ph.D.(3).......................... 2,500,000 16.9 11.6 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 14.9 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 70.8 48.8 OTHER STOCKHOLDERS Arthur P. D'Silva(12)................................ 1,093,846 8.2 5.5 INVESCO Private Capital, Inc.(13).................... 2,455,380 15.6 12.2
- ------------------------ * 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. 49 (4) Consists of vested options to acquire 45,000 shares at $5.00 per share. Mr. Doyle holds unvested options to purchase an additional 30,000 shares at $5.00 per share. (5) Mr. 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 of the shares of our common stock that will be issued upon conversion of these notes. The address of INVESCO Private Capital, Inc. is 1166 Avenue of the Americas, New York, New York 10036. 50 RELATED PARTY TRANSACTIONS On May 16, 2000, we signed an asset purchase agreement with S.D. Acquisition Inc., a company controlled by Stephen F. Dwyer, a director and a principal stockholder of ours, under which we have agreed to sell the assets related to our non-life sciences instrument product line for a total purchase price of $6,000,000. The purchase price is subject to adjustment for changes in the value of inventories and accrued vacation from December 31, 1999 and for expenses paid by us after March 31, 2000 that relate to this product line. A total of $4,000,000 will be paid in cash at the closing and $2,000,000 will be 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 sale of these assets was approved by our stockholders at our annual meeting on March 30, 2000. The sale is expected to close prior to the completion of this offering, subject to customary closing conditions. The purchase price and other terms of the transaction were determined through negotiation between us and Mr. Dwyer and was approved by our disinterested directors. An unaffiliated party recently made a written offer of $4,000,000 for these assets. The purchaser intends to finance 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 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 our 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 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. 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. We intend to repay this loan from the proceeds of the sale of the assets relating to our non-life sciences instrument product line. Collin J. D'Silva, Stephen F. Dwyer and Douglas T. Gjerde were partners of CT Partners, an Iowa general partnership, along with various other individuals, some of whom are relatives of Mr. D'Silva and Mr. Dwyer. Mr. D'Silva, Mr. Dwyer and Dr. Gjerde held partnership interests of 28.6%, 23.8% and 4.8%, respectively, in CT Partners. In 1997, our predecessor company agreed to provide CT Partners with research and development services to assist CT Partners in the development of miniature solid-state optical spectrometry technology to which it held the rights. Our predecessor company was entitled to a fee for these services and for reimbursement of its expenses. In addition, our predecessor company entered into a royalty agreement with CT Partners under which it received an exclusive license to manufacture and market this technology and agreed to pay CT Partners a royalty of up to $6,500,000 based on the sales of products employing this technology. On June 3, 1999, we acquired the rights to this technology from CT Partners for a purchase price of $2,000,000. The purchase price was offset by the cancellation of principal and interest due on promissory notes given to us by CT Partners in payment of the fees and expense reimbursements owed to us by it. Principal and interest on these notes plus additional accrued expenses equaled $1,085,931. The sale price was based on the present value of anticipated future net income from the sale of products associated with the technology. 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. 51 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. DESCRIPTION OF CAPITAL STOCK GENERAL We can issue up to 60,000,000 shares of our common stock and 15,000,000 shares of our preferred stock. There are currently 13,025,000 shares of our common stock outstanding. This number will increase to 16,053,200 assuming conversion of our convertible notes and accrued interest thereon at an assumed conversion price of $5.00 per share and the exercise of 300,000 warrants to purchase our common stock that will expire at the closing of this offering. We have not issued any shares of preferred stock. You should read the following summary description of our capital stock in conjunction with our certificate of incorporation and our bylaws, each of which is available upon request. COMMON STOCK The holders of our common stock are entitled to - one vote per share on all matters submitted to a vote of our stockholders; - the payment of any dividends declared by the Board of Directors out of legally available funds, after the superior rights of any preferred stock holders have been satisfied; and - share ratably in company assets available for distribution to them in the event of the liquidation, dissolution, distribution of assets or winding up of the company. The holders of common stock do not have cumulative voting rights. As a result, the holders of a majority of the outstanding common stock can elect all the directors of the company. The remaining common stock holders will not be able to elect any directors. The holders of common stock have no preemptive or other subscription rights, and there are no conversion, redemption or sinking fund provisions with respect to the common stock. All outstanding shares of common stock are, and all shares of common stock to be outstanding upon completion of this offering will be, fully paid and non-assessable. The common stock has a par value of $0.01 per share. PREFERRED STOCK The Board of Directors is authorized to issue up to 15,000,000 shares of preferred stock in one or more series and to fix the rights, powers, preferences, qualifications, limitations and restrictions granted to or imposed on the preferred stock. The authority of the Board of Directors includes the right to fix dividend rights, conversion rights, terms of redemption, liquidation preference, sinking fund terms and the number of shares constituting any series or the designation of a series, without any further vote or action by the stockholders. The preferred stock may be issued with a preference over the common stock as to the payment of dividends. The Board of Directors, without stockholder approval, can issue preferred stock with voting and conversion rights that could adversely affect the voting power of the holders of common stock. The issuance of preferred stock could have the effect of delaying, deferring or preventing a change in control of Transgenomic. For the foregoing reasons, any preferred stock we issue could adversely affect your rights as a holder of our common stock. We do not have any present plans to issue preferred stock. 52 WARRANTS As of the date of this prospectus, we have issued 452,450 warrants to purchase common stock at an exercise price equal to the lower of $5.00 per share or 50% of the offering price of the common stock in this offering. Of this total, 300,000 warrants will expire upon the closing of this offering and the rest will expire in 2003. All of the warrants contain provisions for the adjustment of the exercise price and the aggregate number of shares that may be issued upon the exercise of the warrant if a stock dividend, stock split, reorganization, reclassification or consolidation occurs. OPTIONS As of the date of this prospectus, we have issued options to purchase 3,707,050 shares of our 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 the lower of $5.00 per share for 15,000 shares or 50% of the price of our common stock in this offering. Additional options to acquire 2,292,950 shares of common stock may be issued in the future under our Stock Option Plan. CONVERTIBLE NOTES In March 1999, we issued $12,000,000 of our convertible notes to a group of investors. The convertible notes will be due and payable in March 2002. Interest on the notes compounds at 6% per annum until maturity or until we complete an underwritten public offering of our common stock which provides us with net proceeds of not less than $15 million. Interest will be payable either in cash upon repayment of the notes at or after the maturity date, or if elected, upon the completion of this offering all accrued and unpaid interest shall be converted into shares of common stock. The interest rate after this offering for notes that are not converted shall be reduced to 3.6%, and interest shall become due for the remainder of the term through the maturity date at the closing of this offering. The convertible notes may be converted into shares of our common stock at or after the time we make an underwritten public offering of our common stock which provides us with net proceeds of not less than $15 million. Accordingly, these conversion rights may be exercised by the holders of the convertible notes when we close this offering. If this offering is completed before September 25, 2000, the conversion price per share will be the lower of (i) $5.00 or (ii) 50% of the public offering price of shares in this offering. If this offering is completed after that date, the conversion price may be reduced depending on the length of the delay. In addition, if 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 amount realized by our stockholders from the merger, sale of assets, change of control or liquidation transaction. Finally, if Collin D'Silva were to sell any of his shares before this offering, the note holders have the right to convert notes into common stock at $5.00 per share. We do not anticipate that any merger, sale of assets, change of control or liquidation transaction will occur prior to the closing of this offering or that Mr. D'Silva will sell any shares of his stock prior to that time. If the note holders do not convert their convertible notes after the completion of this offering, we may elect to convert their notes if at any time the total of (i) the average closing bid price for our common stock over 20 consecutive trading days and (ii) accrued interest on the notes (when converted into an amount per share using the conversion price then in effect) equals or exceeds $13.72 per share. In connection with the issuance of the convertible notes, Collin D'Silva has agreed to vote his shares at any meeting of the stockholders to cause a person designated by the holders of the convertible notes to 53 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. In general, Section 203 of the Delaware General Corporation Law prohibits a publicly held Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder unless: - prior to that date, the Board of Directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; - upon consummation of the transaction that resulted in the stockholder's becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding those shares owned by persons who are directors and also officers, and employee stock plans in which employee participants do not have the right to determine confidentially whether shares held under the plan will be tendered in a tender or exchange offer; or - on or subsequent to that date, the business combination is approved by the Board of Directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least two-thirds of the outstanding voting stock that is not owned by the interested stockholder. Section 203 defines "business combination" to include: - any merger or consolidation involving the corporation and the interested stockholder; - any sale, transfer, pledge or other disposition involving the interested stockholder of 10% or more of the assets of the corporation; - in general, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; or - the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by the entity or person. CHARTER PROVISIONS. Our Second 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" 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 54 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., has been appointed as the transfer agent and registrar for our common stock. NATIONAL MARKET LISTING We have applied for listing of our common stock on the Nasdaq Stock Market's National Market under the symbol TBIO. 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 stock in the public market after the offering could adversely affect the market price of our common stock and our ability to raise equity capital in the future on terms favorable to us. After this offering, 20,053,200 shares of our common stock will be outstanding, assuming conversion of our convertible notes and accrued interest thereon as of March 31, 2000 and the exercise of warrants to acquire 300,000 shares of common stock that will expire at the closing of this offering and also assuming that the underwriters do not exercise the over-allotment option. Of these shares, all of the 4,000,000 shares sold by us in this offering will be freely tradable without restriction or further registration under the Securities Act, unless these shares are purchased by "affiliates" as that term is defined in Rule 144 under the Securities Act. The remaining 16,053,200 shares of common stock held by existing stockholders are "restricted securities" as that term is defined in Rule 144 under the Securities Act. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144 or 701 under the Securities Act, which rules are summarized below. We have agreed to register shares of our common stock and warrants for resale by some of our stockholders and warrant holders. See "Registration Rights and Stock Plans," below. The following table indicates approximately when the 16,053,200 shares of our common stock that are not being sold in this offering but which may be outstanding when this offering is complete will be eligible for sale in the public market: ELIGIBILITY OF RESTRICTED SHARES FOR SALE IN THE PUBLIC MARKET At effective date........................................... 658,500 Before 90 days after the effective date..................... 1,128,000 At 90 days after the effective date......................... 195,500 At 180 days after the effective date........................ 14,071,200
As described under "Lock-Up Agreements" below, 14,071,200 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 55 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. RULE 144 In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year, including any affiliate of ours, is entitled to sell, within any three-month period, a number of shares that is not more than the greater of: - 1% of the number of shares of common stock then outstanding, which will equal approximately 200,532 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. RULE 701 In general, under Rule 701, any of our employees, directors, officers, consultants or advisors who purchase shares from us under a stock option plan or other written agreement can resell those shares 90 days after the effective date of this offering in reliance on Rule 144, without having to comply with the holding period and other restrictions contained in Rule 144. LOCK-UP AGREEMENTS Our directors, officers and some of our existing stockholders owning collectively 14,071,200 shares of our common stock, including persons entitled to obtain stock upon the exercise of warrants or conversion of our convertible notes, are subject to lock-up agreements under which they have agreed not to transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for shares of common stock, for a period of 180 days after the date of this prospectus, 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 4,510,888 shares of our common stock and warrants to purchase 152,450 shares of our common stock. Of these shares and warrants, 3,310,888 shares of common stock and all of the warrants are being registered by us at the request of the holders of our convertible notes (and covers the maximum number of shares that we could issue to the holders of convertible notes assuming that the notes are not converted into common stock until their maturity date), the holder of a warrant to purchase 300,000 shares of our common stock (which warrant will expire if not exercised prior to the closing of this offering) and the holders of additional warrants to purchase 152,450 shares of our common stock that we issued 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 56 placement agents upon the exercise of their warrants are not included in the 20,053,200 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 will become effective at the same time as the registration statement filed by us in connection with this offering. 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. The 3,028,200 shares issuable upon conversion of our convertible notes and upon exercise of the warrant to purchase 300,000 shares are subject to 180-day lock-up agreements described above. See "Lock-Up Agreements" above. As described under "Related Party Transactions," we have agreed to sell 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 will receive $4.0 million in cash and a promissory note for $2.0 million. The purchaser will finance 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 owned by him to us 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 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 have registered these 1,200,000 shares under the Securities Act and intend 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 the date of this prospectus, options to purchase 3,707,050 shares of common stock were issued and outstanding, 2,100,350 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 57 - 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. 58 This discussion does not address all aspects of U.S. federal income and estate taxes that: - may be relevant to non-U.S. holders in light of their personal circumstances, including the fact that in the case of a non-U.S. holder that is a partnership, the U.S. tax consequences of holding and disposing of common shares may be affected by determinations made at the partner level, or - may be relevant to non-U.S. holders which may be subject to special treatment under U.S. federal income tax laws such as insurance companies, tax-exempt organizations, financial institutions, dealers in securities and holders of securities held as part of a "straddle," "hedge" or "conversion transaction." This discussion also does not address any tax consequences arising under the laws of any state, local or foreign jurisdiction. Furthermore, this discussion is based on provisions of the Internal Revenue Code of 1986, as amended, existing and proposed regulations promulgated thereunder and administrative and judicial interpretations thereof, all as of the date hereof, and all of which are subject to change, possibly with retroactive effect. The following summary is included herein for general information. ACCORDINGLY, INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE U.S. FEDERAL, STATE, LOCAL AND NON-U.S. INCOME AND OTHER TAX CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING OF COMMON SHARES. For purposes of this discussion, dividends and gain on the sale, exchange or other disposition of common stock will be considered to be "U.S. trade or business income" if the income or gain is: (1) effectively connected with a United States trade or business, or (2) if a treaty applies, attributable to a permanent establishment (or, in the case of an individual, a fixed base) in the United States. DIVIDENDS We do not anticipate paying cash dividends on our common shares in the foreseeable future. In the event, however, that dividends are paid on our common shares, dividends paid to a non-U.S. holder of common shares generally will be subject to withholding of U.S. federal income tax at a 30% rate, or such lower rate as may be provided by an applicable income tax treaty. Non-U.S. holders should consult their tax advisors regarding their entitlement to benefits under a relevant income tax treaty. Dividends that are U.S. trade or business income are generally subject to U.S. federal income tax on a net income basis at regular graduated rates, but are not generally subject to the 30% withholding tax 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 58 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. GAIN ON DISPOSITION OF COMMON SHARES A non-U.S. holder generally will not be subject to U.S. federal income tax in respect of gain realized on a disposition of our common shares unless: - the gain is U.S. trade or business income, in which case, the branch profits tax described above may also apply to a corporate non-U.S. holder; - the non-U.S. holder is an individual who holds our common shares as a capital asset within the meaning of Section 1221 of the Internal Revenue Code, is present in the United States for 183 or more days in the taxable year of the disposition and meets other requirements; - the non-U.S. holder is subject to tax under the provisions of the U.S. tax law applicable to 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," within the meaning of the Internal Revenue Code for the taxable year, as adjusted for specific items, unless it qualifies for a lower rate under an applicable tax treaty. 59 FEDERAL ESTATE TAX Common shares owned or treated as owned by an individual who is neither a U.S. citizen nor a U.S. resident, as defined for U.S. federal estate tax purposes, at the time of death will be included in the individual's gross estate for U.S. federal estate tax purposes and may be subject to U.S. federal estate tax, unless an applicable estate tax or other treaty provides otherwise. INFORMATION REPORTING AND BACKUP WITHHOLDING TAX Under U.S. Treasury regulations, we must report annually to the Internal Revenue Service and to each non-U.S. holder the amount of dividends paid to these holders, the name and address of the recipient and the tax withheld with respect to such dividends. Copies of the information returns reporting such dividends and withholding may also be made available to the tax authorities in the country in which the non-U.S. holder is a resident under the provisions of an applicable income tax treaty or agreement. Currently, U.S. backup withholding, which generally is a withholding tax imposed at the rate of 31% on payments to persons that fail to furnish specified information under the U.S. information reporting requirements, generally will not apply: - to dividends paid to non-U.S. holders that are subject to the 30% withholding discussed above, or that are not so subject because a tax treaty applies that reduces or eliminates such 30% withholding; or - before January 1, 2001, to dividends paid to a non-U.S. holder at an address outside of the United States unless the payor has actual knowledge that the payee is a U.S. person. Backup withholding and information reporting generally will apply to dividends paid to addresses inside the United States on our common shares to beneficial owners that are not "exempt recipients" and that fail to provide identifying information in the manner required. The payment of the proceeds of the disposition of our common shares by a holder to or through the U.S. office of a broker or through a non-U.S. branch of a U.S. broker generally will be subject to information reporting and backup withholding at a rate of 31% unless the holder either certifies its status as a non-U.S. holder under penalties of perjury or otherwise establishes an exemption. The payment of the proceeds of the disposition by a non-U.S. holder of common shares to or through a non-U.S. office of a 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 reporting on the payment 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; 60 - 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. UNDERWRITING Subject to the terms and conditions contained in an underwriting agreement dated , 2000, the underwriters named below, through their representatives, Chase Securities Inc., Bear, Stearns & Co. Inc. and Dain Rauscher Incorporated have severally agreed to purchase from us the respective number of shares of common stock set forth opposite their names below.
UNDERWRITERS NUMBER OF SHARES - ------------ ---------------- Chase Securities Inc. Bear, Stearns & Co. Inc. Dain Rauscher Incorporated --------- Total................................................ 4,000,000 =========
The underwriting agreement provides that the obligations of the underwriters are subject to 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 $4,186,000
We 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 offering of the shares, the offering price and other selling terms may be changed by the underwriters. The representatives have informed us that the underwriters do not intend to confirm discretionary sales of more than 5% of the shares of common stock offered in this offering. We have granted to the underwriter an option, exercisable no later than 30 days after the date of this prospectus, to purchase up to 600,000 additional shares of common stock at the initial public offering price, less the underwriting discount set forth on the cover page of this prospectus. To the extent that the underwriters exercise this option, each of the underwriters will have a firm commitment to purchase approximately the same percentage thereof which the number of shares of common stock to be purchased 61 by it shown in the above table bears to the total number of shares of common stock offered hereby. We will be obligated, pursuant to the option, to sell shares to the underwriters to the extent the option is exercised. The underwriters may exercise this option solely to cover over-allotments, if any, made in connection with the sale of shares of common stock offered hereby. The offering of the shares is made for delivery when, as and if accepted by the underwriters and subject to prior sale and withdrawal, cancellation or modification of the offering without notice. The underwriters reserve the right to reject an order for the purchase of shares in whole or in part. We have agreed to indemnify the underwriters for misrepresentations and omissions made by us in connection with this Offering, including liabilities under the Securities Act and for liability relating to the directed sale of stock to our directors, officers, employees, business associates and related 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 14,071,200 shares of common stock after the offering, have agreed not to, without the prior written consent of Chase Securities Inc. or its successors, sell, offer, contract to sell, transfer the economic risk of ownership in, make any short sale, pledge or otherwise dispose of any shares of common stock or any securities convertible into or exchangeable or exercisable for shares of common stock for a period of 180 days from the date of this prospectus, subject to some exceptions. We have agreed that we will not, without the prior written consent of Chase Securities Inc. or its successors, sell, offer, contract to sell, transfer the economic risk of ownership in, make any short sale, pledge or otherwise dispose of any shares of common stock or any securities convertible into or exchangeable or exercisable for shares of common stock for a period of 180 days following the date of this prospectus, except that we may issue shares upon the exercise of warrants or options granted prior to the date hereof or pursuant to outstanding convertible notes and may grant additional options under our stock option plan. Shares issued upon exercise of the options that are subject to lock up agreements may not be sold for 180 days after the closing of this offering without the prior written consent of Chase Securities Inc. or its successors. At our request, the underwriters have reserved up to 5% of the total shares of common stock offered hereby for sale in the United States at the initial public offering price to our directors, officers, employees, business associates and related persons. The number of shares of common stock available for sale to the general public will be reduced by the number of reserved shares such persons purchase. Any reserved shares which are not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered by this prospectus. Persons who purchase reserved shares may be required to agree that they will not, without the prior written consent of Chase Securities Inc. or its successors, sell, offer, contract to sell, transfer the economic risk of ownership in, make any short sale, pledge or otherwise dispose of any shares of common stock or any securities convertible into or exchangeable or exercisable for shares of common stock for a period of 180 days from the date of this prospectus. Prior to this offering, there has been no public market for the common stock. The initial public offering price for the common stock will be determined by negotiation among us and the representatives of the underwriters. Among the factors considered in determining the initial public offering price will be prevailing market and economic conditions, our revenues and operating results, market valuations of other companies engaged in activities similar to ours, estimates of our business potential and our prospects, the present state of our business operations, our management and other factors deemed relevant. We have applied for quotation of the common stock on the Nasdaq National Market under the symbol TBIO. 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 62 with the transaction and was paid a fee for its services of $530,000. Hambrecht & Quist California and some of its employees purchased convertible subordinated notes in the aggregate principal amount of $180,000. Hambrecht & Quist Employee Venture Fund, L.P. II purchased convertible subordinated notes in the amount of $120,000. Hambrecht & Quist California was the parent company of Hambrecht & Quist LLC prior to February 1, 2000. Hambrecht & Quist California is a subsidiary of The Chase Manhattan Corporation. On February 1, 2000, Hambrecht & Quist LLC merged into Chase Securities Inc., a wholly owned subsidiary of The Chase Manhattan Corporation. The limited partnership interests of Hambrecht & Quist Employee Venture Fund, L.P. II are held by employees of Hambrecht & Quist California or Chase Securities Inc. (formerly, Hambrecht & Quist LLC), and the general partner of this fund is H&Q Venture Management LLC, a subsidiary of Hambrecht & Quist California. The purchases described above were made on the same terms as those made by other investors in the private placement. At any time at or after the consummation of this offering, each convertible note may be converted into shares of common stock. Chase Securities Inc. has from time to time provided financial advisory and consulting services to us, for which we paid a one-time fee of $550,000 in March, 1999. Persons participating in this offering may over-allot or effect transactions which stabilize, maintain or otherwise affect the market price of the common stock at levels above those which might otherwise prevail in the open market, including by entering stabilizing bids, effecting syndicate covering transactions or imposing penalty bids. A stabilizing bid means the placing of any bid or effecting of any purchase, for the purpose of pegging, fixing or maintaining the price of the common stock. A syndicate covering transaction means the placing of any bid on behalf of the underwriting syndicate or the effecting of any purchase to reduce a short position created in connection with the offering. A penalty bid means an arrangement that permits the underwriters to reclaim a selling concession from a syndicate member in connection with the offering when shares of common stock sold by the syndicate member are purchased in syndicate covering transactions. Such transactions may be effected on the Nasdaq National Market, in the over-the-counter market, or otherwise. This stabilizing, if commenced, may be discontinued at any time. LEGAL MATTERS The validity of the common stock offered by this prospectus will be passed upon for us by Kutak Rock LLP, Omaha, Nebraska. Legal matters in connection with this offering will be passed upon for the underwriters by Milbank, Tweed, Hadley & McCloy LLP, New York, New York. EXPERTS The financial statements as of December 31, 1998 and 1999 and for each of the three years in the period ended December 31, 1999 included in this prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. 63 WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offered hereby. This prospectus is only a part of the registration statement and does not contain all of the information included in the registration statement. Further information with respect to Transgenomic, Inc. and the common stock offered hereby can be found in the registration statement and the exhibits and schedules thereto. Statements made in this prospectus as to the contents of any contract, agreement or other documents are not necessarily complete, and in each instance reference is made to the copy of such contract or other documents filed as an exhibit to the registration statement, each such statement being qualified in all respects by such reference. The registration statement and the exhibits and schedules thereto may be inspected without charge at the public reference facilities maintained by the Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following regional offices of the Commission: Seven World Trade Center, Room 1400, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, Room 1024, at prescribed rates. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, we are required to file electronic versions of these documents with the Commission through the Commission's Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. The Commission maintains an internet site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. We intend to furnish to our stockholders annual reports containing consolidated financial statements audited by an independent public accounting firm and quarterly reports for the first three quarters of each fiscal year containing unaudited consolidated financial data. 64 TRANSGENOMIC, INC. INDEX TO FINANCIAL STATEMENTS
PAGE -------- Unaudited Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 1999 and March 31, 2000.......................................... F-2 Consolidated Statements of Operations for the three months ended March 31, 1999 and 2000........................... F-3 Consolidated Statements of Stockholders' Equity (Deficit) for the three months ended March 31, 1999 and 2000...... F-4 Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and 2000........................... F-5 Notes to Consolidated Financial Statements for the three months ended March 31, 1999 and 2000.................... F-6 Audited Consolidated Financial Statements: Independent Auditors' Report.............................. F-10 Consolidated Balance Sheets as of December 31, 1998 and 1999.................................................... F-11 Consolidated Statements of Operations for the years ended December 31, 1997, 1998 and 1999........................ F-12 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1997, 1998 and 1999.... F-13 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999........................ F-14 Notes to Consolidated Financial Statements for the years ended December 31, 1997, 1998 and 1999.................. F-15 Unaudited Pro Forma Financial Information: Unaudited Pro Forma Balance Sheet as of March 31, 2000.... F-31 Unaudited Pro Forma Statement of Operations for the three months ended March 31, 2000............................. F-32 Unaudited Pro Forma Statement of Operations for the year ended December 31, 1999................................. F-33 Notes to Unaudited Pro Forma Financial Information........ F-34
F-1 TRANSGENOMIC, INC. 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............................................... 6,043,025 2,595,069 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.................................... 13,018,881 13,306,400 PROPERTY AND EQUIPMENT, NET................................. 2,581,139 3,103,511 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-2 TRANSGENOMIC, INC. 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-3 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 TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. F-4 TRANSGENOMIC INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR 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 ============ ===========
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. F-5 TRANSGENOMIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 31, 1999 AND 2000 (UNAUDITED) A. CONSOLIDATED FINANCIAL STATEMENTS The accompanying unaudited consolidated financial statements of Transgenomic, Inc. and Subsidiaries (the "Company") included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management of the Company, all adjustments (consisting of only normal and recurring accruals) have been made to present fairly the financial positions, the results of operations and cash flows for the periods presented. Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these financial statements be read in conjunction with the December 31, 1999 consolidated financial statements included elsewhere herein. B. INVENTORIES At December 31, 1999 and March 31, 2000 inventories consist of the following:
1999 2000 ---------- ---------- Finished goods....................................... $3,256,067 $1,527,443 Raw materials and work in process.................... 2,786,958 1,067,626 ---------- ---------- $6,043,025 $2,595,069 ========== ==========
Within the total inventory above, the Company has demonstration inventory of $3,098,851 and $494,576 for 1999 and 2000, respectively. During the three months ended March 31, 2000, the Company reclassified demonstration inventory of $975,198 to property and equipment. C. NOTE PAYABLE On February 10, 2000 the Company borrowed $204,190 from a director and principal stockholder. The promissory note has an interest rate of 9.75% per annum and is payable on August 10, 2000. The Company must comply with restrictive covenants in connection with its note payable-bank and certain installment 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 expects to receive a waiver from the bank for the covenant violations as of March 31, 2000. D. STOCKHOLDERS' EQUITY AND STOCK OPTIONS STOCKHOLDERS' EQUITY On March 30, 2000, the Company's stockholders approved an increase 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 $10.00 per share to an individual who was subsequently elected to the Company's Board of Directors. F-6 TRANSGENOMIC, 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) STOCK OPTIONS On March 30, 2000, the Company's stockholders approved an amendment to the 1997 Stock Option Plan to increase the number of shares 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 deemed fair value of the 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 operations over the vesting periods of the individual stock options using the straight-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 deemed fair value of 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 accelerated method of amortization. These expense amounts were calculated using the Black-Scholes option 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. The following table summarizes activity under the 1997 Stock Option Plan during the three months ended March 31, 2000.
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 =========
The weighted average fair value of options granted in the first quarter of fiscal 2000 was $4.88. At March 31, 2000, the weighted average remaining contractual life of options outstanding was 9.12 years. The fair value of each stock option granted is estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for options granted in the first F-7 TRANSGENOMIC, 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) quarter of fiscal 2000, respectively: no common stock dividends; risk-free interest rates ranging from 6.30% to 6.57%, 35% volatility; and an expected option life ranging from 1 to 6.5 years. Pro forma net income and income per share for the three months ended March 31, 2000, assuming compensation expense for the Stock Option Plan had been determined under SFAS 123, is 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. INCOME TAXES Due to the Company'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 the three months ended March 31, 2000, 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 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. During the three months ended March 31, 1999, the Company had 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. SUBSEQUENT EVENTS On May 16, 2000, the Company signed an asset purchase agreement with a company controlled by a director and principal stockholder of the Company, under which the Company agreed to sell the assets related to its non-life sciences instruments product line for $6,000,000, of which $4,000,000 will be paid in cash and $2,000,000 will be paid with an interest-bearing promissory note due on December 30, 2000. The note bears interest at 8.75%. The purchase price is subject to adjustment for changes in the value of inventories and accrued vacation from December 31, 1999 and for expenses paid by us after March 31, 2000 that relate to this group of products. The purchaser intends to finance the cash portion of the purchase price plus initial working capital needs with borrowings of approximately $4.6 million obtained from a bank. The Company has agreed with the bank that it will acquire the notes evidencing these loans from the bank upon closing of the Company's initial public offering by paying to the bank an amount equal to the entire principal balance of the notes plus accrued and unpaid interest. If the offering is not completed, the Company is under no obligation to acquire these notes. The director and principal stockholder of the Company has agreed to pledge 1,200,000 shares of the Company's common stock owned by him as security for the acquired notes. All of these shares 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 to be sold in order to pay principal and interest on the acquired notes when due, subject to a 180-day lock-up agreement. The F-8 TRANSGENOMIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 31, 1999 AND 2000 (CONTINUED) (UNAUDITED) F. SUBSEQUENT EVENTS (CONTINUED) acquired notes will mature on December 30, 2000 and will bear interest at a rate of 8.75% per annum. The sale of these assets was approved by the Company's stockholders at the annual meeting on March 30, 2000 and is expected to close during the second quarter of fiscal 2000. 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 sale of the non-life sciences instrument product line occurred as of 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-9 INDEPENDENT AUDITORS' REPORT Board of Directors Transgenomic, Inc. Omaha, Nebraska We have audited the accompanying consolidated balance sheets of Transgenomic, Inc. and subsidiaries (the Company) as of December 31, 1998 and 1999 and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Transgenomic, Inc. and subsidiaries as of December 31, 1998 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP Omaha, Nebraska March 7, 2000 F-10 TRANSGENOMIC, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1998 AND 1999
1998 1999 ----------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 187,455 $ 153,336 Accounts receivable, net.................................. 4,425,419 6,199,059 Inventories............................................... 4,183,509 6,043,025 Prepaid expenses and other current assets................. 292,926 527,461 Deferred income taxes..................................... 114,000 -- Refundable income taxes................................... 34,000 96,000 ----------- ------------ Total current assets.................................... 9,237,309 13,018,881 PROPERTY AND EQUIPMENT: Equipment................................................. 3,272,132 4,695,785 Furniture and fixtures.................................... 1,070,569 1,567,370 ----------- ------------ 4,342,701 6,263,155 Less-accumulated depreciation............................. 2,931,886 3,682,016 ----------- ------------ 1,410,815 2,581,139 OTHER ASSETS................................................ 4,087,940 4,363,490 ----------- ------------ $14,736,064 $ 19,963,510 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Note payable-bank......................................... $ 3,150,000 $ 4,340,000 Current portion of notes payable-other.................... 432,338 579,724 Accounts payable.......................................... 2,287,451 2,827,186 Accrued compensation...................................... 533,680 666,219 Other accrued expenses.................................... 988,950 1,111,871 ----------- ------------ Total current liabilities............................... 7,392,419 9,525,000 NOTES PAYABLE-OTHER, LESS CURRENT MATURITIES................ 694,536 116,958 CONVERTIBLE NOTES PAYABLE................................... -- 12,421,010 COMMITMENTS AND CONTINGENCIES (NOTES H, J, L, M AND N) STOCKHOLDERS' EQUITY (DEFICIT): Preferred stock, $.01 par value, 15,000,000 shares authorized, none outstanding............................ -- -- Common stock, $.01 par value, 30,000,000 shares authorized, 13,000,000 shares issued and outstanding in 1998 and 1999........................................... 130,000 130,000 Additional paid-in capital................................ 10,119,095 10,231,595 Note receivable related party............................. (1,085,931) -- Unearned compensation..................................... -- (112,500) Accumulated deficit....................................... (2,517,189) (12,344,075) Accumulated other comprehensive income (loss)............. 3,134 (4,478) ----------- ------------ Total stockholders' equity (deficit).................... 6,649,109 (2,099,458) ----------- ------------ $14,736,064 $ 19,963,510 =========== ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-11 TRANSGENOMIC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
1997 1998 1999 ----------- ----------- ----------- NET SALES................................................... $11,576,677 $18,935,440 $23,034,954 COST OF GOODS SOLD.......................................... 6,335,986 9,590,663 12,090,036 ----------- ----------- ----------- Gross profit............................................ 5,240,691 9,344,777 10,944,918 OPERATING EXPENSES: General and administrative................................ 2,444,398 2,795,199 3,771,663 Marketing and sales....................................... 3,967,574 5,364,953 7,759,997 Research and development.................................. 2,047,057 3,159,377 6,296,859 ----------- ----------- ----------- 8,459,029 11,319,529 17,828,519 ----------- ----------- ----------- LOSS FROM OPERATIONS........................................ (3,218,338) (1,974,752) (6,883,601) OTHER INCOME (EXPENSE): Interest expense, net of interest income of $53,527, $59,147 and $126,215 in 1997, 1998 and 1999, respectively............................................ (412,755) (516,366) (1,198,378) Other-net................................................. (14,634) (15,282) 366 ----------- ----------- ----------- (427,389) (531,648) (1,198,012) ----------- ----------- ----------- LOSS BEFORE INCOME TAXES.................................... (3,645,727) (2,506,400) (8,081,613) INCOME TAX EXPENSE (BENEFIT): Current................................................... (348,702) 19,993 (27,727) Deferred.................................................. (887,486) (950,000) 1,773,000 ----------- ----------- ----------- (1,236,188) (930,007) 1,745,273 ----------- ----------- ----------- NET LOSS.................................................... $(2,409,539) $(1,576,393) $(9,826,886) =========== =========== =========== BASIC AND DILUTED LOSS PER SHARE............................ $ (0.22) $ (0.13) $ (0.76) =========== =========== =========== BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING....... 11,144,583 12,279,042 13,000,000 =========== =========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-12 TRANSGENOMIC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
RETAINED ADDITIONAL EARNINGS COMMON PREFERRED PAID-IN NOTE UNEARNED (ACCUMULATED STOCK STOCK CAPITAL RECEIVABLE COMPENSATION DEFICIT) -------- --------- -------------- ----------- ------------ ------------ BALANCE, JANUARY 1, 1997........... $ 110 $ 41,000 $ 1,242,940 $ (650,782) $ -- $ 1,479,904 Net loss......................... -- -- -- -- -- (2,409,539) Other comprehensive income (loss): Foreign currency translation adjustment................... -- -- -- -- -- -- Comprehensive income (loss)..................... -- -- -- -- -- -- Note receivable from related party.......................... -- -- -- (369,062) -- -- Preferred stock dividends........ -- -- -- -- -- (11,161) Redeem 410 shares of preferred stock.......................... -- (41,000) -- -- -- -- 1,000 to 1 stock exchange........ 109,890 -- (109,890) -- -- -- Sale of 351,500 common shares.... 3,515 -- 1,620,354 -- -- -- Issuance of warrants to purchase 300,000 common shares.......... -- -- 82,117 -- -- -- -------- -------- -------------- ----------- --------- ------------ BALANCE, DECEMBER 31, 1997......... 113,515 -- 2,835,521 (1,019,844) -- (940,796) Net loss......................... -- -- -- -- -- (1,576,393) Other comprehensive income (loss): Foreign currency translation adjustment................... -- -- -- -- -- -- Comprehensive income (loss)..................... -- -- -- -- -- -- Note receivable from related party.......................... -- -- -- (66,087) -- -- Sale of 1,648,500 common shares......................... 16,485 -- 7,283,574 -- -- -- -------- -------- -------------- ----------- --------- ------------ BALANCE, DECEMBER 31, 1998......... 130,000 -- 10,119,095 (1,085,931) -- (2,517,189) Net loss......................... -- -- -- -- -- (9,826,886) Other comprehensive income (loss): Foreign currency translation adjustment................... -- -- -- -- -- -- Comprehensive income (loss)..................... -- -- -- -- -- -- Issuance of 22,500 stock options........................ -- -- 112,500 -- (112,500) -- Note receivable from related party.......................... -- -- -- 1,085,931 -- -- -------- -------- -------------- ----------- --------- ------------ BALANCE, DECEMBER 31, 1999......... $130,000 $ -- $ 10,231,595 $ -- $(112,500) $(12,344,075) ======== ======== ============== =========== ========= ============ ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) TOTAL ------------- ----------- BALANCE, JANUARY 1, 1997........... $ 768 $ 2,113,940 Net loss......................... (2,409,539) (2,409,539) Other comprehensive income (loss): Foreign currency translation adjustment................... 1,348 1,348 ----------- Comprehensive income (loss)..................... (2,408,191) ----------- Note receivable from related party.......................... -- (369,062) Preferred stock dividends........ -- (11,161) Redeem 410 shares of preferred stock.......................... -- (41,000) 1,000 to 1 stock exchange........ -- -- Sale of 351,500 common shares.... -- 1,623,869 Issuance of warrants to purchase 300,000 common shares.......... -- 82,117 ----------- ----------- BALANCE, DECEMBER 31, 1997......... 2,116 990,512 Net loss......................... (1,576,393) (1,576,393) Other comprehensive income (loss): Foreign currency translation adjustment................... 1,018 1,018 ----------- Comprehensive income (loss)..................... (1,575,375) -- ----------- Note receivable from related party.......................... -- (66,087) Sale of 1,648,500 common shares......................... -- 7,300,059 ----------- ----------- BALANCE, DECEMBER 31, 1998......... 3,134 6,649,109 Net loss......................... (9,826,886) (9,826,886) Other comprehensive income (loss): Foreign currency translation adjustment................... (7,612) (7,612) ----------- Comprehensive income (loss)..................... (9,834,498) -- ----------- Issuance of 22,500 stock options........................ -- -- Note receivable from related party.......................... -- 1,085,931 ----------- ----------- BALANCE, DECEMBER 31, 1999......... $ (4,478) $(2,099,458) =========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-13 TRANSGENOMIC INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
1997 1998 1999 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $(2,409,539) $(1,576,393) $(9,826,886) Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation and amortization........................... 918,214 798,708 1,364,246 Deferred income taxes................................... (887,486) (950,000) 1,773,000 Gain on sale of assets.................................. (72,250) (8,411) (16,105) Accrued interest and redemption premium................. -- -- 858,665 Amortization of deferred financing costs................ -- -- 149,960 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable................................... 318,646 (2,029,247) (1,635,316) Inventories........................................... (174,192) (1,717,595) (1,775,273) Prepaid expenses and other current 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-14 TRANSGENOMIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS DESCRIPTION. Transgenomic, Inc., a Delaware corporation, and its subsidiaries (the "Company") provide innovative research tools to the life sciences industry. These tools enable researchers to discover and understand variation in the human genetic code, or genome, in order to accelerate and improve drug development and diagnostics. The Company also manufactures and designs sample preparation and monitoring instruments, which are primarily used with various types of optical and mass spectrometers to analyze the chemical makeup of samples. The Company markets and sells these platforms primarily throughout North America, Europe and the Pacific Rim. PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of Transgenomic, Inc. and its wholly-owned subsidiaries Transgenomic, Ltd. (fka CETAC Technologies, Ltd.), which provides sales and customer support outside the United States and Transgenomic St. Thomas, Inc., which is organized as a foreign sales corporation. All material intercompany balances and transactions have been eliminated. On July 1, 1997 the Company merged with CETAC Holding Company, Inc. in a 1000 to 1 stock exchange. Before and after the merger, the companies had identical ownership structures. Accordingly, this transaction was between companies under common control and was accounted for similar to a pooling of interests. The Company had no assets, liabilities or operations prior to its merger with CETAC Holding Company, Inc. SALES AND DISTRIBUTION STRATEGY. The Company sells 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. For purposes of reporting cash flows, cash and cash equivalents include cash and temporary investments with maturities at acquisition of three months or less. F-15 TRANSGENOMIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED) A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ACCOUNTS RECEIVABLE. Accounts receivable are shown net of allowance for doubtful accounts of $561,645 and $160,593 in 1998 and 1999, respectively. Payment terms generally are 30 or 60 days. INVENTORIES. Inventories are stated at the lower of cost (first-in, first-out method) or market. The Company has certain finished goods inventory it provides as demonstration units to potential customers for evaluation, as well as to certain universities and original equipment manufacturers for testing and demonstration. These demonstration units are included in inventory at cost. If the instrument is not purchased by the customer or institution, it is retrieved, and, if necessary, reconditioned for sale. Demonstration inventory is evaluated for impairment based on its functional use and technological status. No impairment loss has been recognized to date. If these instruments exhibit wear and no longer are held for resale, they are transferred from inventory to property at cost and depreciated. Demonstration equipment included in property and equipment is used for research and development and training. PROPERTY AND EQUIPMENT. Property and equipment are carried at cost. Depreciation and amortization are computed by the straight-line and accelerated methods over the estimated useful lives of the related assets as follows: Furniture and fixtures...................................... 5 to 7 years Production equipment........................................ 5 to 7 years Computer equipment.......................................... 5 years Research and development equipment.......................... 3 to 5 years Demonstration equipment..................................... 3 to 5 years
GOODWILL. Goodwill arising from the excess of cost over the fair value of net assets at dates of acquisition is being amortized using the straight-line method over 15 years. IMPAIRMENT OF LONG-LIVED ASSETS. The Company assesses the recoverability of long-lived assets held for use, including certain intangible assets and goodwill, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In such cases, if the sum of the expected cash flows (undiscounted and without interest) resulting from the use of the asset are less than the carrying amount, an impairment loss is recognized based on the difference between the carrying amount and the fair value of the assets. No impairment loss has been recognized to date. OTHER ASSETS. Other assets include patents, capitalized software and intellectual property. The Company capitalizes the external and in-house legal costs and filing fees associated with obtaining patents on its new F-16 TRANSGENOMIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED) A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. The Company develops software as an integral component of its instruments. The Company capitalizes software development costs, which include purchased software and direct labor, after technological feasibility for the software has been established. After the software is ready for general release, the Company ceases capitalization of software development costs. The software is amortized over the estimated life of the product, generally three years. Intellectual property, which is purchased technology, is recorded at cost and is amortized over its estimated useful life of between 5 and 10 years. DEFERRED FINANCING COSTS. Deferred financing costs are amortized over the term of the related financing using the effective interest method. STOCK BASED COMPENSATION. The Company accounts for its 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. Stock option grants to nonemployees are accounted for in accordance with Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. UNEARNED COMPENSATION. Unearned compensation represents the unamortized difference between the option exercise price and the deemed fair market value of the Company's common stock at the option grant date, for options issued under the Company's Stock Option Plan (Note L). The unearned compensation is charged to operations over the vesting period of the respective options. INCOME TAXES. Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities at each balance sheet date using enacted tax rates expected to be in effect in the year the differences are expected to reverse. REVENUE RECOGNITION. Sales of products are recorded based on receipt of an unconditional customer order and shipment of product. The Company's sales terms do not provide for the right of return unless the product is damaged or defective. Installation and training revenues are deferred and recognized when earned. RESEARCH AND DEVELOPMENT. Research and development costs are charged to expense when incurred. F-17 TRANSGENOMIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED) A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) TRANSLATION OF FOREIGN CURRENCY. Financial statements of subsidiaries outside the U.S. are measured using the local currency as the functional currency. The adjustments to translate those amounts into U.S. dollars are accumulated in a separate account in stockholders' equity and are included in other comprehensive income. Foreign currency transaction gains or losses resulting from changes in currency exchange rates are included in the determination of net income. For the periods presented, foreign currency transaction adjustments were not significant. COMPREHENSIVE INCOME. Comprehensive income for all periods presented consists of net income and foreign currency translation adjustments. The Company deems its foreign investments to be permanent in nature and does not provide for taxes on currency translation adjustments arising from converting its investments in a foreign currency to U.S. dollars. There were no reclassification adjustments to be reported in the periods presented. FAIR VALUE OF FINANCIAL INSTRUMENTS. The estimated fair value of receivables, accounts payable, and short-term and long-term notes payable approximate the carrying values. The carrying value of receivables and accounts payable approximate fair value based on their short-term nature. The estimated fair value amounts for short-term and long-term debt were determined using rates that are currently available for issuances of debt with similar terms and maturities. 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 have been excluded from the computation of diluted earnings per share as they have an antidilutive effect due to the Company's net loss. Weighted-average shares outstanding reflects the 1,000 to 1 stock exchange which occurred on July 1, 1997, in connection with the merger of Transgenomic, Inc. and CETAC Holding Company, as if such exchange occurred at the beginning of the earliest period presented. ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, (SFAS No. 133). This statement, which is effective for fiscal years beginning after June 15, 2000, requires the recognition of all derivative financial instruments as either assets or liabilities in the statement of financial position and measurement of those instruments at fair value. Management is in the process of determining the effect, if any, SFAS No. 133 will have on the Company's financial statements. In 1999, the Company adopted Statement of Position 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE, (SOP 98-1) which, on a prospective basis, revised the accounting for software development costs. SOP 98-1 requires the capitalization of certain costs related to F-18 TRANSGENOMIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED) A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) internal use software once certain criteria have been met. The adoption of this statement did not have a material impact on the Company's financial statements. USE OF ESTIMATES. The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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. C. INVENTORIES At December 31, 1998 and 1999 inventories consist of the following:
1998 1999 ---------- ---------- Finished goods....................................... $1,888,173 $3,256,067 Raw materials and work in process.................... 2,295,336 2,786,958 ---------- ---------- $4,183,509 $6,043,025 ========== ==========
Within the total inventory above, the Company has demonstration inventory of approximately $1,631,000 and $3,098,851 for 1998 and 1999, respectively. During 1997, 1998 and 1999, the Company reclassified demonstration inventory of $22,914, $9,096 and $41,090, respectively, to property and equipment. F-19 TRANSGENOMIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED) D. OTHER ASSETS At December 31, 1998 and 1999, other assets consist of the following:
1998 1999 ------------------------------------- ------------------------------------- ACCUMULATED NET BOOK ACCUMULATED NET BOOK COST RESERVE VALUE COST RESERVE VALUE ---------- ----------- ---------- ---------- ----------- ---------- Deferred income taxes.......... $1,839,000 $ -- $1,839,000 $ 180,000 $ -- $ 180,000 Goodwill....................... 843,446 235,435 608,011 909,492 306,463 603,029 Intellectual property.......... 534,852 160,455 374,397 2,534,852 447,273 2,087,579 Patents........................ 815,934 8,010 807,924 1,076,384 21,107 1,055,277 Software....................... 369,678 118,558 251,120 503,730 227,079 276,651 Other.......................... 309,103 101,615 207,488 160,954 -- 160,954 ---------- -------- ---------- ---------- ---------- ---------- Total...................... $4,712,013 $624,073 $4,087,940 $5,365,412 $1,001,922 $4,363,490 ========== ======== ========== ========== ========== ==========
E. NOTE PAYABLE-BANK At December 31, 1998 and 1999, note payable-bank consisted of borrowings in the amounts of $3,150,000 and $4,340,000, respectively, against a revolving line of credit of $5,000,000. The note carries an interest rate equal to the national prime. The interest is payable monthly. The interest rate at December 31, 1998 and 1999 was 7.75% and 8.50%, respectively. The line matures July 31, 2000. Substantially all of the Company's assets and certain life insurance policies are pledged as collateral on this note payable. The loan contains certain restrictive covenants, including a prohibition on the payment of dividends, the purchase of its stock, and the redemption of stock options and warrants, among other things, without the written agreement of the lender. As of December 31, 1999, the Company was not in compliance with these covenants. However, a waiver was obtained from the bank for the covenant violations as of December 31, 1999. 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 restrict the purchase or lease of fixed assets to an amount that does not exceed the depreciation taken in the Company's fiscal year. F-20 TRANSGENOMIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED) F. NOTES PAYABLE-OTHER Notes payable-other at December 31, 1998 and 1999 consists of the following:
1998 1999 ---------- -------- Installment note payable to a bank maturing on December 1, 2000; payable in monthly installments of $15,618, which includes interest of 9.0%; collateralized by all equipment and furnishings........................ $ 342,194 $179,711 Installment note payable to a bank maturing on August 13, 2001; payable in monthly installments of $15,123 which includes interest of 9.0%; collateralized by all equipment and furnishings........................ 429,516 280,436 Note payable to a living trust, payable in monthly installments of $11,000 including interest at 5.33% per year, due March 1, 2000 secured by certain assets of the Company's California division................. 355,164 236,535 ---------- -------- Total notes payable-other.............................. 1,126,874 696,682 Less current portion................................... 432,338 579,724 ---------- -------- Notes payable-other excluding current portion.......... $ 694,536 $116,958 ========== ========
Aggregate maturities of notes payable-other at December 31, 1999 consist of the following: YEAR ENDING DECEMBER 31, 2000........................................................ $579,724 2001........................................................ 116,958 -------- $696,682 ========
In connection with certain installment notes payable to a bank, the Company must comply with certain restrictive covenants. As of December 31, 1999, the Company was not in compliance with these covenants. However, a waiver was obtained from the bank for the covenant violations as of December 31, 1999. 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 on the notes compounds at 6% per annum until maturity or a Designated Offering (as defined) ("Offering") and either will be payable in cash upon repayment of the note at or after the maturity date, or if elected upon the completion of an Offering all accrued and unpaid interest shall be converted into shares of common stock. The interest after an Offering shall be reduced to 3.6%, and shall become due for the remainder of the term through the maturity date at the time of an Offering. F-21 TRANSGENOMIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED) G. CONVERTIBLE NOTES PAYABLE (CONTINUED) The holder shall have the right to convert the principal amounts due under these notes into shares of the Company's common stock at any time. If the Company completes an Offering prior to September 25, 2000, the conversion price shall be either the lesser of $5.00 per share or 50% of the per share offering price. If the Offering is completed between September 25, 2000 and the maturity date, the conversion price shall be the lesser of $5.00 per share, or between 35% and 50% of the per share offering price to the public, calculated on a declining straight-line basis, through the day on which an offering is completed. If an Offering is not completed before the maturity date, the holder may elect to convert at $5.00 per share but the price will be adjusted to 35% of the Offering price if less than $5.00 per share, and additional shares, if any, will be issued to reduce the conversion price to such lesser amount. If prior to consummation of an Offering, the Company enters into a merger, consolidation, the sale of substantially all of its assets, change of control, or the dissolution of the Company or other event causing final liquidation, the holders of the notes shall have the right to elect to either receive payment in full of all principal of the notes and accrued interest earned through date of payment, or convert all outstanding principal and unpaid interest on the notes into common stock. The holders will be entitled to receive the greater of the number of shares derived by dividing the balance due by $5.00 per share, or the number of shares having an aggregate value equal to 200% of the outstanding unpaid principal, plus all accrued interest. If the note holders elect not to convert the notes to stock at maturity, the Company will be required to repay all principal amounts, all accrued and unpaid interest, if any, and a redemption premium equal to 10% of the face value of the notes, which is being recognized ratably over the life of the notes. The effective interest rate, including the redemption premium, was 9.3% at December 31, 1999. The Company can require conversion after an Offering provided specific closing prices are achieved for twenty consecutive trading days. The notes contain numerous covenants with which the Company is in compliance. At December 1999, the convertible notes payable balance is comprised of the following: Principal................................................... $12,000,000 Accrued interest and redemption premium..................... 858,665 ----------- 12,858,665 Deferred financing costs (net of accumulated amortization of $149,960)................................................. (437,655) ----------- $12,421,010 ===========
H. LEASE COMMITMENTS The Company leases certain equipment, vehicles and operating facilities. The Company's leases related to its operating facilities currently expire on various dates ranging from 1999 through 2006. However, one lease allows for cancellation at either 36 or 48 months upon 60 days advanced written notice. At December 31, 1999, the future minimum lease payments required under noncancellable lease provisions are approximately $830,000 in 2000; $591,000 in 2001; $304,000 in 2002; $148,000 in 2003; F-22 TRANSGENOMIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED) H. LEASE COMMITMENTS (CONTINUED) $128,000 in 2004; and a total of approximately $188,000 in rental payments for the years 2005 through 2006. Rent expense related to all operating leases for the years ended December 31, 1997, 1998 and 1999 was approximately $441,000, $655,000 and $984,000, respectively. I. INCOME TAXES The Company's provision for income taxes for the years ended December 31 differs from the amounts determined by applying the statutory Federal income tax rate to income before income taxes for the following reasons:
1997 1998 1999 ----------- --------- ----------- Benefit at Federal Rate................................... $(1,239,547) $(852,176) $(2,747,748) Increase (decrease) resulting from: State income taxes-net of federal benefit............... (45,004) (85,805) (62,520) Intangible amortization................................. 46,804 39,020 42,925 Research and development tax credit..................... (15,319) (23,534) (54,231) Meals and entertainment................................. 16,999 27,037 38,687 Other-net............................................... (121) (34,549) 37,160 Valuation allowance..................................... -- -- 4,491,000 ----------- --------- ----------- Total income tax expense (benefit)........................ $(1,236,188) $(930,007) $ 1,745,273 =========== ========= ===========
The Company's deferred income tax asset at December 31, 1998 and 1999 is comprised of the following temporary differences:
1998 1999 ---------- ---------- Net operating loss carryforward...................... $1,497,000 $4,289,000 Allowance for doubtful accounts...................... 221,000 60,000 Fixed asset depreciation............................. 121,000 124,000 Accrued vacation..................................... 114,000 137,000 Intellectual property amortization................... -- 61,000 ---------- ---------- 1,953,000 4,671,000 Less valuation allowance............................. -- (4,491,000) ---------- ---------- $1,953,000 $ 180,000 ========== ==========
At December 31, 1999, the Company has unused tax net operating loss carryforwards of approximately $2,106,000 which expire in 2012, $1,828,000 which expire in 2018 and $7,638,000 which will expire in 2019. Additionally, at December 31, 1999, the Company has unused general business credits earned primarily through increased research expenditures of approximately $131,000. These credits expire at various times between 2010 and 2019. The Company's management believes that it is more likely than not that the deferred tax asset of $180,000 will be realized through the sale of the business discussed in Note R. A valuation allowance has been provided in 1999 for the remaining deferred tax assets, due to the F-23 TRANSGENOMIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED) I. INCOME TAXES (CONTINUED) Company'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. EMPLOYEE BENEFIT PLAN The Company maintains an employee savings plan which allows for voluntary contributions into designated investment funds by eligible employees. The Company matches the employees' contributions at the rate of 50% on the first 6% of contributions. The Company may at the discretion of its Board of Directors, make additional contributions on behalf of the Plan's participants. Company contributions were $92,733, $117,923 and $174,973 for the years ended December 31, 1997, 1998 and 1999, respectively. K. STOCKHOLDERS' EQUITY PRIVATE PLACEMENT The Company issued 2,000,000 shares of the Company's common stock, par value $.01 per share (the "Stock"), at a price of $5.00 per share in a private placement during 1997 and 1998 for net proceeds of $1,623,869 and $7,300,059, respectively. A total of 1,524,500 shares of the 2,000,000 shares of common stock were placed by Placement Agents pursuant to selling agent agreements. A 9% commission was paid to each Placement Agent on all sales of the common stock made by it and broker-dealers. The Company also issued warrants to the Placement Agents with an exercise price of $5.00 per share (subject to certain cashless exercise rights) which will have terms of five years expiring in 2003. Total shares eligible to be purchased through these warrants were 152,450 at December 31, 1999 (see Note L). In 1999, the Company issued convertible notes which can be converted into a minimum of 2,400,000 common shares (see Note G). PREFERRED STOCK. The Company's Board of Directors is authorized to issue up to 15,000,000 shares of preferred stock in one or more series, from time to time, with such designations, powers, preferences and rights and such qualifications, limitations and restrictions as may be provided in a resolution or resolutions adopted by the Board of Directors. The authority of the Board of Directors includes, but is not limited to, the determination or fixing of the following with respect to shares of such class or any series thereof: (i) the number of shares; (ii) the dividend rate, whether dividends shall be cumulative and, if so, from which date; (iii) whether shares are to be redeemable and, if so, the terms and amount of any sinking fund providing for the purchase or redemption of such shares; (iv) whether shares shall be convertible and, if so, the terms and provisions thereof; (v) what restrictions are to apply, if any, on the issue or reissue of any additional preferred stock; and (vi) whether shares have voting rights. The preferred stock may be issued with a preference over the common stock as to the payment of dividends. F-24 TRANSGENOMIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED) K. STOCKHOLDERS' EQUITY (CONTINUED) The Company has no current plans to issue any series of preferred stock. Classes of stock such as the preferred stock may be used, in certain circumstances, to create voting impediments on extraordinary corporate transactions or to frustrate persons seeking to effect a merger or otherwise to gain control of the Company. For the foregoing reasons, any preferred stock issued by the Company could have an adverse effect on the rights of the holders of the common stock. COMMON STOCK. In March 2000, the Company's Board of Directors approved an increase in the number of authorized common shares to 60,000,000, subject to the approval of the Company's stockholders. L. STOCK OPTIONS AND WARRANTS The Company adopted the 1997 Stock Option Plan in June of 1997 which was last amended and restated on October 14, 1998. The Company's 1997 Stock Option Plan (the "Stock Option Plan") allows the Company to grant both incentive stock options and nonqualified stock options to acquire shares of the Company's common stock to employees and directors of the Company and to nonemployee advisors. Either incentive or non-qualified stock options may be granted to employees of the Company, but only nonqualified stock options may be granted to nonemployee directors and advisors. The maximum number of shares for which options may be granted under the Stock Option Plan is 4,000,000. The Stock Option Plan is administered by the Compensation Committee of the Board of Directors (the "Committee") which has the authority to set the number, exercise price, term and vesting provisions of the options granted under the Stock Option Plan, subject to the terms thereof. The options must be granted at exercise prices not less than the fair market value of the common stock on the date of the grant. Generally, the stock options vest at a rate of 20% per year over a five year period and expire 10 years after the date the option was granted. If the option holder ceases to be employed by the Company, the Company will have the right to terminate any outstanding but unexercised options. In March 2000, the Company's Board of Directors approved an amendment to the Stock Option Plan to increase the number of shares for which options can be granted to 6,000,000, subject to the approval of the Company's stockholders. F-25 TRANSGENOMIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED) L. STOCK OPTIONS AND WARRANTS (CONTINUED) The following table summarizes activity under the Stock Option Plan during the three years ended December 31, 1999:
WEIGHTED AVERAGE NUMBER OF EXERCISE OPTIONS PRICE --------- -------- Balance at Inception (June 1997):....................... -- $ -- Granted............................................... 1,515,000 5.00 Exercised............................................. -- -- Canceled.............................................. -- -- --------- Balance at December 31, 1997:........................... 1,515,000 5.00 Granted............................................... 1,690,250 5.00 Exercised............................................. -- -- Canceled.............................................. -- -- --------- Balance at December 31, 1998:........................... 3,205,250 5.00 Granted............................................... 590,250 5.00 Exercised............................................. -- -- Canceled.............................................. (257,750) 5.00 --------- Balance at December 31, 1999............................ 3,537,750 ========= Exercisable at December 31, 1999........................ 2,028,650 =========
The weighted average fair value of options granted in 1997, 1998 and 1999 was $1.34, $1.02 and $1.00, respectively. At December 31, 1999, the weighted average remaining contractual life of options outstanding was 8.4 years. In 1997, the Company granted options to purchase 1.5 million shares at $5.00 per share to an officer of the Company which are fully vested and exercisable at December 31, 1997 and expire in 2007. The Company has also granted options to purchase 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 Opinion No. 25, under which no recognition of expense is required in accounting for stock options granted to employees for which the exercise price equals or exceeds the deemed fair market value of the stock at the grant date. In those cases where options have been granted with an exercise price below the deemed fair market value, the Company recognizes compensation expense using the straight-line method over the vesting periods of the individual stock options. During December 1999, the Company recorded unearned compensation of $112,500 for options granted with exercise prices less than the deemed fair market value at the date of grant. F-26 TRANSGENOMIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED) L. STOCK OPTIONS AND WARRANTS (CONTINUED) Pro forma information regarding net income and income per share is required by Statement of Financial Accounting Standard No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, (SFAS No. 123) assuming the Company accounted for its employee stock options using the fair value method. The fair value of each stock option granted is estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for options granted in 1997, 1998 and 1999, respectively: no common stock dividends, risk-free interest rates ranging from 5.44% and 5.74% to 6.33% and 5.51% to 6.13%; no volatility (prior to becoming a public company); and an expected option life of five years. Pro forma net income and income per share assuming compensation expense for the Stock Option Plan had been determined under SFAS No. 123, are as follows:
1997 1998 1999 ----------- ----------- ----------- Net Loss: As reported........................... $(2,409,539) $(1,576,393) $(9,826,886) Pro forma............................. (4,421,148) (1,662,641) (9,974,172) Basic and diluted loss per share: As reported........................... (0.22) (0.13) (0.76) Pro forma............................. (0.40) (0.14) (0.77)
In the first quarter of fiscal 2000, the Company granted 212,500 options, including 72,000 options with exercise prices at $5.00 per share and will record unearned compensation in connection with these grants. During 1998, the Company issued warrants to purchase 152,450 shares of common stock pursuant to placement agent agreements (see Note K). On December 16, 1997, the Company issued a warrant to purchase 300,000 shares of common stock pursuant to a Securities Purchase Agreement (see Note M). M. RELATED PARTY TRANSACTIONS CT PARTNERS. The Company and CT Partners were related parties through common ownership. The Company provided research and development services for CT Partners at cost. The cost of these services amounted to $650,782 and $318,800 for the years ended December 31, 1996 and 1997, respectively. There were no research and development services provided subsequent to 1997 as the technology involved was fully developed. These amounts are included in note receivable-related party, along with accrued interest and administration fees of $116,349 at December 31, 1998. The Company also performs contract research and development services for unaffiliated entities. On June 27, 1997 the Company entered into a royalty agreement with CT Partners in which the Company received an exclusive license to manufacture and market a miniature solid-state optical spectrometer developed by CT Partners. This agreement was amended on December 1, 1997. Under the terms of the amended royalty agreement, the Company would pay a royalty to CT Partners equal to a maximum of $6.5 million. The first $1.5 million would be paid upon achieving $3 million in sales of products employing the licensed technology or from a sale of the technology. Subsequent royalty payments would equal 10% of gross revenues received by the Company from the licensed technology, payable F-27 TRANSGENOMIC, 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-Scholes pricing model with the following assumptions: no common stock dividends, risk free interest rate of 5.71%; expected life of 12 months; and no volatility. These warrants were completely amortized as of December 31, 1998. N. COMMITMENTS AND CONTINGENCIES The Company is not a party to any material legal proceedings. In May 1998, the Company elected to self-insure the majority of its employees' health care coverage with lifetime coverage up to $2,000,000 and $5,000,000 per person at December 31, 1998 and 1999, respectively. In place are reinsurance policies limiting losses for any individual within the plan of $10,000 per year, and a total company aggregate stop-loss limit at December 31, 1999 of approximately $282,000, with coverage up to $2,282,000 of aggregated total claims. Based on estimated claims and the reinsurance in place, management believes the costs are reasonably estimated in the financial statements. O. SALES AND PRODUCT INFORMATION The Company believes it is advantageous to operate on a fully integrated basis in one operating segment. Accordingly, management of the Company evaluates performance and determines the allocation F-28 TRANSGENOMIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (CONTINUED) O. SALES AND PRODUCT INFORMATION (CONTINUED) of resources on an entity-wide basis. There are no material long-lived assets held outside the United States. The following is supplemental information for net sales by geographic area and product group:
1997 1998 1999 ----------- ----------- ----------- Sales by Geographic Area: 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 ACCOUNTS The following is a summary of activity for the allowance for doubtful acounts during each of the three years ended December 31, 1999:
ADDITIONAL BEGINNING CHARGES DEDUCTIONS ENDING BALANCE TO INCOME FROM RESERVE BALANCE --------- ---------- ------------ -------- Year Ended December 31, 1997....................... $ -- $102,495 $ (2,495) $100,000 Year Ended December 31, 1998....................... 100,000 462,698 (1,053) 561,645 Year Ended December 31, 1999....................... 561,645 121,609 (522,661) 160,593
R. SUBSEQUENT EVENTS On March 7, 2000, the Company signed a letter of intent for the sale of the assets of its non-life sciences instrument product line to a director of the Company for $6,000,000, of which $5,000,000 will be paid in cash and $1,000,000 will be paid with an interest-bearing promissory note due on March 31, 2001. The non-life science instrument product line contributed revenues of $8,794,165 in 1999. The Company expects this transaction to close on March 31, 2000, subject to the approval of the Company's stockholders. F-29 UNAUDITED 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 (The Company as adjusted) and the issuance of 300,000 shares of common stock at $5.00 per share upon the exercise of warrants that will expire at the close of this offering, as if each had occurred on January 1, 1999 and the assumed conversion at $5.00 per share of the $12.0 million aggregate principal amount of our convertible notes and accrued interest into 2,728,200 shares of common stock as of March 23, 1999, the date of issuance of our convertible notes. The following unaudited pro forma balance sheet reflects these transactions as if each 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 pro forma financial data reflects the preliminary identification of the non-life science instruments assets to be sold by the Company. We expect to finalize the identification of the assets to be sold at the time of closing. The unaudited financial data are intended for informational purposes only and are not intended to be indicative of our results of operations or financial position had these transactions occurred on the dates specified, nor are they indicative of our future results of operations or financial position. The unaudited pro forma financial data, including notes thereto, should be read in conjunction with our historical consolidated financial statements, including notes thereto, appearing elsewhere in this Prospectus. F-30 TRANSGENOMIC, INC. UNAUDITED PRO FORMA BALANCE SHEET MARCH 31, 2000
ADJUSTMENTS FOR SALE OF NON-LIFE SCIENCES ADJUSTMENTS FOR INSTRUMENT CONVERTIBLE THE PRODUCT THE NOTES & COMPANY LINE COMPANY WARRANTS PRO (1) (2A) AS ADJUSTED (2B,C) FORMA ------------ ----------- ------------ --------------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents..... $ 142,870 $3,640,000 $ 3,782,870 $ 1,500,000 $ 5,282,870 Accounts receivable, net...... 5,083,542 -- 5,083,542 -- 5,083,542 Note receivable............... -- 2,000,000 2,000,000 -- 2,000,000 Inventories................... 2,595,069 -- 2,595,069 -- 2,595,069 Prepaid expenses and other current assets.............. 677,379 -- 677,379 -- 677,379 Net assets held for sale...... 4,711,540 (4,711,540) -- -- -- Refundable income taxes....... 96,000 -- 96,000 -- 96,000 ------------ ---------- ------------ ------------ ------------ Total current assets........ 13,306,400 928,460 14,234,860 1,500,000 15,734,860 PROPERTY AND EQUIPMENT, Net..... 3,103,511 -- 3,103,511 -- 3,103,511 OTHER ASSETS.................... 2,419,869 (180,000) 2,239,869 -- 2,239,869 ------------ ---------- ------------ ------------ ------------ $ 18,829,780 $ 748,460 $19,578,240 $ 1,500,000 $ 21,078,240 ============ ========== ============ ============ ============ LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) CURRENT LIABILITIES Notes payable-bank............ $ 4,490,000 $ -- $ 4,490,000 -- $ 4,490,000 Current portion of notes payable-other............... 547,188 -- 547,188 -- 547,188 Accounts payable.............. 3,944,069 -- 3,944,069 -- 3,944,069 Accrued compensation.......... 445,371 -- 445,371 -- 445,371 Other accrued expenses........ 1,236,278 -- 1,236,278 -- 1,236,278 ------------ ---------- ------------ ------------ ------------ Total current liabilities... 10,662,906 -- 10,662,906 10,662,906 NOTES PAYABLE-other, less current maturities............ 34,609 -- 34,609 -- 34,609 CONVERTIBLE NOTES PAYABLE....... 12,746,844 -- 12,746,844 (12,746,844) -- STOCKHOLDERS' EQUITY (DEFICIT) Preferred stock............... -- -- -- -- -- Common stock.................. 130,250 -- 130,250 30,282 160,532 Additional paid-in capital.... 11,723,578 -- 11,723,578 14,216,562 25,940,140 Unearned compensation......... (645,074) -- (645,074) -- (645,074) Accumulated deficit........... (15,841,984) 748,460 (15,093,524) -- (15,093,524) Accumulated other comprehensive loss.......... 18,651 -- 18,651 -- 18,651 ------------ ---------- ------------ ------------ ------------ Total stockholders' equity (deficit)................. (4,614,579) 748,460 (3,866,119) 14,246,844 10,380,725 ------------ ---------- ------------ ------------ ------------ $ 18,829,780 $ 748,460 $19,578,240 $ 1,500,000 $ 21,078,240 ============ ========== ============ ============ ============
SEE NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION. F-31 TRANSGENOMIC, INC. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000
ADJUSTMENTS FOR SALE OF NON-LIFE ADJUSTMENTS SCIENCES FOR THE INSTRUMENT THE CONVERTIBLE COMPANY PRODUCT COMPANY NOTES PRO (1) LINE AS ADJUSTED (4) FORMA ----------- ----------- ------------ ----------- ----------- NET SALES....................... $ 6,943,749 $2,170,675 (3a) $ 4,773,074 -- $ 4,773,074 COST OF GOODS SOLD.............. 3,830,519 1,432,956 (3a,b) 2,397,563 -- 2,397,563 ----------- ---------- ------------ -------- ----------- Gross profit................ 3,113,230 737,719 2,375,511 -- 2,375,511 OPERATING EXPENSES General and administrative.... 1,754,741 660,439 (3b,c) 1,094,302 -- 1,094,302 Marketing and sales........... 2,493,849 328,484 (3b) 2,165,365 -- 2,165,365 Research and development...... 1,893,581 419,222 (3b) 1,474,359 -- 1,474,359 ----------- ---------- ------------ -------- ----------- 6,142,171 1,408,145 4,734,026 -- 4,734,026 ----------- ---------- ------------ -------- ----------- LOSS FROM OPERATIONS............ (3,028,941) (670,426) (2,358,515) -- (2,358,515) OTHER INCOME (EXPENSE) Interest expense, net......... (468,968) -- (468,968) 325,834 (143,134) ----------- ---------- ------------ -------- ----------- LOSS BEFORE INCOME TAXES........ (3,497,909) (670,426) (2,827,483) 325,834 (2,501,649) INCOME TAX EXPENSE.............. -- -- -- -- -- ----------- ---------- ------------ -------- ----------- NET LOSS........................ $(3,497,909) $ (670,426) $ (2,827,483) $325,834 $(2,501,649) =========== ========== ============ ======== =========== BASIC AND DILUTED LOSS PER SHARE......................... $ (0.27) $ (0.22) $ (0.16) =========== ============ =========== BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING (5)........................... 13,007,692 13,007,692 16,035,892 =========== ============ ===========
SEE NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION. F-32 TRANSGENOMIC, INC. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999
ADJUSTMENTS FOR SALE OF NON-LIFE ADJUSTMENTS SCIENCES FOR THE INSTRUMENT THE CONVERTIBLE COMPANY PRODUCT COMPANY NOTES PRO (1) LINE AS ADJUSTED (4) FORMA ----------- ----------- ------------ ----------- ----------- NET SALES....................... $23,034,954 $8,794,165 (3a) $ 14,240,789 -- $14,240,789 COST OF GOODS SOLD.............. 12,090,036 4,924,757 (3a,b) 7,165,279 -- 7,165,279 ----------- ---------- ------------ ---------- ----------- Gross profit................ 10,944,918 3,869,408 7,075,510 -- 7,075,510 OPERATING EXPENSES General and administrative.... 3,771,663 236,808 (3b,c) 3,534,855 -- 3,534,855 Marketing and sales........... 7,759,997 1,610,369 (3b) 6,149,628 -- 6,149,628 Research and development...... 6,296,859 1,728,827 (3b) 4,568,032 -- 4,568,032 ----------- ---------- ------------ ---------- ----------- 17,828,519 3,576,004 14,252,515 -- 14,252,515 ----------- ---------- ------------ ---------- ----------- LOSS FROM OPERATIONS............ (6,883,601) 293,404 (7,177,005) -- (7,177,005) OTHER INCOME (EXPENSE) Interest expense, net......... (1,198,378) -- (1,198,378) 1,008,625 (189,753) Other, net.................... 366 -- 366 -- 366 ----------- ---------- ------------ ---------- ----------- (1,198,012) -- (1,198,012) 1,008,625 (189,387) ----------- ---------- ------------ ---------- ----------- LOSS BEFORE INCOME TAXES........ (8,081,613) 293,404 (8,375,017) 1,008,625 (7,366,392) INCOME TAX EXPENSE.............. 1,745,273 -- 1,745,273 -- 1,745,273 ----------- ---------- ------------ ---------- ----------- NET LOSS........................ $(9,826,886) $ 293,404 $(10,120,290) $1,008,625 $(9,111,665) =========== ========== ============ ========== =========== BASIC AND DILUTED LOSS PER SHARE......................... $ (0.76) $ (0.78) $ (0.59) =========== ============ =========== BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING (5)........................... 13,000,000 13,000,000 15,334,150 =========== ============ ===========
SEE NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION. F-33 NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION On May 16, 2000, we signed an asset purchase agreement with a company controlled by Stephen F. Dwyer, a director and a principal stockholder of ours, under which we have agreed to sell the assets related to our non-life sciences instruments product line for a total purchase price of $6,000,000, subject to adjustment for changes in the value of inventories and accrued vacation from December 31, 1999 and for expenses paid by us after March 31, 2000 that relate to this group of products. A total of $4,000,000 will be paid in cash at the closing and $2,000,000 will be paid with an interest-bearing promissory note due on December 30, 2000. The note bears interest at 8.75% per annum. The purchaser intends to finance the cash portion of the purchase price 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 the bank upon closing of our initial public offering by paying to the bank an amount equal to the entire principal balance of the notes 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 1,200,000 shares of our common stock owned by him 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 principal and interest on the acquired notes when due, subject to a 180-day lock-up agreement. The acquired notes will mature on December 30, 2000 and will bear interest at a rate of 8.75% per annum. The sale of these assets was approved by our stockholders at our annual meeting on March 30, 2000 and is expected to close in the second quarter of 2000. The unaudited pro forma statement of operations for the year ended December 31, 1999 and the three months ended March 31, 2000 reflects this sale and the issuance of 300,000 shares of common stock at $5.00 per share upon the exercise of warrants that will expire at the close of this offering, as if each had occurred on January 1, 1999 and the assumed conversion at $5.00 per share of our $12.0 million aggregate principal amount of our convertible notes and accrued interest into 2,728,200 shares of common stock as of March 23, 1999 (date of issuance). The unaudited pro forma balance sheet reflects these transactions as if each had been completed on March 31, 2000. The unaudited pro forma financial data are based on the following: 1. Our March 31, 2000 historical consolidated financial 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 =========
F-34 b. The assumed conversion at $5.00 per share of our convertible notes and accrued interest into 2,728,200 shares of common stock as of March 31, 2000, and elimination of related interest and redemption premium. c. The receipt of $1.5 million in cash upon issuance of 300,000 shares of common stock at $5.00 per share upon exercise of warrants. 3. The pro forma statement of operations adjustments for the sale 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 the year ended December 31, 1999 is based on an allocation of all department expenses based on the ratio of actual individual employees' wages for such department in proportion to our total wages. Our management believes such method is reasonable. The elimination for the three months ended March 31, 2000 is based on actual department expenses. c. An increase in general and administrative expenses to reflect $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 will be incurred 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 costs incurred in connection with the acceleration of vesting of employee options in connection with the sale of the assets relating to our non-life sciences instruments product line. These adjustments for the year ended December 31, 1999 and the three months ended March 31, 2000 are reflected as follows:
1999 2000 --------- -------- Elimination of the non-life sciences instruments product line's general and administrative expenses... $ 436,808 $136,839 Elimination of non-recurring compensation expenses..... -- 573,600 Anticipated increased rental costs..................... (200,000) (50,000) --------- -------- Net reduction in general and administrative expenses... $ 236,808 $660,439 ========= ========
d. No tax adjustment has been made due to our current net operating loss position. 4. The elimination of historical interest, redemption premium and deferred finance amortization associated with the convertible notes. (See Note G to the historical consolidated financial statements.) 5. The weighted average shares outstanding for the year ended December 31, 1999 and the three months ended March 31, 2000 are computed as follows:
1999 2000 ---------- ---------- Historical weighted average shares................... 13,000,000 13,007,692 Shares issued upon conversion of notes and accrued interest (2,712,200 x 9/12 for 1999)........................ 2,034,150 2,728,200 Shares issued upon exercise of warrants.............. 300,000 300,000 ---------- ---------- 15,334,150 16,035,892 ========== ==========
F-35 A picture depicting the WAVE System components - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ALTERNATE COVER PAGE FOR SHELF PROSPECTUS PROSPECTUS [ ] SHARES WARRANTS [LOGO] COMMON STOCK Two of our stockholders, and the holders of warrants to purchase 152,450 shares our common stock and the holders of convertible notes that may be converted into [ ] shares of our common stock, may sell up to [ ] shares of our common stock and the warrants to purchase 152,450 shares under this prospectus. The selling stockholders or warrant holders may sell the shares and warrants at the then prevailing market price for the shares or warrants at the time of the sale, or at other prices. We will not receive any of the proceeds from the sale of these shares or warrants by the selling stockholders or warrant holders. In addition, we are selling 4,000,000 shares of our common stock in our initial public offering of shares of our common stock under a separate prospectus. We have also granted to the underwriters in our initial public offering an option to purchase up to 600,000 additional shares. The underwriters of our initial public offering are not underwriting any of the shares or warrants being sold by the selling stockholders or warrant holders. Prior to our initial public offering, there has been no public market for our common stock. -------------- Our common stock has been approved for quotation on the Nasdaq National Market under the symbol TBIO. -------------- The selling stockholders and warrant holders are offering the common stock and warrants as described under "Plan of Distribution." -------------- 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. , 2000 ALTERNATIVE TABLE OF CONTENTS FOR SHELF PROSPECTUS TABLE OF CONTENTS
PAGE -------- Prospectus Summary.......................................... Risk Factors................................................ Forward-Looking Statements.................................. Dividend Policy............................................. Capitalization.............................................. Selected Financial Data..................................... Management's Discussion and Analysis of Financial Condition and Results of Operations................................. Business.................................................... Management.................................................. Principal Stockholders...................................... Related Party Transactions.................................. Description of Capital Stock................................ Shares Eligible for Future Sale............................. U.S. Federal Tax Considerations for Non-U.S. Holders........ Plan of Distribution........................................ Legal Matters............................................... Experts..................................................... Where You Can Find More Information......................... Index to Financial Statements............................... F-1
THIS PROSPECTUS CONTAINS REFERENCES TO OUR REGISTERED TRADEMARKS WAVE-REGISTERED TRADEMARK- AND DNASEP-REGISTERED TRADEMARK-. WAVEMAKER-TM-, WAVE OPTIMIZED-TM- AND THE TRANSGENOMIC NAME AND THE TRANSGENOMIC LOGO ARE OUR TRADEMARKS FOR WHICH REGISTRATION APPLICATIONS HAVE BEEN FILED WITH THE UNITED STATES PATENT AND TRADEMARK OFFICE. ALL OTHER TRADEMARKS OR TRADE NAMES REFERRED TO IN THIS PROSPECTUS ARE THE PROPERTY OF THEIR RESPECTIVE OWNERS. ALTERNATE PAGE FOR SHELF PROSPECTUS (Insert in lieu of "The Offering" in Prospectus Summary) SHARES TO BE SOLD BY SELLING STOCKHOLDERS Common Stock offered by Selling Shareholders................ [ ] Common Stock outstanding.................................... [ ]
-------------- The number of shares to be outstanding includes all shares outstanding as of , 2000 plus [ ] shares that will be issued upon the assumed conversion of $12.0 million aggregate principal amount of our convertible notes plus accrued interest at $5.00 per share and 152,450 shares that will be issued upon the assumed exercise of outstanding warrants with an exercise price of $5.00 per share. The number of shares to be outstanding after this offering does not include the 6,000,000 shares that we could issue under our employee stock option plan. As of the date of this prospectus, we have issued options to purchase 3,707,050 shares of common stock at an exercise price ranging from $5.00 to $13.00 per share. We may issue options to acquire up to 2,292,950 additional shares of our common stock under this plan. -------------- UNLESS OTHERWISE INDICATED, INFORMATION IN THIS PROSPECTUS: - ASSUMES THAT THE UNDERWRITERS DO NOT EXERCISE THEIR OVERALLOTMENT OPTION IN CONNECTION WITH OUR INITIAL PUBLIC OFFERING; AND - ASSUMES THE INITIAL PUBLIC OFFERING PRICE OF OUR COMMON STOCK WILL BE $13.00 PER SHARE. ALTERNATE PAGE FOR SHELF PROSPECTUS (Insert at end of Section entitled "Principal Stockholders") SELLING STOCKHOLDERS The following table shows the number of shares owned by each of the selling stockholders. This prospectus also shall cover any additional shares of common stock which may become issuable to the selling stockholders in connection with the [ ] shares available for sale under this prospectus by reason of any stock dividend, stock split, recapitalization or other similar transaction effected without the receipt of consideration which results in an increase in the number of our outstanding shares of common stock. The shares and warrants offered by this prospectus may be offered from time to time by the selling stockholders; subject to lockup agreements relating to [ ] of such shares. Unless otherwise indicated, each person has sole power to invest and vote the shares listed in the table, where applicable. For purposes of this table, a person or group of persons is deemed to have "beneficial ownership" of any shares which that person has the right to acquire within 60 days. Percentage ownership is based on [ ] shares of our common stock outstanding on [ ], 2000. For purposes of computing the percentage of outstanding shares held by each person or group of persons named below, any security which such person or group of persons has the right to acquire within 60 days is deemed to be outstanding for the purpose of computing the percentage ownership for such person or persons, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. Any estimate that we give regarding the number of shares that will be held by the selling stockholders after completion of this offering may prove to be inaccurate because the selling stockholders may offer all or some of the shares they hold and because there currently are no agreements, arrangements or understandings with respect to the sale of any of the shares.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED PRIOR TO OWNED AFTER THE OFFERING THE OFFERING ------------------------- SHARES TO BE ---------------------- NAME NUMBER PERCENTAGE SOLD NUMBER PERCENTAGE - ---- ------------ ---------- ------------ --------- ---------- G.S. Beckwith Gilbert........... 300,000 * 300,000 0 0 Stephen F. Dwyer................ 2,986,000(1) 14.9% 1,200,000 1,786,000 8.9 % [Name of each holder of Convertible Notes](2)......... [] []% [] 0 0 [Name of each holder of Warrants](3).................. [] * [] 0 0 Total........................... [] []% [] 0 0
- ------------------------ * less than 1% (1) Includes 500,000 shares owned by Nancy A. Dwyer, Mr. Dwyer's wife. (2) Consists of Convertible Note and interest thereon which is convertible in shares of common stock at $5.00 per share. (3) Consists of warrants to acquire common stock at $5.00 per share. These warrants were issued under the terms of various placement agent agreements that we entered in connection with the private offering of 2,000,000 shares of common stock by us in 1997 and 1998. ALTERNATE PAGE FOR SHELF PROSPECTUS (Insert in lieu of Section entitled "Underwriting") PLAN OF DISTRIBUTION The selling stockholders and warrant holders may sell their shares of our common stock or warrants to purchase our common stock, from time to time; subject to lockup agreements entered into by some of them in connection with our initial public offering that prohibit the sale of [ ] shares until November , 2000. The selling stockholders and warrant holders will act independently of us in making decisions regarding the timing, manner and size of each sale. The sales may be made on the Nasdaq National Market or in the over-the-counter market or otherwise, at prices and at terms then prevailing or at prices related to the then current market price, or in negotiated transactions. The selling stockholders and warrant holders may effect such transactions by selling the shares or warrants to or through broker-dealers. The shares may be sold by one or more of, or a combination of, the following: - a block trade in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction, - purchases by a broker-dealer as principal and resale by such broker-dealer for its account under this prospectus, - an exchange distribution in accordance with the rules of such exchange, - ordinary brokerage transactions and transactions in which the broker solicits purchasers, and - in privately negotiated transactions. Stephen F. Dwyer has pledged 1,200,000 shares of common stock to us in order to secure payment of principal and interest on promissory notes with a total principal balance of approximately $6.6 million. These shares are held in escrow and we have the right to cause them to be sold in order to pay principal and interest on these notes, subject to Mr. Dwyer's 180-day lock-up agreement. See "Related Party Transactions." To the extent required, this prospectus may be amended or supplemented from time to time to describe a specific plan of distribution. In effecting sales, broker-dealers engaged by the selling stockholders and warrant holders may arrange for other broker-dealers to participate in the resales. The selling stockholders may enter into hedging transactions with broker-dealers in connection with distributions of the shares or otherwise. In these transactions, broker-dealers may engage in short sales of the shares in the course of hedging the positions they assume with selling stockholders. The selling stockholders also may sell shares short and redeliver the shares to close out such short positions. The selling stockholders may enter into option or other transactions with broker-dealers which require the delivery to the broker-dealer of the shares. The broker-dealer may then resell or otherwise transfer such shares under this prospectus. The selling stockholders also may lend or pledge the shares to a broker-dealer. The broker-dealer may sell the shares so lent, or upon a default the broker-dealer may sell the pledged shares under this prospectus. Broker-dealers or agents may receive compensation in the form of commissions, discounts or concessions from selling stockholders and warrant holders. Broker-dealers or agents may also receive compensation from the purchasers of the shares or warrants for whom they act as agents or to whom they sell as principals, or both. Compensation as to a particular broker-dealer might be in excess of customary commissions and will be in amounts to be negotiated in connection with the sale. Broker-dealers or agents and any other participating broker-dealers or the selling stockholders or warrant holders may be deemed to be "underwriters" within the meaning of Section 2(11) of the Securities Act of 1933 (the "Securities Act") in connection with sales of the shares or warrants. Accordingly, any such commission, discount or concession received by them and any profit on the resale of the shares or warrants purchased by them may be deemed to be underwriting discounts or commissions under the Securities Act. Because selling stockholders and warrant holders may be deemed to be "underwriters" within the meaning of Section 2(11) of the Securities Act, the selling stockholders and warrant holders will be subject to the prospectus delivery requirements of the Securities Act. In addition, any securities covered by this prospectus which qualify for sale under Rule 144 promulgated under the Securities Act may be sold under Rule 144 rather than under this prospectus. The selling stockholders and warrant holders have advised us that they have not entered into any agreements, understandings or arrangements with any underwriters or broker-dealers regarding the sale of their securities. There is no underwriter or coordinating broker acting in connection with the proposed sale of shares by the selling stockholders or warrants by the warrant holders. ALTERNATE PAGE FOR SHELF PROSPECTUS (Insert in lieu of Section entitled "Underwriting") The shares and warrants will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states the shares or warrants may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with. Under applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the shares may not simultaneously engage in market making activities with respect to our common stock for a period of two business days prior to the commencement of such distribution. In addition, each selling stockholder and warrant holder will be subject to applicable provisions of the Exchange Act and the associated rules and regulations under the Exchange Act, including Regulation M, which provisions may limit the timing of purchases and sales of shares of our common stock by the selling stockholders or warrants by warrant holders. We will make copies of this prospectus available to the selling stockholders and warrant holders and have informed them of the need to deliver copies of this prospectus to purchasers at or prior to the time of any sale of the shares or warrants. We will file a supplement to this prospectus, if required, to comply with Rule 424(b) under the Securities Act upon being notified by a selling stockholder or warrant holder that any material arrangements have been entered into with a broker-dealer for the sale of shares through a block trade, special offering, exchange distribution or secondary distribution or a purchase by a broker or dealer. Such supplement will disclose: - the name of each such selling stockholder or warrant holder and of the participating broker-dealer(s), - the number of shares or warrants involved, - the price at which such shares or warrants were sold, - the commissions paid or discounts or concessions allowed to such broker-dealer(s), where applicable, - that such broker-dealer(s) did not conduct any investigation to verify the information set out or incorporated by reference in this prospectus, and - other facts material to the transaction. In addition, upon being notified by a selling stockholder or warrant holder that a donee or pledgee intends to sell more than 500 shares, we will file a supplement to this prospectus. We will bear all costs, expenses and fees in connection with the registration of the shares and the warrants. The selling stockholders and warrant holders will bear all commissions and discounts, if any, attributable to the sales of the shares and warrants. The selling stockholders and warrant holders may agree to indemnify any broker-dealer or agent that participates in transactions involving sales of the shares and the warrants against certain liabilities, including liabilities arising under the Securities Act. PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13: OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the expenses (other than the underwriting discount and commissions) expected to be incurred by us while issuing and distributing the securities registered pursuant to this Registration Statement. All amounts other than the SEC registration fee and NASD filing fee are estimates. SEC registration fee......................... $ 33,674 NASD filing fee.............................. 6,940 Nasdaq National Market listing fee........... 95,000 Legal fees and expenses...................... 450,000 Accounting fees and expenses................. 250,000 Printing and engraving....................... 150,000 Blue sky fees and expenses (including legal fees)...................................... 10,000 Transfer agent fees.......................... 10,000 Miscellaneous................................ 494,386 ---------- Total...................................... $1,500,000 ==========
ITEM 16: EXHIBITS AND FINANCIAL STATEMENTS; SCHEDULES (a) Exhibits. 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* 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* 10.14 License Agreement, dated September 1, 1994, between the Registrant and Professor Dr. Gunther Bonn, et. al. and Amendment thereto, dated March 14, 1997+* 10.15 License Agreement, dated August 20, 1997, between the Registrant and Leland Stanford Junior University+*
II-1 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 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-2 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, we have duly caused Amendment No. 1 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 16th day of May 2000. TRANSGENOMIC, INC. By: /s/ COLLIN J. D'SILVA ----------------------------------------- Collin J. D'Silva CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 1 to this Registration Statement has been signed by the following persons in the capacities indicated as of the 16th day of May 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-3 EXHIBIT 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* 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* 10.14 License Agreement, dated September 1, 1994, between Registrant and Professor Dr. Gunther Bonn, et. al. and Amendment thereto, dated March 14, 1997+* 10.15 License Agreement, dated August 20, 1997, between the Registrant and Leland Stanford Junior University+* 10.16 Supply Agreement, dated January 1, 2000, between the Registrant and Hitachi Instruments*+ 10.17 Lease Agreement, dated November 2, 1998, between the Registrant and Westlake Development Company, Inc.* 10.18 Lease Agreement, dated May 15, 1996, between Interaction Chromatography Inc. and Westlake Development Co., Inc.* 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 the 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 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. EX-1 2 EXHIBIT 1 TRANSGENOMIC, INC. 4,000,000 SHARES(1) COMMON STOCK UNDERWRITING AGREEMENT _____ __, 2000 CHASE SECURITIES INC. Bear, Stearns & Co. Inc. Dain Rauscher Incorporated as representatives of the Several Underwriters c/o Chase Securities Inc. One Bush Street San Francisco, CA 94104 Ladies and Gentlemen: Transgenomic, Inc. a Delaware corporation (herein called the Company, which term shall also include its direct and indirect subsidiaries, unless the context otherwise requires), proposes to issue and sell 4,000,000 shares of its authorized but unissued common stock, $0.01 par value (herein called the Common Stock) (said 4,000,000 shares of Common Stock being herein called the Underwritten Stock). The Company proposes to grant to the Underwriters (as hereinafter defined) an option to purchase up to 600,000 additional shares of Common Stock (herein called the Option Stock and with the Underwritten Stock herein collectively called the Stock). The Common Stock is more fully described in the Registration Statement and the Prospectus hereinafter mentioned. The Company hereby confirms the agreements made with respect to the purchase of the Stock by the several underwriters, for whom you are acting, named in SCHEDULE I hereto (herein collectively called the Underwriters, which term shall also include any underwriter purchasing Stock pursuant to Section 3(b) hereof). You represent and warrant that you have been authorized by each of the other Underwriters to enter into this Agreement on its behalf and to act for it in the manner herein provided. 1. REGISTRATION STATEMENT. The Company has filed with the Securities and Exchange Commission (herein called the Commission) a registration statement on Form S-1 (No. 333-32174), including the related preliminary prospectus, for the registration under the Securities Act of 1933, as amended (herein called the Securities Act), of the Stock. Copies of such registration statement and of each amendment thereto, if any, including the related preliminary prospectus (meeting the requirements of Rule 430A of the rules and regulations of the Commission) heretofore filed by the Company with the Commission have been delivered to you. - -------- (1) Plus an option to purchase from the Company up to additional shares to cover over-allotments. The term Registration Statement as used in this agreement shall mean such registration statement, including all exhibits and financial statements, all information omitted therefrom in reliance upon Rule 430A and contained in the Prospectus referred to below, in the form in which it became effective, and any registration statement filed pursuant to Rule 462(b) of the rules and regulations of the Commission under the Securities Act (herein called the Rules and Regulations) with respect to the Stock (herein called a Rule 462(b) registration statement), and, in the event of any amendment thereto after the effective date of such registration statement (herein called the Effective Date), shall also mean (from and after the effectiveness of such amendment) such registration statement as so amended (including any Rule 462(b) registration statement). The term Prospectus as used in this Agreement shall mean the prospectus relating to the Stock first filed with the Commission pursuant to Rule 424(b) and Rule 430A (or if no such filing is required, as included in the Registration Statement) and, in the event of any supplement or amendment to such prospectus after the Effective Date, shall also mean (from and after the filing with the Commission of such supplement or the effectiveness of such amendment) such prospectus as so supplemented or amended. The term Preliminary Prospectus as used in this Agreement shall mean each preliminary prospectus included in such registration statement prior to the time it becomes effective. The Registration Statement has been declared effective under the Securities Act, and no post-effective amendment to the Registration Statement has been filed as of the date of this Agreement. No stop order suspending the effectiveness of the Registration Statement is in effect, and no proceedings for such purpose are pending before or threatened by the Commission. The Company has caused to be delivered to you copies of each Preliminary Prospectus and has consented to the use of such copies for the purposes permitted by the Securities Act. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants as follows: (a) Each of the Company and its subsidiaries has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has full corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement and the Prospectus and as being conducted, and is duly qualified as a foreign corporation and in good standing in all jurisdictions in which the character of the property owned or leased or the nature of the business transacted by it makes qualification necessary (except where the failure to be so qualified would not have a material adverse effect on the business, properties, financial condition or results of operations of the Company and its subsidiaries, taken as a whole) (herein called a Material Adverse Effect). The Company has no Subsidiary (as defined in the Rules and Regulations) other than Transgenomic, Ltd., a U.K. limited liability company, and Transgenomic St. Thomas, Inc., a corporation organized under the laws of the U.S. Virgin Islands (herein called the Subsidiaries). Other than the Subsidiaries, the Company does not own, directly or indirectly, any shares of capital stock or any other equity interest in any firm, partnership, joint venture, association or other entity. (b) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, other than as set forth in the Registration Statement and the Prospectus, (i) there has not been any material adverse change, or any development involving a prospective material adverse change, in the business, 2 properties, financial condition or results of operations of the Company and its Subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, (ii) neither the Company nor any of its Subsidiaries has incurred any material liability or obligation, direct or contingent, and (iii) since such dates, except in the ordinary course of business, neither the Company nor any of its Subsidiaries has entered into any material transaction not referred to in the Registration Statement and the Prospectus. Neither the Company nor any of its Subsidiaries has any material contingent obligations which are not disclosed in the Prospectus or provided for in the Company's consolidated financial statements that are included in the Registration Statement. (c) The Registration Statement and the Prospectus comply, and on the Closing Date (as hereinafter defined) and any later date on which Option Stock is to be purchased, the Prospectus will comply, in all material respects, with the provisions of the Securities Act and the Rules and Regulations; on the Effective Date, the Registration Statement did not contain any untrue statement of a material fact and did not omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading; and, on the Effective Date the Prospectus did not and, on the Closing Date and any later date on which Option Stock is to be purchased, will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; PROVIDED, HOWEVER, that none of the representations and warranties in this subparagraph (c) shall apply to statements in, or omissions from, the Registration Statement or the Prospectus made in reliance upon and in conformity with information herein or otherwise furnished in writing to the Company by or on behalf of the Underwriters for use in the Registration Statement or the Prospectus. (d) The shares of the Company's common stock, $.01 par value, issued and outstanding prior to the offering of the Stock have been duly authorized and are validly issued, fully paid and nonassessable. The Stock, when issued and sold to the Underwriters as provided herein, will be duly authorized and, when issued and paid for as contemplated herein, will be validly issued, fully paid and nonassessable and conform to the description thereof in the Prospectus. No preemptive right, registration right, right of first refusal or other similar rights of stockholders exists with respect to any Stock or the issue or sale thereof, except as set forth in the Prospectus. No further approval or authority of the stockholders or the Board of Directors of the Company will be required for the issuance and sale of the Stock as contemplated herein. Except as described in the Prospectus, neither the filing of the Registration Statement nor the offering or sale of the Stock as contemplated by this Agreement gives rise to any rights, other than those which have been waived or satisfied, for or relating to the registration of any shares of capital stock. Except as described in the Prospectus, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Securities Act. Except as described in the Prospectus, there are no outstanding subscriptions, rights, warrants, options, calls, convertible securities, commitments of sales or liens 3 related to or entitling any person to purchase or otherwise acquire any shares of the capital stock of, or other ownership interest in the Company. (e) Prior to the Closing Date, the Stock to be issued and sold by the Company will be authorized for listing by the Nasdaq National Market upon official notice of issuance. (f) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus or Prospectus relating to the proposed offering of Stock, nor, to the best knowledge of the Company, instituted proceedings for that purpose. (g) Each Preliminary Prospectus or Prospectus filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Securities Act, complied when so filed in all material respects with the Securities Act, and did not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; PROVIDED, HOWEVER, that none of the representations and warranties contained in this subparagraph (g) shall apply to the statements in, or omissions from, any Preliminary Prospectus made in reliance upon and in conformity with information herein or otherwise furnished in writing to the Company by or on behalf of the Underwriters for use in such Preliminary Prospectus. (h) The authorized and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization". The form of certificates for the Stock conforms to the legal requirements of the state of Delaware, the Company's charter and bylaws and the rules of the Nasdaq National Market. (i) The Commission has not issued an order preventing or suspending the use of any Prospectus relating to the proposed offering of the Stock, nor, to the best knowledge of the Company, instituted proceedings for that purpose. (j) The financial statements of the Company, together with related notes and schedules as set forth in the Registration Statement, present fairly the consolidated financial position and the results of operations and cash flows of the Company and its Subsidiaries at the indicated dates and for the indicated periods. Such financial statements and related schedules have been prepared in accordance with generally accepted accounting principles, consistently applied throughout the periods involved, and all adjustments necessary for a fair presentation of results for such periods have been made. The summary and selected financial data included in the Registration Statement present fairly the information shown therein and such data has been compiled on a basis consistent with the financial statements presented therein and the books and records of the Company. The other financial and statistical information and data set forth in the Registration Statement are, in all material respects, accurately presented and prepared on a basis consistent with such financial statements and the books and records of the Company. (k) Deloitte & Touche LLP, who have certified certain of the financial statements filed with the Commission as part of the Registration Statement, are 4 independent public accountants as required by the Securities Act and the Rules and Regulations. (l) Except as disclosed in the Registration Statement, there is no action, suit, claim or proceeding pending, or, to the knowledge of the Company, threatened against the Company, any of its Subsidiaries, or any of their respective directors, officers or properties, before any court or administrative agency or otherwise, which if determined adversely to the Company or such Subsidiaries could reasonably be expected to result in any Material Adverse Effect or prevent the consummation of the transactions contemplated hereby. (m) There are no agreements, contracts, leases or documents of the Company of a character required to be described or referred to in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement by the Securities Act or the Rules and Regulations which have not been accurately described in all material respects or referred to in the Registration Statement or Prospectus or filed as exhibits to the Registration Statement. The agreements, contracts, leases or documents so described in the Registration Statement and Prospectus are in full force and effect on the date hereof (unless otherwise indicated in the Registration Statement and the Prospectus), and neither the Company nor, to the best of the Company's knowledge, any other party, is in breach of or default under, and no event has occurred which with the giving of notice or with the lapse of time would constitute a breach of or default under, any of such agreements, contracts, leases or documents. Neither the Company, nor to its knowledge, any other party has repudiated any provision of such agreements, contracts, leases or documents. (n) Each of the Company and its Subsidiaries has good and marketable title to all of the properties and assets as described in the Registration Statement or as reflected in the financial statements filed with the Commission as part of the Registration Statement, free and clear of any lien, mortgage, pledge, charge or encumbrance of any kind except those reflected in such financial statements or as described in the Registration Statement. All leases to which the Company or any of its Subsidiaries is a party are valid and binding obligations of the Company or such Subsidiary, as the case may be, and no default by the Company or such Subsidiary has occurred or is continuing thereunder which could reasonably be expected to result in a Material Adverse Effect, and each of the Company and its Subsidiaries enjoys peaceful and undisturbed possession under all such leases to which it is a party as lessee. Such leases conform in all material respects to the descriptions thereof set forth in the Prospectus. (o) Each of the Company and its Subsidiaries has timely filed all federal, state, local and foreign income tax returns which have been required to be filed and have paid all taxes indicated by said returns and all assessments received by them or any of them to the extent that such taxes have become due and are not being contested in good faith except where the failure to file such returns and pay such taxes would not have a Material Adverse Effect. All tax liabilities (including those being contested in good faith) for the periods covered by the financial statements of the Company that are included in the Registration Statement have been adequately provided for in such financial statements. No tax deficiency has been, or to the best of the Company's knowledge, might be, asserted or contemplated against the Company or any of its Subsidiaries. 5 (p) The Company has full legal right, power and authority to enter into this Agreement and to perform the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by the Company and (assuming due authorization and delivery by the Underwriters) is a valid and binding agreement of the Company, enforceable in accordance with its terms except insofar as indemnification and contribution provisions may be limited by Federal or state securities laws, principles of public policy or equitable principles and except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors' rights generally or by general equitable principles. (q) Neither the Company nor any of its Subsidiaries is, or with the giving of notice or lapse of time or both will be, in violation of or in default under its charter or bylaws or under any agreement, lease, contract, indenture or other instrument or obligation to which it is a party or by which it, or any of its properties, is bound and which default could have a Material Adverse Effect. The execution and delivery of this Agreement by the Company and the consummation of the transactions herein contemplated and the fulfillment of the terms hereof will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust or other agreement or instrument to which the Company is a party, or of the respective Certificate of Incorporation or Bylaws of the Company or any law, order, rule or regulation, injunction, judgment, or decree applicable to the Company or any of its Subsidiaries of any court or of any regulatory body or administrative agency or other governmental body having jurisdiction over the Company or any of its Subsidiaries, which conflict, breach or default could have a Material Adverse Effect. (r) Each approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body necessary in connection with the execution and delivery by the Company of this Agreement and the consummation of the transactions herein contemplated, including, without limitation, any such approval, consent, order, authorization, designation, declaration or filing which may be required in connection with the offering of Stock reserved for sale to the Company's directors, officers, employees, business associates and related persons (herein called the Directed Shares) pursuant to a program established for such purpose by the Company (herein called the Directed Share Program) (except as may be required in connection with the registration of the Stock under the Securities Act and such additional steps as may be required by the National Association of Securities Dealers, Inc. (herein called the NASD) or such additional steps as may be necessary to qualify the Stock for public offering by the Underwriters under state securities or blue sky laws) has been obtained or made and is in full force and effect. (s) The Company and each of its Subsidiaries now holds and at the Closing Date and any later date on which the Option Stock is purchased, as the case may be, will hold, all licenses, consents, certificates, orders, approvals and permits from all state, United States, foreign and other governmental or regulatory authorities, that are required for the conduct of the business of the Company and its Subsidiaries as such business is currently conducted and as proposed to be conducted as described in the Prospectus, except for such licenses, certificates approvals and permits the failure of which to maintain would not have a Material Adverse Effect, all of which are valid and in full force and effect (and there is no proceeding pending or, to the best knowledge of the Company, threatened which may cause any such license, consent, certificate, order, 6 approval or permit to be withdrawn, cancelled, suspended or not renewed). Neither the Company nor any of its Subsidiaries is in violation or breach of any of its obligations under, or of the terms of, any such license, consent, certificate, order, approval or permit, except for such breach, default or failure as would not reasonably be expected to result in a Material Adverse Effect. (t) The Company and each of its Subsidiaries is in compliance with all of the laws, rules, regulations, orders, directives or judgments issued or administered by any governmental agency or body or any court, foreign or domestic having jurisdiction over the Company or any of its Subsidiaries or any of their respective properties or assets, except where any such failure to be in compliance would not have a Material Adverse Effect. (u) The Company and each of its Subsidiaries (i) is in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants (including, without limitation, all laws and regulations relating to biohazardous substances) (herein called Environmental Laws), (ii) has received all permits, licenses or other approvals required of it under applicable Environmental Laws to conduct its respective business and (iii) is in compliance with all terms and conditions of any such permit, license or approvals, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, singly, or in the aggregate, have a Material Adverse Effect. (v) There are no costs or liabilities associated with Environmental Laws (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties) which would, singly or in the aggregate, have a Material Adverse Effect. (w) To the best of Company's knowledge, no labor disturbance by the employees of the Company or its Subsidiaries exists or is imminent, and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its principal suppliers, authorized dealers or distributors that might be expected to result in a Material Adverse Effect. No collective bargaining agreement exists with any of the Company's or any of its Subsidiaries' employees and, to the best of the Company's knowledge, no such agreement is imminent. (x) The Company is in compliance in all material respects with all currently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder (herein called ERISA); no "reportable event" (as defined in ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for which the Company would have any liability; the Company has not incurred and does not expect to incur liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretation thereunder (herein called the Code); and each "pension plan" for which the Company would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material 7 respects and nothing has occurred, whether by action or by failure to act, that would cause the loss of such qualification. (y) The Company and each of its Subsidiaries owns or possesses adequate licenses or other rights to the patents and patent applications, copyrights, trademarks, service marks, trade names, technology and know-how (including trade secrets and other unpatented and/or unpatentable proprietary rights) (herein collectively called Intellectual Property) which are necessary to conduct, or currently employed by them in connection with the conduct, of their businesses as described in the Registration Statement and the Prospectus. Neither the Company nor any of its Subsidiaries is obligated to pay a material royalty, grant a material license or provide other material consideration to any third party in connection with the Intellectual Property, except as described in the Registration Statement and in the Prospectus. Except as set forth in the Registration Statement and the Prospectus, neither the Company nor any of its Subsidiaries has received any notice of, or has any knowledge of, any infringement of or conflict with any rights of the Company by others or any infringement of or conflict with any rights of others, in each case with respect to any Intellectual Property which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a Material Adverse Effect. There are no legal or governmental proceedings pending or threatened relating to Intellectual Property, which, singly or in the aggregate, would have a Material Adverse Effect. To the Company's best knowledge, none of the Intellectual Property licensed to or by the Company or any of its Subsidiaries is unenforceable or invalid; and neither the Company nor any of its Subsidiaries is aware of the granting of any patent rights to third parties or the filing of any patent applications by third parties or of any other rights of third parties to, or conflicting with, any Intellectual Property owned by the Company or any of its Subsidiaries. Except as set forth in the Registration Statement and the Prospectus, no third party, including any academic or governmental organization, possesses rights to the Intellectual Property which, if exercised, could reasonably be expected to result in a Material Adverse Effect. (z) To the best of the Company's knowledge, in connection with the filing of all patent applications filed or caused to be filed by the Company and its Subsidiaries with the United States Patent and Trademark Office (herein called the PTO), the Company and each of its Subsidiaries has complied with the PTO's duty of candor and disclosure for their patent and has made no misrepresentation in any such application or in any application filed with any applicable foreign and international patent authorities. The Company is unaware of any facts material to a determination of patentability regarding the Company's and its Subsidiaries' patent applications not called to the attention of the PTO and is unaware of any facts not called to the attention of the PTO which would preclude the grant of a patent for such applications. The Company has no knowledge of any facts which would materially conflict with the Company's or its Subsidiaries' ownership rights to the Company's patent applications. (aa) The Company is not, and after giving effect to the offer and sale of the Stock and the application of the proceeds thereof as described in the Prospectus, will not be, an "investment company" or a company "controlled" by an "investment company" within the meaning of such terms under the Investment Company Act of 1940, as amended (herein called the Investment Company Act), and the rules and regulations thereunder. 8 (bb) The Company and each of its Subsidiaries maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (cc) The Company and each of its Subsidiaries carries, or is covered by, insurance with insurers of nationally recognized reputability in such amounts and covering such risks as it believes is customary for companies engaged in similar industries to protect it from material liabilities; and neither the Company nor any of its Subsidiaries (i) has received notice from any insurer or agent of such insurer that substantial capital improvements or other material expenditures will have to be made in order to continue such insurance or (ii) has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers at a cost that would not, singly or in the aggregate, have a Material Adverse Effect. (dd) The statements in the Prospectus under the caption "Related Party Transactions" set forth all existing agreements, arrangements, understandings or transactions, or proposed agreements, arrangements, understandings or transactions, between or among the Company, on the one hand, and any officer, director or stockholder of the Company, or with any partner, affiliate or associate of any of the foregoing persons or entities, on the other hand, required to be set forth or described thereunder. (ee) The Company has not and will not distribute prior to the later of (i) the Closing Date, or any date on which Option Stock is to be purchased, as the case may be, and (ii) completion of the distribution of the Stock, any offering material (including, without limitation, content on its website, if any, that may be deemed to be offering material) in connection with the offering and sale of the Stock other than any Preliminary Prospectuses, the Prospectus, the Registration Statement and other materials, if any, permitted by the Securities Act. (ff) The Company has not incurred any liability for any finder's fees or similar payments in connection with the transactions contemplated hereby other than to the Underwriters. (gg) The Company has not offered, or caused any Underwriter to offer, Stock to any person pursuant to the Directed Share Program with the specific intent to unlawfully influence (i) a customer or supplier of the Company to alter the customer's or supplier's level or type of business with the Company or (ii) a trade journalist or publication to write or publish favorable information about the Company or its products. (hh) All sales of the Company's securities prior to the date hereof were at all relevant times duly registered under the Securities Act and applicable foreign securities laws and state securities or Blue Sky laws or were exempt from the registration requirements of the Securities Act and applicable foreign and state securities laws, or if 9 such securities were not registered or exempt in compliance with the Securities Act and applicable foreign and state securities laws, any private rights of action for recission or damages arising from the failure to register any such securities are time barred by applicable statutes of limitations or equitable principles, including laches. (ii) The Company has obtained the agreement of (A) each of its directors and officers, (B) the holders of at least [__]% of the outstanding Common Stock; and (C) the holders of other securities convertible into or exercisable or exchangeable for Common Stock or warrants or other rights to purchase Common Stock (such that the aggregate of such securities that are not subject to such agreement does not represent more than [__]% of the outstanding Common Stock), not to sell, contract to sell, transfer the economic risk of ownership in, make any short sale, pledge or otherwise dispose of, directly or indirectly, any shares of Common Stock or securities convertible into or exercisable or exchangeable for Common Stock or warrants or other rights to purchase Common Stock for a period of 180 days after the date of the Prospectus. (jj) Each certificate signed by an officer of the Company and delivered to the Underwriters or counsel for the Underwriters in connection with the issuance and sale of the Common Stock shall be deemed to be a representation and warranty by the Company to the Underwriters as to the matters covered thereby. 3. PURCHASE OF THE STOCK BY THE UNDERWRITERS. (a) On the basis of the representations and warranties and subject to the terms and conditions herein set forth, the Company agrees to issue and sell 4,000,000 shares of the Underwritten Stock to the several Underwriters and each of the Underwriters agrees to purchase from the Company the respective aggregate number of shares of Underwritten Stock set forth opposite its name in SCHEDULE I. The price at which such shares of Underwritten Stock shall be sold by the Company and purchased by the several Underwriters shall be $___ per share. In making this Agreement, each Underwriter is contracting severally and not jointly; except as provided in paragraphs (b) and (c) of this Section 3, the agreement of each Underwriter is to purchase only the respective number of shares of the Underwritten Stock specified in SCHEDULE I. (b) If for any reason one or more of the Underwriters shall fail or refuse (otherwise than for a reason sufficient to justify the termination of this Agreement under the provisions of Section 8 or 9 hereof) to purchase and pay for the number of shares of the Stock agreed to be purchased by such Underwriter or Underwriters, the Company shall immediately give notice thereof to you, and the non-defaulting Underwriters shall have the right within 24 hours after the receipt by you of such notice to purchase, or procure one or more other Underwriters to purchase, in such proportions as may be agreed upon between you and such purchasing Underwriter or Underwriters and upon the terms herein set forth, all or any part of the shares of the Stock which such defaulting Underwriter or Underwriters agreed to purchase. If the non-defaulting Underwriters fail so to make such arrangements with respect to all such shares and portion, the number of shares of the Stock which each non-defaulting Underwriter is otherwise obligated to purchase under this Agreement shall be automatically increased on a pro rata basis to absorb the remaining shares and portion which the defaulting Underwriter or Underwriters agreed to purchase; PROVIDED, HOWEVER, that the non-defaulting Underwriters shall not be obligated to purchase the shares and portion which the defaulting Underwriter or Underwriters agreed to purchase if the aggregate number of such shares of the Stock exceeds 10% of the total number of shares of the Stock which all Underwriters agreed to purchase hereunder. If the total 10 number of shares of the Stock which the defaulting Underwriter or Underwriters agreed to purchase shall not be purchased or absorbed in accordance with the two preceding sentences, the Company shall have the right, within 24 hours next succeeding the 24-hour period above referred to, to make arrangements with other underwriters or purchasers satisfactory to you for purchase of such shares and portion on the terms herein set forth. In any such case, either you or the Company shall have the right to postpone the Closing Date determined as provided in Section 5 hereof for not more than seven business days after the date originally fixed as the Closing Date pursuant to said Section 5 in order that any necessary changes in the Registration Statement, the Prospectus or any other documents or arrangements may be made. If neither the non-defaulting Underwriters nor the Company shall make arrangements within the 24-hour periods stated above for the purchase of all the shares of the Stock which the defaulting Underwriter or Underwriters agreed to purchase hereunder, this Agreement shall be terminated without further act or deed and without any liability on the part of the Company to any non-defaulting Underwriter and without any liability on the part of any non-defaulting Underwriter to the Company. Nothing in this paragraph (b), and no action taken hereunder, shall relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. (c) On the basis of the representations, warranties and covenants herein contained, and subject to the terms and conditions herein set forth, the Company grants an option to the several Underwriters to purchase, severally and not jointly, up to 600,000 shares in the aggregate of the Option Stock from the Company at the same price per share as the Underwriters shall pay for the Underwritten Stock. Said option may be exercised only to cover over-allotments in the sale of the Underwritten Stock by the Underwriters and may be exercised in whole or in part at any time (but not more than once) on or before the thirtieth day after the date of this Agreement upon written or telegraphic notice by you to the Company setting forth the aggregate number of shares of the Option Stock as to which the several Underwriters are exercising the option. Delivery of certificates for the shares of Option Stock, and payment therefor, shall be made as provided in Section 5 hereof. The number of shares of the Option Stock to be purchased by each Underwriter shall be the same percentage of the total number of shares of the Option Stock to be purchased by the several Underwriters as such Underwriter is purchasing of the Underwritten Stock, as adjusted by you in such manner as you deem advisable to avoid fractional shares. 4. OFFERING BY UNDERWRITERS. (a) The terms of the initial public offering by the Underwriters of the Stock to be purchased by them shall be as set forth in the Prospectus. The Underwriters may from time to time change the public offering price after the closing of the initial public offering and increase or decrease the concessions and discounts to dealers as they may determine. (b) The information set forth under "Underwriting" in the Registration Statement, any Preliminary Prospectus and the Prospectus (insofar as such information relates to the Underwriters) constitutes the only information furnished by the Underwriters to the Company for inclusion in the Registration Statement, any Preliminary Prospectus, and the Prospectus, and you on behalf of the respective Underwriters represent and warrant to the Company that the statements made therein are correct. 11 5. DELIVERY OF AND PAYMENT FOR THE STOCK. (a) Delivery of certificates for the shares of the Underwritten Stock and the Option Stock (if the option granted by Section 3(c) hereof shall have been exercised not later than 10:00 a.m., New York time, on the date two business days preceding the Closing Date), and payment therefor, shall be made at the office of Milbank, Tweed, Hadley & McCloy LLP, One Chase Manhattan Plaza, New York, New York 10005, at 10:00 a.m., New York time, on the third business day after the date of this Agreement, or at such time on such other day, not later than seven full business days after such fourth business day, as shall be agreed upon in writing by the Company and you. The date and hour of such delivery and payment (which may be postponed as provided in Section 3(b) hereof) are herein called the Closing Date. (b) If the option granted by Section 3(c) hereof shall be exercised after 10:00 a.m., New York time, on the date two business days preceding the Closing Date, delivery of certificates for the shares of Option Stock, and payment therefor, shall be made at the office of Milbank, Tweed, Hadley & McCloy LLP, One Chase Manhattan Plaza, New York, New York 10005, at 10:00 a.m., New York time, on the third business day after the exercise of such option. (c) Payment for the Stock purchased from the Company shall be made to the Company or its order by wire transfer of Federal or other funds immediately available in New York City. Such payment shall be made upon delivery of certificates for the Stock to you for the respective accounts of the several Underwriters against receipt therefor signed by you. Certificates for the Stock to be delivered to you shall be registered in such name or names and shall be in such denominations as you may request at least one business day before the Closing Date, in the case of Underwritten Stock, and at least one business day prior to the purchase thereof, in the case of the Option Stock. Such certificates will be made available to the Underwriters for inspection, checking and packaging at the offices of Lewco Securities Corporation, Two Broadway, New York, New York 10004 on the business day prior to the Closing Date or, in the case of the Option Stock, by 3:00 p.m., New York time, on the business day preceding the date of purchase. It is understood that you, individually and not on behalf of the Underwriters, may (but shall not be obligated to) make payment to the Company for shares to be purchased by any Underwriter whose check shall not have been received by you on the Closing Date or any later date on which Option Stock is purchased for the account of such Underwriter. Any such payment by you shall not relieve such Underwriter from any of its obligations hereunder. 6. FURTHER AGREEMENTS OF THE COMPANY. The Company covenants and agrees as follows: (a) The Company will (i) prepare and timely file with the Commission under Rule 424(b) a Prospectus containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A and (ii) not file any amendment to the Registration Statement or supplement to the Prospectus of which you shall not previously have been advised and furnished with a copy or to which you shall have reasonably objected in writing or which is not in compliance with the Securities Act or the Rules and Regulations. (b) The Company will promptly notify each Underwriter in the event of (i) the request by the Commission for amendment of the Registration Statement or for 12 supplement to the Prospectus or for any additional information, (ii) the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement, (iii) the institution or notice of intended institution of any action or proceeding for that purpose, (iv) the receipt by the Company of any notification with respect to the suspension of the qualification of the Stock for sale in any jurisdiction, or (v) the receipt by it of notice of the initiation or threatening of any proceeding for such purpose. The Company will make every reasonable effort to prevent the issuance of such a stop order and, if such an order shall at any time be issued, to obtain the withdrawal thereof at the earliest possible moment. (c) The Company will (i) on or before the Closing Date, deliver to you a signed copy of the Registration Statement as originally filed and of each amendment thereto filed prior to the time the Registration Statement becomes effective and, promptly upon the filing thereof, a signed copy of each post-effective amendment, if any, to the Registration Statement (together with, in each case, all exhibits thereto unless previously furnished to you) and will also deliver to you, for distribution to the Underwriters, a sufficient number of additional conformed copies of each of the foregoing (but without exhibits) so that one copy of each may be distributed to each Underwriter, (ii) as promptly as possible deliver to you and send to the several Underwriters, at such office or offices as you may designate, as many copies of the Prospectus as you may reasonably request, and (iii) thereafter from time to time during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, likewise send to the Underwriters as many additional copies of the Prospectus and as many copies of any supplement to the Prospectus and of any amended prospectus, filed by the Company with the Commission, as you may reasonably request for the purposes contemplated by the Securities Act. (d) If at any time during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer any event relating to or affecting the Company, or of which the Company shall be advised in writing by you, shall occur as a result of which it is necessary, in the opinion of counsel for the Company or of counsel for the Underwriters, to supplement or amend the Prospectus in order to make the Prospectus not misleading in the light of the circumstances existing at the time it is delivered to a purchaser of the Stock, the Company will forthwith prepare and file with the Commission a supplement to the Prospectus or an amended prospectus so that the Prospectus as so supplemented or amended will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances existing at the time such Prospectus is delivered to such purchaser, not misleading. If, after the initial public offering of the Stock by the Underwriters and during such period, the Underwriters shall propose to vary the terms of offering thereof by reason of changes in general market conditions or otherwise, you will advise the Company in writing of the proposed variation, and, if in the opinion either of counsel for the Company or of counsel for the Underwriters such proposed variation requires that the Prospectus be supplemented or amended, the Company will forthwith prepare and file with the Commission a supplement to the Prospectus or an amended prospectus setting forth such variation. The Company authorizes the Underwriters and all dealers to whom any of the Stock may be sold by the several Underwriters to use the Prospectus, as from time to time amended or supplemented, in connection with the sale of the Stock in accordance with the applicable provisions of the Securities Act and the applicable rules and regulations thereunder for such period. 13 (e) Prior to the filing thereof with the Commission, the Company will submit to you, for your information, a copy of any post-effective amendment to the Registration Statement and any supplement to the Prospectus or any amended prospectus proposed to be filed. (f) The Company will cooperate, when and as requested by you, in the qualification of the Stock for offer and sale under the securities or blue sky laws of such jurisdictions as you may designate and, during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, in keeping such qualifications in good standing under said securities or blue sky laws; PROVIDED, HOWEVER, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation in any jurisdiction in which it is not so qualified. The Company will, from time to time, prepare and file such statements, reports, and other documents as are or may be required to continue such qualifications in effect for so long a period as you may reasonably request for distribution of the Stock. (g) During a period of three years commencing with the date hereof, the Company will furnish to you, and to each Underwriter who may so request in writing, copies of all periodic and special reports furnished to stockholders of the Company and of all information, documents and reports filed with the Commission including the Report on Form SR required by Rule 463 of the Commission under the Securities Act. (h) Not later than the 45th day following the end of the fiscal quarter first occurring after the first anniversary of the Effective Date, the Company will make generally available to its security holders an earnings statement in accordance with Section 11(a) of the Securities Act and Rule 158 thereunder. (i) The Company agrees to pay all costs and expenses incident to the performance of its obligations under this Agreement, including all costs and expenses incident to (i) the preparation, printing and filing with the Commission and the NASD of the Registration Statement, any Preliminary Prospectus and the Prospectus, (ii) the furnishing to the Underwriters of copies of any Preliminary Prospectus and of the several documents required by paragraph (c) of this Section 6 to be so furnished, (iii) the printing of this Agreement and related documents delivered to the Underwriters, (iv) the preparation, printing and filing of all supplements and amendments to the Prospectus referred to in paragraph (d) of this Section 6, (v) the furnishing to you and the Underwriters of the reports and information referred to in paragraph (g) of this Section 6 and (vi) the printing and issuance of stock certificates, including the transfer agent's fees. Except as specifically provided for in this Section 6, the Underwriters will pay their own costs and expenses, including fees of their counsel, any stock transfer taxes due upon any resale of Stock by them and advertising costs incurred by them. (j) The Company agrees to reimburse you, for the account of the several Underwriters, for blue sky fees and related disbursements (including counsel fees and disbursements and cost of printing memoranda for the Underwriters) paid by or for the account of the Underwriters or their counsel in qualifying the Stock under state securities or blue sky laws and in the review of the offering by the NASD. 14 (k) The Company hereby agrees that, without the prior written consent of Chase Securities Inc. on behalf of the Underwriters, the Company will not, for a period of 180 days following the commencement of the public offering of the Stock by the Underwriters, directly or indirectly, (i) sell, offer, contract to sell, make any short sale, pledge, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any shares of Common Stock or any securities convertible into or exchangeable or exercisable for or any rights to purchase or acquire Common Stock or (ii) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences or ownership of Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (A) shares of Common Stock issued by the Company upon the exercise of options granted under the Company's stock option plan or upon the exercise of warrants outstanding as of the date hereof, all as described in the Preliminary Prospectus, and (B) options to purchase Common Stock granted under the Company's stock option plan. If this Agreement is terminated prior to the Closing Date, the provisions of this Section 6(k) shall be of no further force or effect. (l) The Company agrees to use its best efforts to cause all directors, officers, and the beneficial owners of the outstanding Common Stock identified on ANNEX C hereto to agree that, without the prior written consent of Chase Securities Inc. on behalf of the Underwriters, such person or entity will not, for a period of 180 days following the commencement of the public offering of the Stock by the Underwriters, directly or indirectly, 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 or any rights to purchase or acquire Common Stock. (m) If at any time during the 25-day period after the Registration Statement becomes effective any rumor, publication or event relating to or affecting the Company shall occur as a result of which in your opinion the market price for the Stock has been or is likely to be materially affected (regardless of whether such rumor, publication or event necessitates a supplement to or amendment of the Prospectus), the Company will, after written notice from you advising the Company to the effect set forth above, forthwith prepare, consult with you concerning the substance of, and disseminate a press release or other public statement, reasonably satisfactory to you, responding to or commenting on such rumor, publication or event. (n) The Company is familiar with the Investment Company Act of 1940, as amended, and has in the past conducted its affairs, and will in the future conduct its affairs, in such a manner to ensure that the Company was not and will not be an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended, and the rules and regulations thereunder. (o) The Company (i) will comply with all applicable securities and other applicable laws, rules and regulations in each jurisdiction in which the Directed Shares are offered and (ii) will pay all reasonable fees and disbursements of counsel incurred by the Underwriters in connection with the Directed Share Program and any stamp 15 duties, similar taxes or duties or other taxes, if any, incurred by the Underwriters in connection with the Directed Share Program. 7. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person (including each partner or officer thereof) who controls any Underwriter within the meaning of Section 15 of the Securities Act from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject under the Securities Act, the Securities Exchange Act of 1934, as amended (herein called the Exchange Act), or the common law or otherwise, and the Company agrees to reimburse each such Underwriter and controlling person for any legal or other expenses (including, except as otherwise hereinafter provided, reasonable fees and disbursements of counsel) incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding which may be brought against, the respective indemnified parties, in each case arising out of or based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (including the Prospectus as part thereof and any Rule 462(b) registration statement) or any post-effective amendment thereto (including any Rule 462(b) registration statement), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus or the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (iii) any untrue statement or alleged untrue statement of a material fact contained in any material prepared by or with the consent of the Company for distribution to participants in connection with the Directed Share Program, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; (iv) the failure of any participant under the Directed Share Program to pay for and accept delivery of Directed Shares that such participant has agreed to purchase thereunder; or (v) the establishment of and any offers and sales of Stock made under or in connection with the Directed Share Program (other than, in the case of clause (v) above, losses, claims, damages or liabilities (or expenses relating thereto) that are finally judicially determined to have resulted from the bad faith or gross negligence of the Underwriters), PROVIDED, HOWEVER, that (1) the indemnity agreements of the Company contained in clauses (i) and (ii) of this subparagraph (a) shall not apply to any such losses, claims, damages, liabilities or expenses if such statement or omission was made in reliance upon and in conformity with information furnished as herein stated or otherwise furnished in writing to the Company by or on behalf of any Underwriter for use in any Preliminary Prospectus or the Registration Statement or the Prospectus or any such amendment thereof or supplement thereto and (2) the indemnity agreement contained in clauses (i) and (ii) of this subparagraph (a) with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages, liabilities or expenses purchased the Stock which is the subject thereof (or to the benefit of any person controlling such Underwriter) if at or prior to the written confirmation of the sale of such Stock a copy of the Prospectus (or the Prospectus as amended or supplemented) was not sent or delivered to such person and the untrue statement or omission of a material fact contained in such Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as amended or supplemented) unless the failure is the result of noncompliance by the Company with subparagraph (c) of Section 6 hereof. The 16 indemnity agreements of the Company contained in this subparagraph (a) and the representations and warranties of the Company contained in Section 2 hereof shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Stock. (b) Each Underwriter severally agrees to indemnify and hold harmless the Company, each of its officers who signs the Registration Statement on his own behalf or pursuant to a power of attorney, each of its directors, each other Underwriter and each person (including each partner or officer thereof) who controls the Company or any such other Underwriter within the meaning of Section 15 of the Securities Act, from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject under the Securities Act, the Exchange Act, or the common law or otherwise and to reimburse each of them for any legal or other expenses (including, except as otherwise hereinafter provided, reasonable fees and disbursements of counsel) incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding which may be brought against, the respective indemnified parties, in each case arising out of or based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (including the Prospectus as part thereof and any Rule 462(b) registration statement) or any post-effective amendment thereto (including any Rule 462(b) registration statement) or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or (ii) any untrue statement or alleged untrue statement of a material fact contained in the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, if such statement or omission was made in reliance upon and in conformity with information furnished as herein stated or otherwise furnished in writing to the Company by or on behalf of such indemnifying Underwriter for use in the Registration Statement or the Prospectus or any such amendment thereof or supplement thereto. The indemnity agreement of each Underwriter contained in this subparagraph (b) shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Stock. (c) Each party indemnified under the provision of subparagraphs (a) and (b) of this Section 7 agrees that, upon the service of a summons or other initial legal process upon it in any action or suit instituted against it or upon its receipt of written notification of the commencement of any investigation or inquiry of, or proceeding against, it in respect of which indemnity may be sought on account of any indemnity agreement contained in such paragraphs, it will promptly give written notice (herein called the Notice) of such service or notification to the party or parties from whom indemnification may be sought hereunder. No indemnification provided for in such paragraphs shall be available to any party who shall fail so to give the Notice if the party to whom such Notice was not given was unaware of the action, suit, investigation, inquiry or proceeding to which the Notice would have related and was prejudiced by the failure to give the Notice, but the omission so to notify such indemnifying party or parties of any such service or notification shall not relieve such indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of such indemnity agreement. Any indemnifying party shall be entitled at its own expense to participate in the defense of any action, suit or proceeding against, or investigation or inquiry of, an indemnified party. Any indemnifying party shall be entitled, 17 if it so elects within a reasonable time after receipt of the Notice by giving written notice (herein called the Notice of Defense) to the indemnified party, to assume (alone or in conjunction with any other indemnifying party or parties) the entire defense of such action, suit, investigation, inquiry or proceeding, in which event such defense shall be conducted, at the expense of the indemnifying party or parties, by counsel chosen by such indemnifying party or parties and reasonably satisfactory to the indemnified party or parties; PROVIDED, HOWEVER, that (i) if the indemnified party or parties reasonably determine that there may be a conflict between the positions of the indemnifying party or parties and of the indemnified party or parties in conducting the defense of such action, suit, investigation, inquiry or proceeding or that there may be legal defenses available to such indemnified party or parties different from or in addition to those available to the indemnifying party or parties, then counsel for the indemnified party or parties shall be entitled to conduct the defense to the extent reasonably determined by such counsel to be necessary to protect the interests of the indemnified party or parties, (ii) in any event, the indemnified party or parties shall be entitled to have counsel chosen by such indemnified party or parties participate in, but not conduct, the defense, (iii) if the indemnified parties under this Section 7 consist of the Underwriters or any of their officers, employees or controlling persons, then any such counsel chosen for such indemnified parties shall be designated in writing by Chase Securities Inc., and (iv) if the indemnified parties under this Section 7 consist of the Company or any of its officers, employees or controlling persons, then any such counsel chosen for such indemnified parties shall be designated in writing by the Company. If, within a reasonable time after receipt of the Notice, an indemnifying party gives a Notice of Defense and the counsel chosen by the indemnifying party or parties is reasonably satisfactory to the indemnified party or parties, the indemnifying party or parties will not be liable under subparagraphs (a) through (c) of this Section 7 for any legal or other expenses subsequently incurred by the indemnified party or parties in connection with the defense of the action, suit, investigation, inquiry or proceeding, except that (A) the indemnifying party or parties shall bear the legal and other expenses incurred in connection with the conduct of the defense as referred to in clause (i) of the proviso to the preceding sentence (provided, however, that the indemnifying party shall not be liable for more than one separate firm for all such indemnified parties) and (B) the indemnifying party or parties shall bear such other expenses as it or they have authorized to be incurred by the indemnified party or parties. If, within a reasonable time after receipt of the Notice, no Notice of Defense has been given, the indemnifying party or parties shall be responsible for any legal or other expenses incurred by the indemnified party or parties in connection with the defense of the action, suit, investigation, inquiry or proceeding. (d) If the indemnification provided for in this Section 7 is unavailable or insufficient to hold harmless an indemnified party under subparagraph (a) or (b) of this Section 7, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in subparagraph (a) or (b) of this Section 7 (i) in such proportion as is appropriate to reflect the relative benefits received by each indemnifying party from the offering of the Stock or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of each indemnifying party in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, or actions in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Underwriters shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Stock received by the Company and the total underwriting discount received by the Underwriters, as set forth in the table on the cover page of the Prospectus, bear to the aggregate public offering price of 18 the Stock. Relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by each indemnifying party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The parties agree that it would not be just and equitable if contributions pursuant to this subparagraph (d) were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to in the first sentence of this subparagraph (d). The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities, or actions in respect thereof, referred to in the first sentence of this subparagraph (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigation, preparing to defend or defending against any action or claim which is the subject of this subparagraph (d). Notwithstanding the provisions of this subparagraph (d), no Underwriter shall be required to contribute any amount in excess of the underwriting discount applicable to the Stock purchased by such Underwriter. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this subparagraph (d) to contribute are several in proportion to their respective underwriting obligations and not joint. Each party entitled to contribution agrees that upon the service of a summons or other initial legal process upon it in any action instituted against it in respect of which contribution may be sought, it will promptly give written notice of such service to the party or parties from whom contribution may be sought, but the omission so to notify such party or parties of any such service shall not relieve the party from whom contribution may be sought from any obligation it may have hereunder or otherwise (except as specifically provided in subparagraph (c) of this Section 7). (e) The Company will not, without the prior written consent of each Underwriter, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not such Underwriter or any person who controls such Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act is a party to such claim, action, suit or proceeding) unless such settlement, compromise or consent includes an unconditional release of such Underwriter and each such controlling person from all liability arising out of such claim, action, suit or proceeding. 8. TERMINATION. This Agreement may be terminated by you at any time prior to the Closing Date by giving written notice to the Company if after the date of this Agreement trading in the Common Stock shall have been suspended, or if there shall have occurred (i) the engagement in hostilities or an escalation of major hostilities by the United States or the declaration of war or a national emergency by the United States on or after the date hereof, (ii) any outbreak of hostilities or other national or international calamity or crisis or change in economic or political conditions if the effect of such outbreak, calamity, crisis or change in economic or political conditions in the financial markets of the United States would, in the Underwriters' reasonable judgment, make the offering or delivery of the Stock impracticable, (iii) suspension of trading in securities generally or a material adverse decline in value of securities generally on the New York Stock Exchange, the American Stock Exchange, The Nasdaq Stock Market, or limitations on prices (other than limitations on hours or numbers of 19 days of trading) for securities on either such exchange or system, (iv) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of, or commencement of any proceeding or investigation by, any court, legislative body, agency or other governmental authority which in the Underwriters' reasonable opinion materially and adversely affects or will materially or adversely affect the business or operations of the Company, (v) declaration of a banking moratorium by either federal or New York State authorities or (vi) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in the Underwriters' reasonable opinion has a material adverse effect on the securities markets in the United States. If this Agreement shall be terminated pursuant to this Section 8, there shall be no liability of the Company to the Underwriters and no liability of the Underwriters to the Company; PROVIDED, HOWEVER, that in the event of any such termination, the indemnity and contribution agreements contained in Section 7 hereof shall survive such termination and (y) the Company agrees to indemnify and hold harmless the Underwriters from all costs or expenses incident to the performance of the obligations of the Company under this Agreement, including all costs and expenses referred to in subparagraphs (i) and (j) of Section 6 hereof. 9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the several Underwriters to purchase and pay for the Stock shall be subject to the performance by the Company of all its obligations to be performed hereunder at or prior to the Closing Date or any later date on which Option Stock is to be purchased, as the case may be, and to the following further conditions: (a) The Registration Statement shall have become effective; and no stop order suspending the effectiveness thereof shall have been issued and no proceedings therefor shall be pending or threatened by the Commission. (b) The legality and sufficiency of the sale of the Stock hereunder and the validity and form of the certificates representing the Stock, all corporate proceedings and other legal matters incident to the foregoing, and the form of the Registration Statement and of the Prospectus (except as to the financial statements contained therein), shall have been approved at or prior to the Closing Date by Milbank, Tweed, Hadley & McCloy LLP, counsel for the Underwriters. (c) You shall have received from Kutak Rock LLP, counsel for the Company, and from William B. Walker, Esq., Vice President of Intellectual Property for the Company, opinions, addressed to the Underwriters and dated the Closing Date, covering the matters set forth in ANNEX A and ANNEX B hereto, respectively, and if Option Stock is purchased at any date after the Closing Date, additional opinions from each such counsel, addressed to the Underwriters and dated such later date, confirming that the statements expressed as of the Closing Date in such opinions remain valid as of such later date. (d) You shall be satisfied that (i) as of the Effective Date, the statements made in the Registration Statement and the Prospectus were true and correct and neither the Registration Statement nor the Prospectus omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, respectively, not misleading, (ii) since the Effective Date, no event has occurred which should have been set forth in a supplement or amendment to the Prospectus which has not been set forth in such a supplement or amendment, (iii) since the respective dates as of which information is given in the Registration Statement in the form in which it originally 20 became effective and the Prospectus contained therein, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the business, properties, financial condition or results of operations of the Company and its Subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, and, since such dates, except in the ordinary course of business, neither the Company nor any of its Subsidiaries has entered into any material transaction not referred to in the Registration Statement in the form in which it originally became effective and the Prospectus contained therein, (iv) neither the Company nor any of its Subsidiaries has any material contingent obligations which are not disclosed in the Registration Statement and the Prospectus, (v) there are not any pending or known threatened legal proceedings to which the Company or any of its Subsidiaries is a party or of which property of the Company or any of its Subsidiaries is the subject which are material and which are not disclosed in the Registration Statement and the Prospectus, (vi) there are not any franchises, contracts, leases or other documents which are required to be filed as exhibits to the Registration Statement which have not been filed as required, (vii) the representations and warranties of the Company herein are true and correct in all material respects as of the Closing Date or any later date on which Option Stock is to be purchased, as the case may be, and (viii) there has not been any material change in the market for securities in general or in political, financial or economic conditions from those reasonably foreseeable as to render it impracticable in your reasonable judgment to make a public offering of the Stock, or a material adverse change in market levels for securities in general (or those of companies in particular) or financial or economic conditions which render it inadvisable to proceed. (e) You shall have received on the Closing Date and on any later date on which Option Stock is purchased a certificate, dated the Closing Date or such later date, as the case may be, and signed by the President and the Chief Financial Officer of the Company, stating that the respective signers of said certificate have carefully examined the Registration Statement in the form in which it originally became effective and the Prospectus contained therein and any supplements or amendments thereto, and that the statements included in clauses (i) through (vii) of subparagraph (d) of this Section 9 are true and correct. (f) You shall have received from Deloitte & Touche LLP, a letter or letters, addressed to the Underwriters and dated the Closing Date and any later date on which Option Stock is purchased, confirming that they are independent public accountants with respect to the Company within the meaning of the Securities Act and the applicable published rules and regulations thereunder and based upon the procedures described in their letter delivered to you concurrently with the execution of this Agreement (herein called the Original Letter), but carried out to a date not more than three business days prior to the Closing Date or such later date on which Option Stock is purchased (i) confirming, to the extent true, that the statements and conclusions set forth in the Original Letter are accurate as of the Closing Date or such later date, as the case may be, and (ii) setting forth any revisions and additions to the statements and conclusions set forth in the Original Letter which are necessary to reflect any changes in the facts described in the Original Letter since the date of the Original Letter or to reflect the availability of more recent financial statements, data or information. The letters shall not disclose any change, or any development involving a prospective change, in or affecting the business or properties of the Company or any of its Subsidiaries which, in your sole judgment, makes it impractical or inadvisable to proceed with the public 21 offering of the Stock or the purchase of the Option Stock as contemplated by the Prospectus. (g) You shall have received from Deloitte & Touche LLP a letter stating that their review of the Company's system of internal accounting controls, to the extent they deemed necessary in establishing the scope of their examination of the Company's financial statements as at March 31, 2000, did not disclose any weakness in internal controls that they considered to be material weaknesses. (h) You shall have been furnished evidence in usual written or telegraphic form from the appropriate authorities of the several jurisdictions, or other evidence satisfactory to you, of the qualification referred to in subparagraph (f) of Section 6 hereof. (i) Prior to the Closing Date, the Stock to be issued and sold by the Company shall have been duly authorized for listing by the Nasdaq National Market upon official notice of issuance. (j) On or prior to the Closing Date, you shall have received from all directors, officers, and the beneficial owners of the outstanding Common Stock identified on ANNEX C hereto, agreements, in form reasonably satisfactory to Chase Securities Inc., stating that without the prior written consent of Chase Securities Inc. on behalf of the Underwriters, such person or entity will not, for a period of 180 days following the commencement of the public offering of the Stock by the Underwriters, directly or indirectly, 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 or any rights to purchase or acquire Common Stock. (k) The Company shall have acquired from Nebraska State Bank, on terms reasonably satisfactory to you, the promissory notes of SD Acquisition Inc. ("SD") in an aggregate principal amount of $4.635 million (the "SD Notes") evidencing loans made by Nebraska State Bank to SD under loan agreements between the parties, dated as of May 15, 2000, the proceeds of which were used by SD to purchase the assets of the Company associated with its non-life science product line. The acquisition of the SD Notes will be made simultaneously with the closing of the sale of the Stock to you hereunder and will be financed with a portion of the net offering proceeds. The Company authorizes you to pay a portion of the net proceeds of the offering sufficient to purchase the SD Notes directly to Nebraska State Bank (or such other parties as it shall direct) at the Closing. In addition, you shall have received on the Closing Date and on any later date on which Option Stock is purchased, such additional documents (including, without limitation, opinions of counsel, letters, certificates and agreements) as you may reasonably request. All the agreements, opinions, certificates and letters mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only if Milbank, Tweed, Hadley & McCloy LLP, counsel for the Underwriters, shall be satisfied that they comply in form and scope. In case any of the conditions specified in this Section 9 shall not be fulfilled, this Agreement may be terminated by you by giving notice to the Company. Any such termination shall be without liability of the Company to the Underwriters and without liability of the Underwriters to the Company; PROVIDED, HOWEVER, that (i) in the event of such termination, the Company agrees to indemnify and hold harmless the Underwriters from all costs or expenses incident to the performance of the obligations of the Company under this Agreement, including all costs and expenses referred to in subparagraphs (i) and (j) of Section 6 hereof, and (ii) if this Agreement is terminated by you because of any refusal, inability or failure on the part of the Company to perform any agreement herein, to fulfill any of the conditions herein, or to comply with any provision hereof other than by reason of a default by any of the Underwriters, the Company will reimburse the Underwriters severally upon demand for all out-of-pocket expenses (including reasonable fees and disbursements of counsel) that shall have been incurred by them in connection with the transactions contemplated hereby. 22 10. CONDITIONS OF THE OBLIGATION OF THE COMPANY. The obligation of the Company to deliver the Stock shall be subject to the conditions that: (a) the Registration Statement shall have become effective and no stop order suspending the effectiveness thereof shall be in effect and no proceedings therefor shall be pending or threatened by the Commission; and (b) you shall have made payment for all the Stock to be sold on the Closing Date (or, in the case of the Option Stock, on any later date on which Option Stock is purchased) against delivery of the certificates evidencing such Stock, as provided in Section 5 hereof. In case either of the conditions specified in this Section 10 shall not be fulfilled, this Agreement may be terminated by the Company by giving notice to you. Any such termination shall be without liability of the Company to the Underwriters and without liability of the Underwriters to the Company; PROVIDED, HOWEVER, that in the event of any termination due to the non-fulfillment of the condition set forth in subparagraph (a) of this Section 10, the Company agrees to indemnify and hold harmless the Underwriters from all costs or expenses incident to the performance of the obligations of the Company under this Agreement, including all costs and expenses referred to in subparagraphs (i) and (j) of Section 6 hereof. 11. REIMBURSEMENT OF CERTAIN EXPENSES. With respect to its obligations under Section 7 of this Agreement, the Company hereby agrees to reimburse on a quarterly basis any indemnified person identified in Section 7 of this Agreement for all reasonable legal and other expenses incurred in connection with investigating or defending any claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in subparagraph (a) of Section 7 of this Agreement, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the obligations under this Section 11 and the possibility that such payments might later be held to be improper; PROVIDED, HOWEVER, that (i) to the extent any such payment is ultimately held to be improper, the persons receiving such payments shall promptly refund them and (ii) such persons shall provide to the Company, upon request, reasonable assurances of their ability to effect any refund, when and if due. 12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure to the benefit of the Company and the several Underwriters and, with respect to the provisions of Section 7 hereof, the several parties (in addition to the Company and the several Underwriters) indemnified under the provisions of said Section 7, and their respective personal representatives, successors and assigns. Nothing in this Agreement is intended or shall be construed to give to any other person, firm or corporation any legal or equitable remedy or claim under or in respect of this Agreement or any provision herein contained. The term "successors and assigns" as herein used shall not include any purchaser, as such purchaser, of any of the Stock from any of the several Underwriters. 13. NOTICES. Except as otherwise provided herein, all communications hereunder shall be in writing or by telegraph and, if to the Underwriters, shall be mailed, telegraphed or delivered to Chase Securities Inc., One Bush Street, San Francisco, CA 94104, with a copy to Milbank, Tweed, Hadley & McCloy LLP, One Chase Manhattan Plaza, 47th Floor, New York, New York 10005, Attention: Robert B. Williams, Esq.; and if to the Company, shall be mailed, telegraphed or delivered to it at its office, 5600 South 42nd Street, Omaha, Nebraska 68107, Attention: Collin D'Silva, with a copy to Kutak Rock LLP, 1650 Farnam Street, Omaha, 23 Nebraska 68102, Attention: Steven P. Amen, Esq. All notices given by telegraph shall be promptly confirmed by letter. 14. MISCELLANEOUS. The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties and covenants in this Agreement shall remain in full force and effect regardless of (a) any investigation made by or on behalf of any Underwriter or controlling person thereof, or by or on behalf of the Company or their respective directors or officers, and (b) delivery and payment for the Stock under this Agreement. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. 24 Please sign and return to the Company the enclosed duplicates of this letter, whereupon this letter will become a binding agreement between the Company and the several Underwriters in accordance with its terms. Very truly yours, TRANSGENOMIC, INC. By: -------------------------- Name: Title: The foregoing Agreement is hereby confirmed and accepted as of the date first above written. CHASE SECURITIES INC. Bear, Stearns & Co. Inc. Dain Rauscher Incorporated by Chase Securities Inc. By --------------------------- Managing Director Acting on behalf of the several Underwriters, including themselves, named in Schedule I hereto. 25 SCHEDULE I UNDERWRITERS
NUMBER OF SHARES TO BE UNDERWRITERS PURCHASED ------------ ---------- Chase Securities Inc............................................................................. Bear, Stearns & Co. Inc.......................................................................... Dain Rauscher Incorporated ...................................................................... Total ............................................................................... 4,000,000
ANNEX A MATTERS TO BE COVERED IN THE OPINION OF KUTAK ROCK LLP COUNSEL FOR THE COMPANY 1. The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware, is duly qualified as a foreign corporation and in good standing in each state of the United States of America in which its ownership or leasing of property requires such qualification (except where the failure to be so qualified would not have a Material Adverse Effect) and has full corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement. 2. The authorized capital stock of the Company consists of 15,000,000 shares of Preferred Stock, $.01 par value, of which there are no outstanding shares, and 60,000,000 shares of Common Stock, $.01 par value, of which there are outstanding [__________] shares (including the Underwritten Stock plus the number of shares of Option Stock issued on the date hereof) and conforms as to legal matters to the description thereof contained in the Prospectus; proper corporate proceedings have been taken validly to authorize such authorized capital stock; all of the outstanding shares of such capital stock (including the Underwritten Stock and the shares of Option Stock issued, if any) have been duly and validly issued and are fully paid and nonassessable; any Option Stock purchased after the Closing Date, when issued and delivered to and paid for by the Underwriters as provided in the Underwriting Agreement, will have been duly and validly issued and be fully paid and nonassessable; and no preemptive rights of, or rights of refusal in favor of, stockholders exist with respect to the Stock, or the issue and sale thereof, pursuant to the Certificate of Incorporation or Bylaws of the Company and, to the knowledge of such counsel, there are no contractual preemptive rights that have not been waived, rights of first refusal or rights of co-sale which exist with respect to the issue and sale of the Stock. 3. The Registration Statement has become effective under the Securities Act and, to the best of such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement or suspending or preventing the use of the Prospectus is in effect and no proceedings for that purpose have been instituted or are pending or contemplated by the Commission; any required filing of the Prospectus pursuant to Rule 424(b) under the Securities Act has been made within the time period required by Rule 424(b); and the Prospectus may lawfully be used for the purposes specified in the Securities Act in connection with the offer and sale of the Stock in the manner therein specified. 4. The Registration Statement and the Prospectus (except as to the financial statements and schedules and other financial data contained therein, as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the Securities Act and with the Rules and Regulations. 5. The information required to be set forth in the Registration Statement in answer to Items 9, 10 (insofar as it relates to such counsel), 11(c) and 15 of Form S-1 is to the best of such counsel's knowledge accurately and adequately set forth 1 therein in all material respects or no response is required with respect to such Items, and the description of the Company's stock option plans and the options granted and which may be granted thereunder and the options granted otherwise than under such plans set forth in the Prospectus accurately and fairly presents the information required to be shown with respect to said plans and options to the extent required by the Securities Act and the rules and regulations of the Commission thereunder. 6. Such counsel does not know of any franchises, contracts, leases, documents or legal proceedings, pending or threatened, which in the opinion of such counsel are of a character required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement, which are not described and filed as required. 7. The Underwriting Agreement has been duly authorized, executed and delivered by the Company; and the Company has the corporate power and authority to enter into the Underwriting Agreement and to perform its obligations contemplated thereunder. 8. The issue and sale by the Company of the shares of Stock sold by the Company as contemplated by the Underwriting Agreement and the compliance by the Company with all of the provisions of the Underwriting Agreement will not (a) conflict with, breach or result in a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or any of its Subsidiaries is a party or (b) violate the Company's charter or bylaws or any law, statute, rule or regulation applicable to the Company or any of its Subsidiaries (other than state securities or blue sky laws as to which no opinion need be expressed) or any judgment, decree or order known to such counsel and applicable to the Company or any of its Subsidiaries of any court or governmental agency or body having jurisdiction over the Company or any of its Subsidiaries or any of their respective properties. 9. Except as described in the Registration Statement and the Prospectus, all holders of securities of the Company having rights to the registration of shares of Common Stock, or other securities, because of the filing of the Registration Statement by the Company, (i) have waived such rights, (ii) have had such rights expire by reason of lapse of time following notification of the Company's intent to file the Registration Statement or (iii) have had their shares or other securities registered by the Company pursuant to the Registration Statement. 10. No consent, approval, authorization or order of, or filing or registration with, any court or governmental agency or body is required for the execution, delivery and performance by the Company of the Underwriting Agreement and the consummation of the transactions contemplated therein, except such as have been obtained under the Securities Act and such as may be required under state securities or blue sky laws in connection with the purchase and distribution of the Stock by the Underwriters (as to which such counsel need express no opinion). 11. The Company is not, and after the offer and sale of the Stock in the manner set forth in the Underwriting Agreement and in the manner contemplated in the Prospectus will not be, an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act and the rules and regulations thereunder. 2 12. The Stock issued and sold by the Company will have been duly authorized for listing by the Nasdaq National Market upon official notice of issuance. Counsel rendering the foregoing opinion may rely as to questions of law not involving the laws of the United States or of the State of Delaware, upon opinions of local counsel satisfactory in form and scope to counsel for the Underwriters. Copies of any opinions so relied upon shall be delivered to the Representatives and to counsel for the Underwriters and the foregoing opinion shall also state that counsel knows of no reason the Underwriters are not entitled to rely upon the opinions of such local counsel. In addition to the matters set forth above, counsel rendering the foregoing opinion shall also include a statement to the effect that nothing has come to the attention of such counsel that leads such counsel to believe that the Registration Statement (except as to the financial statements and schedules and other financial data contained therein, as to which such counsel need not express any opinion or belief) at the Effective Date contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, that the Prospectus (except as to the financial statements and schedules and other financial data contained therein, as to which such counsel need not express any opinion or belief) as of its date or at the Closing Date (or any later date on which Option Stock is purchased), contained or contains any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 3 ANNEX B MATTERS TO BE COVERED IN THE OPINION OF WILLIAM WALKER, ESQ. VICE PRESIDENT OF INTELLECTUAL PROPERTY FOR THE COMPANY 1. The statements in the Registration Statement and in the Prospectus relating to Intellectual Property, under the captions "Risk Factors -- Our patents may not protect us from others using our technology which could harm our business and our competitive position"; "Risk Factors -- We cannot be certain other measure taken to protect our intellectual property will be effective"; "Risk Factors -- We are dependent upon our licensed technologies and may need to obtain additional licenses in the future to offer our products and remain competitive"; "Risk Factors - The protection of intellectual property in foreign countries is uncertain"; "Risk Factors -- Our products could infringe on the intellectual property rights of others which could require us to pay substantial royalties"; "Business -- Strategy -- Build a Substantial Intellectual Property Estate"; "Business -- Legal Proceedings"; and "Business -- Intellectual Property", insofar as such statements constitute matters of law, legal conclusions, or summaries of legal matters or proceedings, are accurate and complete statements or summaries of the matters set forth therein. 2. There are no pending, or to the best of such counsel's knowledge, threatened, legal, or governmental proceedings relating to any Intellectual Property that are referred to in the Prospectus and listed in Schedules A, B, C and D hereto. 3. The Company owns each of the Intellectual Property rights that are referred to in the Prospectus and listed in Schedules A and B hereto. 4. No security interests have been recorded in the U.S. Patent and Trademark Office with respect to any of the U.S. patents or patent applications that are referred to in the Prospectus and listed in Schedules A, B, C and D. 5. Except as described in the Prospectus, no third party has any rights to any of the Intellectual Property rights that are referred to in the Prospectus and listed in Schedules A, B, C and D. 6. No liens have been recorded against the Company with respect to any of the Intellectual Property rights that are referred to in the Prospectus and listed in Schedules A, B, C and D. 7. No interference has been declared or provoked with respect to any of the Intellectual Property rights that are referred to in the Prospectus and listed in Schedules A, B, C and D. 8. For each U.S. patent application referred to in the Prospectus and listed in Schedules B and D, all information known, to date, to be "material to patentability", as defined in 37 C.F.R. Section 1.56(b), has been disclosed, or will be disclosed pursuant to 37 C.F.R. Section 1.97, to the U.S. Patent and Trademark Office. 1 9. The Company has not received any notice challenging the validity or enforceability of any of the Intellectual Property rights that are referred to in the Prospectus and listed in Schedules A and C. 10. The micro-beads packed into the commercially available DNASep-Registered Trademark- chromatography columns for use on the WAVE-Registered Trademark- platform are covered by one or more of the claims of U.S. Patent No. 5,585,236. 11. The chromatographic processes intended for utilization with the commercially available WAVE-Registered Trademark- platform are covered by one or more of the claims of one or more of U.S. Patent Nos. 5,986,085, 6,024,878, 6,027,898, and 5,795,976. 12. The chromatographic processes intended for utilization with the commercially available WAVE-Registered Trademark- platform are covered by one or more of the claims of the one or more of U.S. Patent Nos. 5,972,222, 5,772,889, 5997,742, and 6,017,457. 13. The chromatographic processes for utilization with the commercially available WAVE-Registered Trademark- platform are covered by one or more of the claims of one or more of U.S. Patent Nos. 5,149,661 and 5,393,673. 14. The chromatographic processes intended for utilization with the commercially available WAVE-Registered Trademark- platform are covered by one or more of the claims of U.S. Patent No. 5,338,448. 15. No claim which is presently pending has been asserted against the Company relating to the potential infringement of, or conflict with, any Intellectual Property rights of others. 16. Neither the Company nor any of its Subsidiaries is infringing or otherwise violating any Intellectual Property rights of others, and there are no infringements by others of any of Company's or its Subsidiaries' Intellectual Property rights which in the judgment of such counsel could affect materially the use thereof by the Company or any of its Subsidiaries. 17. The Company and its Subsidiaries own or possess sufficient Intellectual Property rights to conduct the business now being or proposed to be conducted by the Company and its Subsidiaries as described in the Prospectus. In addition to the matters set forth above, such counsel shall also state that such counsel is familiar with the technology used by the Company and its Subsidiaries in their respective businesses and the manner of their use thereof and has read the Registration Statement and the Prospectus, including the portions of the Registration Statement and the Prospectus referring to Intellectual Property and that, based thereon, nothing has come to the attention of such counsel that leads it to believe that Registration Statement at the Effective Date and the Prospectus at the date thereof and as of the Closing Date contains any untrue statement of a material fact with respect to Intellectual Property owned or used by the Company and its Subsidiaries, or the manner of their use thereof, or omits to state any material fact relating to Intellectual Property owned or used by the Company and its Subsidiaries, or the manner of their use thereof, that is required to be stated in the Registration Statement or the Prospectus or is necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. 2 With respect to each of the opinions rendered in paragraphs 5, 6, 7 , 8, 16 and 17 above, such counsel may state that such opinion is given to the best of such counsel's knowledge. 3 ANNEX C SECURITYHOLDERS SUBJECT TO LOCK-UP EX-2 3 EXHIBIT 2 EXHIBIT 2 EXECUTION COPY ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT is entered into on May 16, 2000 by and between SD ACQUISITION INC., a Nebraska corporation (the "Buyer"), and TRANSGENOMIC, INC., a Delaware corporation (the "Seller"). The Buyer and the Seller are referred to herein individually as a Party and collectively as the Parties. WHEREAS, the Buyer desires to purchase the assets, and assume certain liabilities, of the Seller that are used by Seller in, or otherwise relate to, the manufacture and sale of certain non-life science scientific instruments that are marketed by the Seller under the CETAC Technologies brand (the "CETAC Products"), and Seller desires to sell and convey such assets, subject to such liabilities, all pursuant to the terms and conditions hereof; Now, therefore, in consideration of the premises and the mutual promises herein made, and in consideration of the representations, warranties, and covenants herein contained, the Parties agree as follows. 1. DEFINITIONS. "ACQUIRED ASSETS" means all of: (a) the leaseholds in real property, including all amounts delivered to the lessor by Seller, representing a security deposit with respect to the leaseholds, and the improvements, fixtures, and fittings thereon described in Schedule 1.1 (the "Leases"); (b) all raw materials, supplies, manufactured and purchased parts, goods in process and finished goods described in Schedule 1.2 (the "Inventory"); (c) machinery, equipment, furniture, fixtures, vehicles, trailers, leasehold improvements and tools described in Schedule 1.3 (the "Fixed Assets"); (d) the patents, patent applications, and patent disclosures (including all reissuances, continuations, continuations-in-part, revisions, extensions, and reexaminations thereof), trademarks, service marks, trade dress, logos, trade names, (including all translations, adaptations, derivations, and combinations thereof, all goodwill associated therewith, and all applications, registrations, and renewals in connection therewith), copyrights (including applications, registrations, and renewals in connection therewith) that are described in Schedule 1.4 hereof plus any trade secrets and confidential business information (including ideas, research and development, know-how, formulas, compositions, manufacturing and production processes and techniques, technical data, designs, drawings, specifications, customer and supplier lists, pricing and cost information, and business and marketing plans and proposals relating directly and exclusively to the manufacture and marketing of the CETAC Products and all tangible embodiments thereof (in whatever form or medium) (the "Intellectual Property"); (e) the agreements, contracts, instruments, security interests, guaranties, warranties and other intangible property rights described in Schedule 1.5 (the "Intangible Property"); (f) the accounts, notes and other receivables relating to sales of the CETAC Products occurring after March 31, 2000 (the "Accounts Receivable"); (g) the permits, licenses, orders, registrations, certificates, variances, and similar rights obtained from governments and governmental agencies relating to the manufacture and sale of the CETAC Products described in Schedule 1.6 (the "Permits"); (h) the books, records, ledgers, files, documents, correspondence, lists, plats, architectural plans, drawings, and specifications, creative materials, advertising and promotional materials, studies, reports, and other printed or written materials relating to the CETAC Products (the "Documents"); and (i) all funds held in the Section 125 Employee Reimbursement Accounts for Healthcare and Dependent Care relating to the employees set forth in Schedule 3(n) and all related reports from the administrator relating to participants and their balances. Acquired Assets shall not include any other asset other that those described above and, specifically, shall not include (i) the corporate charter, qualifications to conduct business as a foreign corporation, arrangements with registered agents relating to foreign qualifications, taxpayer and other identification numbers, seals, minute books, stock transfer books, blank stock certificates, and other documents relating to the organization, maintenance, and existence of the Seller as a corporation or (ii) any of the rights of the Seller under this Agreement. "ASSUMED LIABILITIES" means only those Liabilities and obligations of the Seller set forth in Schedule 1.7, including, specifically, all trade liabilities incurred in connection with the manufacture of the CETAC Products after March 31, 2000. Assumed Liabilities do not include (i) any Liability of the Seller for unpaid Taxes for periods prior to the Closing Date, (ii) any Liability of the Seller for income, transfer, sales, use, and other Taxes arising in connection with the consummation of the transactions contemplated hereby (including any income Taxes arising because the Seller is transferring the Acquired Assets, (iii) any Liability of the Seller for the unpaid Taxes of any Person other than the Seller under Treas. Reg. sec 1.1502-6 (or any similar provision of state, local, or foreign law), as a transferee or successor, by contract or otherwise, (iv) any obligation of the Seller to indemnify any Person by reason of the fact that such Person was a director, officer, employee, or agent of the Seller or was serving at the request of the Seller as a partner, trustee, director, officer, employee, or agent of another entity (whether such indemnification is for judgments, damages, penalties, fines, costs, amounts paid in settlement, losses, expenses, or otherwise and whether such indemnification is pursuant to any statute, charter document, bylaw, agreement, or otherwise), (v) any Liability of the Seller for costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby, or (vi) any Liability or obligation of the Seller under this Agreement. "BUYER" has the meaning set forth in the preface above. "BUYER NOTE" has the meaning set forth in Section 2(d) below. 2 "BUYER'S PLAN" has the meaning set forth in Section 4(f) below. "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended. "CETAC PRODUCTS" has the meaning set forth in the preface above. "CLOSING" has the meaning set forth in Section 2(f) below. "CLOSING DATE" has the meaning set forth in Section 2(f) hereof. "CODE" means the Internal Revenue Code of 1986, as amended. "CONFIDENTIAL INFORMATION" means any information concerning the Acquired Assets or otherwise relating to the CETAC Products that is not already generally available to the public. "DISCLOSURE SCHEDULES" has the meaning set forth in Section 3 hereof. "DWYER GUARANTEE" has the meaning set forth in Section 2(d) hereof. "ENVIRONMENTAL, HEALTH, AND SAFETY LAWS" means CERCLA, RCRA, and the Occupational Safety and Health Act of 1970, as amended, together with all other laws (including rules, regulations, codes, plans, injunctions, judgments, orders, decrees, rulings, and charges thereunder) of federal, state, local, and foreign governments (and all agencies thereof) concerning pollution or protection of the environment, public health and safety, or employee health and safety, including laws relating to emissions, discharges, releases, or threatened releases of pollutants, contaminants, or chemical, industrial, hazardous, or toxic materials or wastes into ambient air, surface water, ground water, or lands or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of pollutants, contaminants, or chemical, industrial, hazardous, or toxic materials or wastes. "FACILITY" has the meaning set forth in Section 2(b) below. "IPO" means the initial pubic offering of the Seller's common stock pursuant to a registration statement declared effective under the Securities Act of 1933, as amended. "KNOWLEDGE" means, with respect to any Party, the actual knowledge of the officers or employees of such Party with responsibility for the matter in question after reasonable investigation. "LENDERS" has the meaning set forth in Section 2(h). "LIABILITY" means any liability (whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due), including any liability for Taxes. "ORDINARY COURSE OF BUSINESS" means the ordinary course of business consistent with past custom and practice (including with respect to quantity and frequency). 3 "PARTY" has the meaning set forth in the preface above. "PERSON" means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization, or a governmental entity (or any department, agency, or political subdivision thereof). "PURCHASE PRICE" has the meaning set forth in Section 2(d) below. "RCRA" means the Resource Conservation and Recovery Act of 1976, as amended. "SECURITIES ACT" MEANS the Securities Act of 1933, as amended. "SECURITY INTEREST" means any mortgage, pledge, lien, encumbrance, charge or other security interest, other than (a) mechanic's, materialmen's, and similar liens, (b) liens for Taxes not yet due and payable or for Taxes that the taxpayer is contesting in good faith through appropriate proceedings, (c) purchase money liens and liens securing rental payments under capital lease arrangements, and (d) other liens which secure the performance of Assumed Liabilities. "SELLER" has the meaning set forth in the preface above. "SELLER'S PLAN" has the meaning set forth in Section 3(n) below. "TAX" means any federal, state, local, or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental (including taxes under Section 59A of the Code), customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated or other tax of any kind whatsoever, including any interest, penalty or addition thereto, whether disputed or not. "401(k) ASSETS" has the meaning set forth in Section 4(f) below. 2. THE TRANSACTION. (a) PURCHASE AND SALE OF ACQUIRED ASSETS. On and subject to the terms and conditions of this Agreement, the Buyer agrees to purchase from the Seller, and the Seller agrees to sell, transfer, convey, and deliver to the Buyer, all of the Acquired Assets at the Closing for the consideration specified below in this Section 2. (b) CERTAIN PERSONAL PROPERTY. The office supplies and certain other personal property on the premises of the Seller located generally at 5600 South 42nd Street, Omaha, Nebraska (such premises referred to herein as the "Facility"), including, without limitation, paper products, spare computer parts and other accessories, including additional memory, printer cartridges and such other personal property of Seller, shall be apportioned among the Parties in a mutually agreeable manner. 4 (c) ASSUMPTION OF LIABILITIES. On and subject to the terms and conditions of this Agreement, the Buyer agrees to assume and become responsible for all of the Assumed Liabilities as of March 31, 2000. (d) PURCHASE PRICE. The Buyer agrees to pay to the Seller at the Closing a purchase price (the "Purchase Price") equal to Six Million and 00/100 Dollars ($6,000,000) adjusted: (i) upward in an amount equal to any net increase or downward in an amount equal to any net decrease in the book value of the Inventories as reflected on the Seller's balance sheet as of March 31, 2000 from book value of the Inventories reflected on the Seller's balance sheet as of December 31, 1999 (which the parties stipulate shall equal $2,833,354); provided that no adjustment to the Purchase Price shall be made pursuant to this clause (i) unless any such net increase or decrease in the book value of the Inventories is equal to One Hundred Thousand Dollars ($100,000) or more; (ii) upward in an amount equal to any net decrease or downward in an amount equal to any net increase in the aggregate amount of accrued employee vacation liability as reflected on the Seller's balance sheet as of March 31, 2000 from amount of such liability reflected on the Seller's balance sheet as of December 31, 1999; provided that no adjustment to the Purchase Price shall be made pursuant to this clause (ii) unless any such net increase or decrease in such liability is equal to Ten Thousand Dollars ($10,000) or more; (iii) upward in an amount equal to all payroll, payroll taxes and other employee benefits costs incurred by the Seller with respect to the employees listed on Schedule 3(n) between April 1, 2000 and the Closing Date; and (iv) upward in an amount equal to all other expenses set forth in Schedule 2.4 that are paid or incurred by Seller on behalf of Buyer between April 1, 2000 and the Closing Date ("Paid and Incurred Expenses"). Payment of the Purchase Price shall be made by delivery to Seller at the Closing of (i) a promissory note in the form attached as Exhibit A hereto in the principal amount of Two Million and 00/100 Dollars ($2,000,000) (the "Buyer Note"), which shall be accompanied by a personal guarantee of Stephen F. Dwyer in the form attached as Exhibit B hereto (the "Dwyer Guarantee") and (ii) cash for the balance of the Purchase Price payable by wire transfer or delivery to Seller's designated account of other immediately available funds. (e) ALLOCATION. The Parties agree to allocate the Purchase Price among the Acquired Assets for all purposes (including financial accounting and tax purposes) in accordance with the allocation schedule attached hereto as Exhibit C. (f) THE CLOSING. The closing of the transactions contemplated by this Agreement (the "Closing") shall take place at the offices Dwyer, Smith, Gardner, Lazer, Pohren, Rogers & Forrest, 8712 West Dodge Road, Suite 400, Omaha, Nebraska 68114 5 commencing at 9:00 a.m. local time on the second business day following the satisfaction or waiver of all conditions to the obligations of the Parties to consummate the transactions contemplated hereby (other than conditions with respect to actions the respective Parties will take at the Closing itself) or such other date as the Parties may mutually determine (the "Closing Date"); PROVIDED, HOWEVER, that the Closing Date shall be no later than May 31, 2000. (g) DELIVERIES AT THE CLOSING. At the Closing, (i) the Seller will deliver to the Buyer the various certificates, instruments and documents referred to in Section 8(a) below; (ii) the Buyer will deliver to the Seller the various certificates, instruments and documents referred to in Section 8(b) below; (iii) the Seller will execute, acknowledge (if appropriate) and deliver to the Buyer all documents necessary for the effective sale, transfer, conveyance and assignment to the Buyer of the Acquired Assets; (iv) the Buyer will execute, acknowledge (if appropriate) and deliver to the Seller all documents necessary for the effective assumption of the Assumed Liabilities and (v) the Buyer and Stephen Dwyer will deliver to the Seller the consideration specified in Section 2(d) above. (h) FINANCING AFTER SELLER'S INITIAL PUBLIC OFFERING. (A) Seller acknowledges that Buyer is paying the cash portion of the Purchase Price at the Closing as an accommodation to the Seller and that the Buyer has entered into a loan agreement with one or more lenders (the "Lenders") under which the Buyer has borrowed the funds necessary to pay the cash portion of the Purchase Price along with loan fees and to provide additional working capital to Buyer (the "Buyer Loans"). The Seller agrees that within three days following closing of the IPO, the Seller will pay to the Lenders the full amount of principal and accrued and unpaid interest on the Buyer Loans and will acquire and assume the Buyer Loans as if it were the original lender thereunder. (B) In connection with the acquisition of the Buyer Loans by the Seller, the Seller shall be entitled to all security interests in the assets of the Buyer (including, specifically, the Acquired Assets) and any other security interest held by the Lenders in connection with the Buyer Loans and to the personal guarantees of Stephen F. and Nancy Dwyer delivered with respect thereto, each of which shall be assigned and delivered to the Seller in such documents, in a form and substance satisfactory to Seller, as are necessary to provide Seller with the same collateral rights as the Lenders; provided, however, that Seller shall not be entitled to receive the personal guarantees delivered by any person other than Stephen F. and Nancy Dwyer in connection with the Buyer Loans. (C) In the event the Seller acquires the Buyer Loans under this Section 2(h), the maturity date of the Buyer Note shall be adjusted so that all principal and accrued interest on the Buyer Note is due and payable in full on the same date the Buyer Loan is due and payable and the Buyer Note shall 6 also become secured by each of the security interests described in paragraph B above on a pari passu basis with the Buyer Loans. (D) As a condition to Seller's obligation to acquire the Buyer Loans, Stephen F. Dwyer shall deliver certificates for 1,200,000 shares of Seller's common stock owned by him, along with signed and undated stock powers relating thereto in a form and substance acceptable to Seller, to an escrow agent designated by Seller and grant to such escrow agent the right to sell any and all of such shares to the extent necessary to pay principal and interest on the Buyer Loans and the Buyer Note as and when due, including the acceleration thereof in the event of default. In connection with the foregoing, the Seller agrees to (i) register 1,200,000 shares of the Seller's common stock owned by Stephen F. Dwyer for resale with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended (the "Securities Act") and (ii) list such shares with the Nasdaq Stock Market for quotation on the Nasdaq National Market or such other market or exchange on which the Seller's common stock is then listed. Registration under the Securities Act shall be made at the same time as the registration of the shares of common stock to be sold by Seller in connection with the IPO. 3. REPRESENTATIONS AND WARRANTIES OF THE SELLER. The Seller represents and warrants to the Buyer that the statements contained in this Section 3 are correct and complete as of the date of this Agreement and will be correct and complete as of the Closing Date (as though made then and as though the Closing Date were substituted for the date of this Agreement throughout this Section 3), except as set forth in the disclosure schedules accompanying this Agreement (the Disclosure Schedules). (a) ORGANIZATION OF THE SELLER. The Seller is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware. (b) AUTHORIZATION OF TRANSACTION. The Seller has full power and authority (including full corporate power and authority) to execute and deliver this Agreement and to perform its obligations hereunder. This Agreement has been duly authorized, executed and delivered by the Seller and (assuming due authorization and delivery by the Buyer) is a valid and binding agreement of the Seller, enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors' rights generally or by general equitable principles. (c) NONCONTRAVENTION. Neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will (i) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge or other restriction of any government, governmental agency or court to which the Seller is subject or any provision of the charter or bylaws of the Seller or (ii) conflict with, result in a breach of, constitute a default under, result in the acceleration of or create in any party the right to accelerate, terminate, modify or cancel any agreement, contract, lease, license, instrument or other arrangement to which the Seller is 7 a party or by which it is bound or to which any of its assets is subject (or result in the imposition of any Security Interest upon any of the Acquired Assets). Other than set forth in Schedule 4(c), the Seller is not required to give any notice to, make any filing with or obtain any authorization, consent or approval of any governmental or regulatory agency or any other third party in order for the Parties to consummate the transactions contemplated by this Agreement. (d) BROKERS' FEES. The Seller has no liability or obligation to pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement for which the Buyer could become liable or obligated. (e) TITLE TO ACQUIRED ASSETS. The Seller has good and marketable title to, or a valid leasehold interest in, each of the Acquired Assets free and clear of all Security Interests other than those that will be released at or prior to the Closing. (f) LEGAL COMPLIANCE. The Seller and its predecessors have complied with all applicable laws (including rules, regulations, codes, plans, injunctions, judgments, orders, decrees, rulings and charges thereunder) of federal, state, local and foreign governments (and all agencies thereof) relating to the manufacture and marketing of the CETAC Products, and no action, suit, proceeding, hearing, investigation, charge, complaint, claim, demand or notice has been filed or commenced against the Seller alleging any failure so to comply. (g) LEASES. The Seller has delivered to the Buyer correct and complete copies of the Leases listed in Schedule 1.1. Each Lease is legal, valid, binding, enforceable, and in full force and effect and will continue to be legal, valid, binding, enforceable and in full force and effect on identical terms following the consummation of the transaction contemplated hereby. The Seller is not in breach or default under any Lease and no event has occurred which, with notice or lapse of time, would constitute a breach or default of the Lease by the Seller or permit termination, modification or acceleration thereof by the respective lessor and no party to any Lease has repudiated any provision thereof. There are no disputes, oral agreements, or forbearance programs in effect as to any Lease. All facilities leased thereunder are supplied with utilities and other services necessary for the operation of said facilities. (h) INTELLECTUAL PROPERTY. The Seller has delivered to the Buyer correct and complete copies of each item of Intellectual Property listed in Schedule 1.4. The Seller owns or has the right to use pursuant to license, sublicense, agreement, or permission each item of the Intellectual Property free and clear of any restriction and has taken all necessary action to maintain and protect each item of Intellectual Property. No item of Intellectual Property is subject to any outstanding injunction, judgment, order, decree, ruling or charge limiting its use by the Seller or Seller's ability to convey such Intellectual Property to the Buyer hereunder. No action, suit, proceeding, hearing, investigation, charge, complaint, claim or demand is pending or, to the Seller's Knowledge, is threatened which challenges the legality, validity, enforceability, use, or ownership of any item of the Intellectual Property; and Seller has never received any charge, complaint, claim, demand or notice alleging any such interference, infringement, 8 misappropriation or violation (including any claim that it license or refrain from using any intellectual property rights of any third party). To the Seller's Knowledge, no third party has interfered with, infringed upon, misappropriated or otherwise come into conflict with any item of the Intellectual Property and no item of the Intellectual Property interferes with, infringes upon, misappropriates or otherwise comes into conflict with any intellectual property rights of third parties. (i) INVENTORIES. The items included in the Inventory are merchantable and fit for the purpose for which they were procured or manufactured, and are not obsolete, damaged or defective. (j) INTANGIBLE PROPERTY. The Seller has delivered to the Buyer correct and complete copies of each item of Intangible Property listed in Schedule 1.5. Each item of Intangible Property is legal, valid, binding, enforceable and in full force and effect and will continue to be legal, valid, binding, enforceable and in full force and effect on identical terms following the consummation of the transaction contemplated hereby. The Seller is not in breach or default under any item of Intangible Property and no event has occurred which, with notice or lapse of time, would constitute a breach or default of an item of Intangible Property by the Seller or permit termination, modification or acceleration thereof by the respective counterparty and no party to any item of Intangible Property has repudiated any provision thereof. There are no disputes, oral agreements or forbearance programs in effect as to any item of Intangible Property. (k) PERMITS. The Seller has delivered to the Buyer correct and complete copies of each Permit listed in Schedule 1.6. Each Permit is in full force and effect and will continue to be in full force and effect on identical terms following the consummation of the transaction contemplated hereby. The Seller is not in breach or default under any Permit and no event has occurred which, with notice or lapse of time, would constitute a breach or default by the Seller of any Permit or result in the revocation thereof. There are no disputes, oral agreements or forbearance programs in effect as to any Permit. (l) DOCUMENTS. The Documents to be delivered at the Closing include all of the books, records (including all relevant employee records or copies thereof), ledgers, files, documents, correspondence, lists, plats, architectural plans, drawings, and specifications, creative materials, advertising and promotional materials, studies, reports and other printed or written materials relating to the CETAC Products. (m) PRODUCT LIABILITY AND WARRANTIES. There are no actions, suits, proceedings, hearings, investigations, charges, complaints, claims or demands pending or, to the Seller's Knowledge, threatened arising out of any injury to individuals or property as a result of the ownership, possession or use of any CETAC Product. The Seller has delivered to the Buyer correct and complete copies of each warranty relating to the CETAC products that are included in the Assumed Liabilities (the "Product Warranties"). There are no other express guaranties, warranties or other indemnities beyond the terms and conditions of the Product Warranties. 9 (n) EMPLOYEES AND CERTAIN EMPLOYEE BENEFITS. To the Seller's Knowledge, each of its employees listed on Schedule 3(n) hereof plans to become an employee of the Buyer upon consummation of the transaction contemplated by this Agreement. The Seller is not a party to or bound by any collective bargaining agreement, nor has experienced any strikes, grievances, claims of unfair labor practices or other collective bargaining disputes. Seller has committed no unfair labor practice. Seller has no Knowledge of any organizational effort presently being made or threatened by or on behalf of any labor union with respect to the employees listed in Schedule 3(n). The 401(k) Plan maintained by the Seller with respect to employees listed in Schedule 3(n) (the "Seller's Plan") complies in all material respects with the applicable provisions of the Code. (o) SALES AND COST INFORMATION. The information relating to the sales of CETAC products and costs of materials associated therewith set forth in Schedule 3(o) and all financial data and other information provided for or used in connection with determining any purchase price adjustment pursuant to Section 2(d)(i)-(iv) of this Agreement is accurate and complete. (p) ENVIRONMENT, HEALTH, AND SAFETY. (i) The Seller has complied with all Environmental, Health, and Safety Laws at each of the subject premises under the Leases, and no action, suit, proceeding, hearing, investigation, charge, complaint, claim, demand or notice has been filed or commenced against any of them alleging any failure so to comply. Without limiting the generality of the preceding sentence, the Seller has obtained and been in compliance with all of the terms and conditions of all permits, licenses and other authorizations which are required under, and has complied with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables which are contained in, all Environmental, Health, and Safety Laws. (ii) Other than as described in Schedule 3(p), neither the Seller nor its predecessors have used or disposed of any substance at any property which is the subject premises under the Leases or exposed any employee or other individual at such locations to any substance or condition in any manner that could form the basis for any present or future action, suit, proceeding, hearing, investigation, charge, complaint, claim or demand against Buyer for damage to any site, location or body of water (surface or subsurface), for any illness of or personal injury to any employee or other individual, or for any reason under any Environmental, Health, and Safety Law. (q) DISCLOSURE. The representations and warranties contained in this Section 3 do not contain any untrue statement of a fact or omit to state any fact necessary in order to make the statements and information contained in this Section 3 not misleading. (r) INVESTMENT. The Seller (i) understands that the Buyer Note has not been, and will not be, registered under the Securities Act or under any state securities laws, and is being offered and sold in reliance upon federal and state exemptions for transactions 10 not involving any public offering, (ii) is acquiring the Buyer Note solely for its own account, and not with a view to the distribution thereof, (iii) is a sophisticated investor with knowledge and experience in business and financial matters and (iv) is able to bear the economic risk and lack of liquidity inherent in holding the Buyer Note. (s) ASSUMED LIABILITIES. The information relating to the Assumed Liabilities set forth in Schedule 1.7 is accurate and complete. 4. REPRESENTATIONS AND WARRANTIES OF THE BUYER. The Buyer represents and warrants to the Seller that the statements contained in this Section 4 are correct and complete as of the date of this Agreement and will be correct and complete as of the Closing Date (as though made then and as though the Closing Date were substituted for the date of this Agreement throughout this Section 4), except as set forth in the Disclosure Schedule. (a) ORGANIZATION OF THE BUYER. The Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Nebraska. (b) AUTHORIZATION OF TRANSACTION. The Buyer has full power and authority (including full corporate power and authority) to execute and deliver this Agreement and to perform its obligations hereunder. This Agreement has been duly authorized, executed and delivered by the Buyer and (assuming due authorization and delivery by the Seller) is a valid and binding agreement of the Buyer, enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors' rights generally or by general equitable principles. (c) NONCONTRAVENTION. Neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will (i) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge or other restriction of any government, governmental agency or court to which the Buyer is subject or any provision of the charter or bylaws of the Buyer or (ii) conflict with, result in a breach of, constitute a default under, result in the acceleration of or create in any party the right to accelerate, terminate, modify or cancel any agreement, contract, lease, license, instrument or other arrangement to which the Buyer is a party or by which it is bound or to which any of its assets is subject. The Buyer is not required to give any notice to, make any filing with, or obtain any authorization, consent, or approval of any governmental or regulatory agency or any other third party in order for the Parties to consummate the transaction contemplated by this Agreement. (d) AVAILABILITY OF FUNDS. The Buyer has obtained a firm commitment from Lenders to lend the Buyer the funds necessary to allow the Buyer to consummate the transaction contemplated by this Agreement at the Closing. (e) INVESTIGATION BY BUYER. The Buyer has conducted, to its satisfaction, an independent investigation and analysis of the projected operation of its business upon the consummation of the transaction contemplated by this Agreement and has relied exclusively on the results thereof in making any determination as the future operations, 11 financial viability and prospects of its business operations. Buyer has relied on the representations and warranties of the Seller contained herein only with respect to the matters specifically discussed therein. (f) EMPLOYEES AND CERTAIN EMPLOYEE BENEFITS. Buyer intends to retain the services of each of employees of the Seller identified on Schedule 3(n) for a period of at least six months after the Closing Date, it being understood by the Seller that the Buyer shall retain all power to discharge individual employees who are not performing on a satisfactory basis. Buyer intends to establish a 401(k) Plan for its employees (including those listed on Schedule 3(n) (the "Buyer's Plan") that will comply in all material respects with the applicable provisions of the Code. Buyer and Buyer's Plan will maintain all accrued benefits and optional forms of benefits with respect to the assets in the Seller's Plan attributable to the accounts of the current employees of Seller who are identified on Schedule 3(n) and who become employees of Buyer as of the Closing Date (the "401(k) Assets"), within the meaning of Section 411(d)(6) of the Code. (g) BROKERS' FEES. The Buyer has no liability or obligation to pay any fees or commissions to any broker, finder, or agent with respect to the transactions contemplated by this Agreement for which the Seller could become liable or obligated. 5. DISCLAIMER OF WARRANTY. THE BUYER ACKNOWLEDGES AND AGREES THAT ALL ACQUIRED ASSETS ARE BEING ASSIGNED, TRANSFERRED AND CONVEYED TO BUYER ON AN "AS IS, WHERE IS" BASIS, AND THAT, EXCEPT AS EXPRESSLY SET FORTH IN SECTION 3 HEREOF, SELLER IS MAKING NO REPRESENTATION OR WARRANTY OF ANY KIND, EXPRESSED OR IMPLIED, RESPECTING THE ACQUIRED ASSETS AS TO MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR ANY OTHER MATTER. 6. PRE-CLOSING COVENANTS. The Parties agree as follows with respect to the period between the execution of this Agreement and the Closing: (a) GENERAL. Each of the Parties will use its best efforts to take all action and to do all things necessary in order to consummate and make effective the transactions contemplated by this Agreement (including satisfaction, but not waiver, of the closing conditions set forth in Section 8 hereof). (b) NOTICES AND CONSENTS. Each of the Parties will provide such notices to, make such filings, and use its best efforts to obtain any authorizations, consents and approvals of any governmental or regulatory agency or third parties necessary to the consummation of the transaction contemplated by this Agreement. (c) OPERATION OF BUSINESS. The Seller will not engage in any practice, take any action or enter into any transaction with respect to the manufacture or marketing of the CETAC Products which are outside the Ordinary Course of Business with respect thereto. 12 (d) PRESERVATION OF ACQUIRED ASSETS. The Seller will keep the Acquired Assets substantially intact, including its physical facilities and relationships with lessors, licensors, suppliers, customers and employees. (e) ACCOUNTS PAYABLE. On or before the Closing Date the Seller will remit payment to each of its suppliers or venders who have provided goods or services to the Seller relating directly to the manufacture of the CETAC Products so that all supplier or vender accounts are paid as of a date no later than 45 days after relevant invoice date. Buyer agrees that such payments may be made, in whole or in part, from the cash portion of the Purchase Price paid at Closing. (f) FULL ACCESS. The Seller will permit representatives of the Buyer to have full access at all reasonable times, and in a manner so as not to interfere with the normal business operations of the Seller to all Acquired Assets. (g) NOTICE OF DEVELOPMENTS. Each Party will give prompt written notice to the other Party of any material adverse development causing, or which could cause, a breach of any of its own representations and warranties contained herein. No disclosure by any Party pursuant to this Section 6(g), however, shall be deemed to amend or supplement any Disclosure Schedule or to prevent or cure any misrepresentation, breach of warranty or breach of covenant. (h) EXCLUSIVITY. The Seller will not (i) solicit, initiate or encourage the submission of any proposal or offer from any Person relating to the acquisition of any of the Acquired Assets (other than sales of Inventories made in the Ordinary Course of Business), including any acquisition structured as a merger, consolidation or share exchange or (ii) participate in any discussions or negotiations regarding, furnish any information with respect to, assist or participate in or facilitate in any other manner any effort or attempt by any Person to do or seek any of the foregoing. The Seller will notify the Buyer immediately if any Person makes any proposal, offer, inquiry or contact with respect to any of the foregoing. 7. POST-CLOSING COVENANTS. The Parties agree as follows with respect to the period following the Closing. (a) GENERAL. In case at any time after the Closing any further action is necessary or desirable to carry out the purposes of this Agreement, each of the Parties will take such further action (including the execution and delivery of such further instruments and documents) as the other Party reasonably may request, all at the sole cost and expense of the requesting Party (unless the requesting Party is entitled to indemnification therefor under Section 9 hereof). (b) LITIGATION SUPPORT. In the event, and for so long as, any Party actively is contesting or defending against any action, suit, proceeding, hearing, investigation, charge, complaint, claim or demand in connection with (i) any transaction contemplated under this Agreement or (ii) any fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act or transaction on or prior 13 to the Closing Date involving any of the Acquired Assets, the other Party will cooperate with the contesting or defending Party and its counsel in the contest or defense thereof, make available its personnel and provide such testimony and access to its books and records as shall be reasonably necessary in connection with the contest or defense thereof, all at the sole cost and expense of the contesting or defending Party (unless the contesting or defending Party is entitled to indemnification therefor under Section 9 hereof). (c) TRANSITION. The Seller will not take any action that is designed or intended to have the effect of discouraging any lessor, licensor, customer, supplier or other business associate from maintaining the same business relationships with the Buyer after the Closing as such party maintained with the Seller prior to the Closing. The Seller will refer all customer inquiries relating to the CETAC Products to the Buyer from and after the Closing. Buyer and Seller shall each use their best efforts to cooperate with the other, and to cause their respective employees to act accordingly, in order to fulfill the intent and purpose of this Agreement. (d) CONFIDENTIALITY. The Seller will treat and hold as such all of the Confidential Information, refrain from using any of the Confidential Information except in connection with this Agreement and deliver promptly to the Buyer or destroy, at the request and option of the Buyer, all tangible embodiments (and all copies) of the Confidential Information which are in its possession. In the event that the Seller is requested or required (by oral question or request for information or documents in any legal proceeding, interrogatory, subpoena, civil investigative demand or similar process) to disclose any Confidential Information, the Seller will notify the Buyer promptly of the request or requirement so that the Buyer may seek an appropriate protective order or waive compliance with the provisions of this Section 7(d). If, in the absence of a protective order or the receipt of a waiver hereunder, the Seller is, on the advice of counsel, compelled to disclose any Confidential Information to any tribunal or else stand liable for contempt, the Seller may disclose the Confidential Information to the tribunal; PROVIDED, HOWEVER, that the Seller shall use its best efforts to obtain, at the request of the Buyer, an order or other assurance that confidential treatment will be accorded to such portion of the Confidential Information required to be disclosed as the Buyer shall designate. (e) COVENANT NOT TO COMPETE. Seller and Collin J. D'Silva, in his individual capacity, respectively, agree that, for a period of five (5) years following the Closing Date, in any geographic area in which Seller conducts business as of the Closing Date, neither shall, directly or indirectly, alone or in association with others, in the capacity as partner, shareholder or any other legal or beneficial capacity, or otherwise, or through or in connection with any Person: (i) Manufacture or sell any product that directly or indirectly competes with any CETAC Product being sold (or contemplated to be sold) by the Seller as of the Closing Date; 14 (ii) Solicit, or attempt to solicit, any supplier, vendor, customer or employee of the Buyer; (iii) Divert or attempt to divert, for its direct or indirect benefit or for the benefit of any other person, any supplier, vendor, customer, employee or other relevant party from the Buyer; (iv) Influence or attempt to influence any supplier, vendors, customer, employee, or other relevant party to change or transfer its business, patronage, employment or other relationship from the Buyer, directly or indirectly, to Seller or to any other Person; (v) Assist, be or become involved in or associated with, in any capacity, any Person that manufactures or sells any product that directly or indirectly competes with any CETAC Product being sold (or contemplated to be sold) by the Seller as of the Closing Date; provided, however, that in this provision shall not apply to Seller's ownership of less than 1% of the outstanding securities any publicly-traded corporation which is engaged in any such business; (vii) In any other manner interfere with, disrupt or attempt to disrupt the relationship of the Buyer with any customer, supplier, vendor, employee or other relevant party of the Buyer, including the solicitation of any of the foregoing; or In the event of a breach or threatened breach under this Section 7(e), each of the Seller and Collin J. D'Silva hereby acknowledges and stipulates that Buyer shall not have an adequate remedy at law, shall suffer irreparable harm, and, therefore, it is mutually agreed and stipulated by the Seller and Collin J. D'Silva that, in addition to any other remedies at law or in equity which the Buyer may have, the Buyer shall be entitled to obtain in a court of law and/or equity a temporary and/or permanent injunction restraining the Buyer or Collin J. D'Silva, as the case may be, from any further violation or breach of the covenants set forth in this Section 7(e). In the event that any one or more of the provisions contained herein shall, for any reason, be held to be excessively broad as to duration, geographical scope, activity or subject, such provision shall be construed as limiting and reducing it as determined by a court of competent jurisdiction and shall be enforceable to the extent compatible with applicable law. (f) USE OF PREMISES AND SHARE SYSTEMS. The Buyer agrees to allow the Seller and its personnel to continue to occupy the Facility and to conduct its business operations thereat for a period of not less than 120 days after the Closing Date. Buyer will allow Seller full and unimpeded access to computers and other shared systems during the term of co-occupancy. The Buyer and Seller agree to enter into a sublease of such premises on commercially reasonable terms reflecting their co-occupancy thereof during such period and to share systems and services, including but not limited to utilities, and cost thereof on an equitable basis. The Seller agrees to use its best efforts to locate another suitable 15 location for its Omaha, Nebraska operations as soon as practicable after the Closing Date consistent with limiting disruption to its business operations. (g) ACCOUNTS RECEIVABLE. The Buyer will use its reasonable best efforts (which includes providing prompt customer support) to assist the Seller in collecting accounts receivable from the sale of the CETAC Products by the Seller prior to April 1, 2000 and in the event that the Buyer receives payment with respect to such accounts receivable, it shall hold such payments in trust for the benefit of the Seller and promptly remit such payments to Seller. Likewise, the Seller will use its reasonable best efforts to assist the Buyer in collecting Accounts Receivable and in the event that the Seller receives payment with respect to such Accounts Receivable, it shall hold such payments in trust for the benefit of the Buyer and promptly remit such payments to Buyer. (h) 401(k) ASSETS. Within 30 days following the Closing Date, Seller and Buyer shall enter into a transfer agreement and shall cause the 401(k) Assets in the Seller's Plan to be transferred to the Buyer's Plan. (i) COMPLETION OF M6000 ELECTRONIC DOCUMENTATION. The Seller will undertake to complete the M6000 Electronic Documentation according to the specifications in Schedule 7(i). 8. CONDITIONS TO OBLIGATION TO CLOSE. (a) CONDITIONS TO OBLIGATION OF THE BUYER. The obligation of the Buyer to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction of the following conditions: (i) the representations and warranties of the Seller set forth in Section 3 hereof shall be true and correct in all material respects at and as of the Closing Date; (ii) the Seller shall have performed and complied with all of its covenants hereunder in all material respects through the Closing; (iii) the Seller shall have procured all of the third party consents specified in Schedule 3(c); (iv) no action, suit or proceeding shall be pending or threatened before any court or quasi-judicial or administrative agency of any federal, state, local or foreign jurisdiction or before any arbitrator wherein an unfavorable injunction, judgment, order, decree, ruling,or charge would (A) prevent consummation of any of the transactions contemplated by this Agreement, (B) cause any of the transactions contemplated by this Agreement to be rescinded following consummation, (C) affect adversely the right of the Buyer to own the Acquired Assets or to utilize them in its business operations; 16 (v) the Seller shall have delivered to the Buyer a certificate to the effect that each of the conditions specified above in Section 8(a)(i)-(iv) has been satisfied in all respects; (vi) the Buyer shall have received from counsel to the Seller an opinion in form and substance as set forth in Exhibit D attached hereto, addressed to the Buyer and dated as of the Closing Date; (vii) the Buyer shall have obtained on terms and conditions satisfactory to it all of the financing it needs in order to consummate the transactions contemplated hereby and fund the working capital requirements of its business after the Closing; (viii) the Seller shall have entered into an agreement with the Lenders under which Seller has agreed to acquire the Buyer Loans as described in Section 2(h) hereof; and (ix) all actions to be taken by the Seller in connection with consummation of the transactions contemplated hereby and all certificates, opinions, instruments and other documents required to effect the transactions contemplated hereby will be satisfactory in form and substance to the Buyer. The Buyer may waive any condition specified in this Section 8(a) if it executes a writing so stating at or prior to the Closing. (b) CONDITIONS TO OBLIGATION OF THE SELLER. The obligation of the Seller to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction of the following conditions: (i) the representations and warranties of the Buyer set forth in Section 4 above shall be true and correct in all material respects at and as of the Closing Date; (ii) the Buyer shall have performed and complied with all of its covenants hereunder in all material respects through the Closing; (iii) no action, suit or proceeding shall be pending or threatened before any court or quasi-judicial or administrative agency of any federal, state, local or foreign jurisdiction wherein an unfavorable injunction, judgment, order, decree, ruling or charge would (A) prevent consummation of any of the transactions contemplated by this Agreement or (B) cause any of the transactions contemplated by this Agreement to be rescinded following consummation; (iv) the Buyer shall have delivered to the Seller a certificate to the effect that each of the conditions specified above in Section 8(b)(i)-(iii) has been satisfied in all respects; 17 (v) the Seller shall have received from counsel to the Buyer an opinion in form and substance as set forth in Exhibit E attached hereto, addressed to the Seller and dated as of the Closing Date; and (vi) all actions to be taken by the Buyer in connection with consummation of the transactions contemplated hereby and all certificates, opinions, instruments and other documents required to effect the transactions contemplated hereby will be satisfactory in form and substance to the Seller. The Seller may waive any condition specified in this Section 8(b) if it executes a writing so stating at or prior to the Closing. 9. INDEMNIFICATION. (a) INDEMNIFICATION BY THE SELLER. (i) from and after the Closing Date, the Seller shall defend, indemnify and hold harmless the Buyer and its directors, officers, employees and agents from, and reimburse the aforesaid parties for, any and all Buyer's Damages (defined below) in the manner and to the extent set forth in this Section 9(a). (ii) the term "Buyer's Damages" shall include all losses, costs, expenses (including reasonable attorneys' fees and expenses and other costs and expenses incident to any suit, action, investigation, claim or proceeding), fees, liabilities and damages sustained by the party entitled to indemnity prior to any reimbursement therefor: (A) arising from any breach of a representation or warranty of the Seller contained in or made pursuant to this Agreement (except in each case to the extent corrected or disclosed in writing to the Buyer prior to the Closing); (B) resulting from a default in the performance of any of the covenants or obligations that the Seller is required to perform under this Agreement (except to the extent corrected or performed by the Seller prior to the Closing); (C) resulting from any claim made with respect to any Product Warranties relating to CETAC Products sold by Seller prior to the Closing Date; (D) resulting from or arising in connection with the operation of the Seller's business, including the management, control, ownership or operation of the Acquired Assets prior to March 31, 2000; (E) resulting from any Taxes payable with respect to Seller's business for the period ending on the Closing Date; 18 (F) which arise from any activities of Seller or Seller's employees or agents on Buyer's premises after Closing; and (G) resulting from any environmental claim made against the Buyer, or their respective parent corporations, subsidiaries, officers, directors, shareholders and other affiliates by any person or entity (including, but not limited to, claims under CERCLA, RCRA, or other federal, state, local, or foreign environmental laws) arising from events, circumstances, or conditions occurring, or existing on or prior to March 31, 2000 relating to the business of Seller at the Facility, whether disclosed or undisclosed provided however, that Seller shall not be required to pay any Buyer's Damages unless the aggregate amount of such Buyer's Damages exceeds $25,000 (but then to the full extent of such Buyer's Damages). Notwithstanding the foregoing provisions hereof to the contrary, it is understood and agreed that the amount of Buyer's Damages payable by Seller to Buyer hereunder shall in no event exceed the Purchase Price, except, however the amount of any Buyer's Damages pursuant to Section 9(a)(ii)(D) shall not be limited in amount. (b) INDEMNIFICATION BY THE BUYER. (i) from and after the Closing Date, the Buyer shall indemnify and hold harmless the Seller and its directors, officers, employees and agents from, and reimburse the aforesaid parties for, any and all Seller's Damages (as defined below) in the manner and to the extent set forth in this Section 9(b). (ii) the term "Seller's Damages" shall include all losses, costs, expenses (including reasonable attorneys' fees and expenses and other costs and expenses incident to any suit, action, investigation, claim or proceeding), fees, liabilities and damages sustained by the party entitled to indemnity prior to any reimbursement therefor: (A) arising from any breach of a representation or warranty of the Buyer contained in or made pursuant to this Agreement (except in each case to the extent corrected or disclosed in writing to the Seller prior the Closing); (B) resulting from a default in the performance of any of the covenants or obligations that the Buyer is required to perform under this Agreement (except to the extent corrected or performed by the Buyer prior to the Closing); (C) resulting from or arising in connection with any Assumed Liability as contemplated by this Agreement; (D) resulting from or arising in connection with the operation of the Buyer's business, including the management, control, ownership or operation of the Acquired Assets after March 31, 2000; 19 (E) resulting from any Taxes payable with respect to Buyer's business; (F) resulting from any claim which alleges that activities of the Buyer or any sublicensees of Buyer infringe or violate a third party's intellectual property rights. provided however, that Buyer shall not be required to pay any Seller's Damages unless the aggregate amount of such Seller's Damages exceeds $250,000 (but then to the full extent of such Seller's Damages). Notwithstanding the foregoing provisions hereof to the contrary, it is understood and agreed that the amount of Seller's Damages payable by Buyer to Seller hereunder shall in no event exceed $500,000. (c) LEGAL PROCEEDINGS. (i) If any legal proceeding shall be instituted, or any claim or demand made, against any indemnified party in respect of which an indemnifying party may be liable hereunder, the indemnified party shall give prompt written notice thereof to the indemnifying party. No indemnification provided for in this Section 9 shall be available to any party who shall fail so to give notice if the party to whom such notice was not given was unaware of the action, suit, investigation, inquiry or proceeding to which the notice would have related and was prejudiced by the failure to give the notice, but the omission so to notify such indemnifying party or parties of any such service or notification shall not relieve such indemnifying party or parties from any liability which it or they may have to the indemnified party otherwise than on account of such indemnity agreement. Any indemnifying party shall be entitled at its own expense to participate in the defense of any action, suit or proceeding against, or investigation or inquiry of, an indemnified party. Any indemnifying party shall be entitled, if it so elects within a reasonable time after receipt of the notice by giving written notice to the indemnified party, to assume the entire defense of such action, suit, investigation, inquiry or proceeding, in which event such defense shall be conducted, at the expense of the indemnifying party or parties, by counsel chosen by such indemnifying party or parties and reasonably satisfactory to the indemnified party or parties; PROVIDED, HOWEVER, that (i) if the indemnified party or parties reasonably determine that there may be a conflict between the positions of the indemnifying party or parties and of the indemnified party or parties in conducting the defense of such action, suit, investigation, inquiry or proceeding or that there may be legal defenses available to such indemnified party or parties different from or in addition to those available to the indemnifying party or parties, then counsel for the indemnified party or parties shall be entitled to conduct the defense to the extent reasonably determined by such counsel to be necessary to protect the interests of the indemnified party or parties and (ii) in any event, the indemnified party or parties shall be entitled to have counsel chosen by such indemnified party or parties participate in, but not conduct, the defense. If an indemnifying party gives a notice that it intends to assume the defense of any action, suit, investigation, inquiry or proceeding and the counsel chosen by the indemnifying party or parties is reasonably satisfactory to the indemnified party or parties, the indemnifying party or parties will 20 not be liable under this Section 9 for any legal or other expenses subsequently incurred by the indemnified party or parties in connection with the defense of the action, suit, investigation, inquiry or proceeding, except that (A) the indemnifying party or parties shall bear the legal and other expenses incurred in connection with the conduct of the defense as referred to in clause (i) of the proviso to the preceding sentence (provided, however, that the indemnifying party shall not be liable for the fees and expenses of more than one separate firm for all such indemnified parties) and (B) the indemnifying party or parties shall bear such other expenses as it or they have authorized to be incurred by the indemnified party or parties. If the indemnifying party or parties fail to provide such notice within a reasonable period of time, it shall be responsible for any legal or other expenses incurred by the indemnified party or parties in connection with the defense of the action, suit, investigation, inquiry or proceeding (ii) An indemnifying party will not, without the prior written consent of each indemnified party, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder unless such settlement, compromise or consent includes an unconditional release of such indemnified party from all liability arising out of such claim, action, suit or proceeding. 10. TERMINATION OF AGREEMENT. (a) TERMINATION. This Agreement may be terminated as follows: (i) the Buyer and the Seller may terminate this Agreement by mutual written consent at any time prior to the Closing; (ii) the Buyer may terminate this Agreement by giving written notice to the Seller at any time prior to the Closing (A) in the event the Seller has breached any material representation, warranty or covenant contained in this Agreement in any material respect, the Buyer has notified the Seller of the breach, and the breach has continued without cure for a period of 30 days after the notice of breach or (B) if the Closing shall not have occurred on or before May 31, 2000, by reason of the failure of any condition precedent under Section 8(a) hereof (unless the failure results primarily from the Buyer itself breaching any representation, warranty, or covenant contained in this Agreement); and (iii) the Seller may terminate this Agreement by giving written notice to the Buyer at any time prior to the Closing (A) in the event the Buyer has breached any material representation, warranty or covenant contained in this Agreement in any material respect, the Seller has notified the Buyer of the breach and the breach has continued without cure for a period of 30 days after the notice of breach or (B) if the Closing shall not have occurred on or before May 31, 2000, by reason of the failure of any condition precedent under Section 8(b) hereof (unless the failure results primarily from the Seller itself breaching any representation, warranty or covenant contained in this Agreement). 21 (b) EFFECT OF TERMINATION. If any Party terminates this Agreement pursuant to this Section 10, all rights and obligations of the Parties hereunder shall terminate without any Liability of any Party to the other Party (except for any Liability of any Party then in breach). 11. MISCELLANEOUS. (a) SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All of the representations and warranties of the Buyer and the Seller contained in this Agreement shall remain in full force and effect regardless of any investigation made by or on behalf of the other Party and shall survive for a period of 36 months after the Closing Date. (b) PRESS RELEASES AND PUBLIC ANNOUNCEMENTS. No Party shall issue any press release or make any public announcement relating to the subject matter of this Agreement prior to the Closing without the prior written approval of the other Party; PROVIDED, HOWEVER, that any Party may make any public disclosure it believes in good faith is required by applicable law in which case the disclosing Party will use its reasonable best efforts to advise the other Party prior to making the disclosure. (c) NO THIRD-PARRY BENEFICIARIES. This Agreement shall not confer any rights or remedies upon any Person other than the Parties and their respective successors and permitted assigns. (d) ENTIRE AGREEMENT. This Agreement (including the documents referred to herein) constitutes the entire agreement between the Parties and supersedes any prior understandings, agreements or representations by or between the Parties, whether written or oral, to the extent they have related in any way to the subject matter hereof. (e) SUCCESSION AND ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the Parties named herein and their respective successors and permitted assigns. No Party may assign either this Agreement or any of its rights, interests or obligations hereunder without the prior written approval of the other Party. (f) COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. (g) HEADINGS. The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. (h) NOTICES. All notices, requests, demands, claims and other communications hereunder will be in writing. Any notice, request, demand, claim or other communication hereunder shall be deemed duly given if (and then two business days after) it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: 22 If to the Seller: Transgenomic, Inc. 5600 South 42nd Street Omaha, Nebraska 68107 Attention: Mr. Collin J. D'Silva Copy to: Steven P. Amen Kutak Rock LLP 1650 Farnam Street Omaha, Nebraska 68102 If to the Buyer: SD ACQUISITION, INC. 5600 South 42nd Street Omaha, Nebraska 68107 Attention: Mr. Stephen F. Dwyer Copy to: Michael L. Lazer Dwyer, Smith, Gardner, Lazer, Pohren, Rogers & Forrest 8712 West Dodge Road, Suite 400 Omaha, Nebraska 68114 Any Party may send any notice, request, demand, claim or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail or electronic mail), but no such notice, request, demand, claim or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any Party may change the address to which notices, requests, demands, claims and other communications hereunder are to be delivered by giving the other Party notice in the manner herein set forth. (i) GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the domestic laws of the State of Nebraska. (j) AMENDMENTS AND WAIVERS. No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by the Buyer and the Seller. No waiver by any Party of any default, misrepresentation or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. (k) SEVERABILITY. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. 23 (l) EXPENSES. Buyer and Seller will bear its own costs and expenses (including legal fees and expenses) incurred in connection with this Agreement and the transactions contemplated hereby. (m) CONSTRUCTION. The Parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the Parties and no presumption or burden of proof shall arise favoring or disfavoring any Party by virtue of the authorship of any of the provisions of this Agreement. Any reference to any federal, state, local or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. The word "including" shall mean including without limitation. Nothing in the Disclosure Schedules shall be deemed adequate to disclose an exception to a representation or warranty made herein unless the Disclosure Schedule identifies the exception with reasonable particularity and describes the relevant facts in reasonable detail. Without limiting the generality of the foregoing, the mere listing (or inclusion of a copy) of a document or other item shall not be deemed adequate to disclose an exception to a representation or warranty made herein (unless the representation or warranty has to do with the existence of the document or other item itself). The Parties intend that each representation, warranty, and covenant contained herein shall have independent significance. If any Party has breached any representation, warranty, or covenant contained herein in any respect, the fact that there exists another representation, warranty, or covenant relating to the same subject matter (regardless of the relative levels of specificity) which the Party has not breached shall not detract from or mitigate the fact that the Party is in breach of the first representation, warranty, or covenant. (n) INCORPORATION OF EXHIBITS AND SCHEDULES. The Exhibits and Schedules identified in this Agreement are incorporated herein by reference and made a part hereof. (o) SPECIFIC PERFORMANCE. Each of the Parties acknowledges and agrees that the other Party would be damaged irreparably in the event any of the provisions of this Agreement are not performed in accordance with their specific terms or otherwise are breached. Accordingly, each of the Parties agrees that the other Party shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically this Agreement and the terms and provisions hereof in any action instituted in any court of the United States or any state thereof having jurisdiction over the Parties and the matter, in addition to any other remedy to which it may be entitled, at law or in equity. (p) TAX MATTERS. (i) The Seller will be responsible for the preparation and filing of all Tax Returns of the Seller for all periods as to which Tax Returns are due before and after the Closing Date. The Seller will make all payments required with respect to any such Tax Return. 24 (ii) The Buyer will be responsible for the preparation and filing of all Tax Returns of the Buyer for all periods as to which Tax Returns are due before and after the Closing Date. The Buyer will make all payments required with respect to any such Tax Return. 25 IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on as of the date first above written. SD ACQUISITION INC. By: /S/ Stephen F. Dwyer -------------------- Stephen F. Dwyer, President and Chief Executive Officer TRANSGENOMIC, INC. By: /S/ Collin J. D'Silva --------------------- Collin J. D'Silva, Chief Executive Officer /S/ Collin J. D'Silva ----------------- Collin J. D'Silva, in his individual capacity solely for purposes of the covenant contained in Section 7(e) hereof 26 EX-3.1 4 EXHIBIT 3.1 EXHIBIT 3.1 SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF TRANSGENOMIC, INC. Transgenomic, Inc., a corporation organized and existing under the laws of the State of Delaware (the "Corporation") hereby certifies that: (i) The Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on March 6, 1997; (ii) On June 27, 1997, the incorporator of the Corporation adopted an amendment and restatement of the Corporation's Certificate of Incorporation in accordance with the provisions of Sections 241 and 245 of the Delaware General Corporation Law which was filed with the Secretary of State of the State of Delaware on June 27, 1997; (iii) On February 17, 1998, a Certificate of Correction of the First Amended and Restated Certificate of Incorporation was filed with the Secretary of State of Delaware; (iv) On March 4, 2000, the Board of Directors of the Corporation proposed an amendment and restatement of the Corporation's First Amended and Restated Certificate of Incorporation which was duly adopted by the stockholders of the Corporation in the manner and by the vote prescribed by Section 242 of the Delaware General Corporation Law and in accordance with Section 245 thereof on March 30, 2000. Accordingly, the text of the First Amended and Restated Certificate of Incorporation of the Corporation is amended and restated in its entirety to read as follows: ARTICLE I The name of the Corporation is Transgenomic, Inc. ARTICLE II The address of the registered office of the Corporation in the State of Delaware is Corporation Trust Center, 1209 Orange Street, City of Wilmington, County of New Castle, Delaware 19805, and the name of its registered agent at the address of the Corporation's registered office is The Corporation Trust Company. ARTICLE III The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. ARTICLE IV SECTION 4.1. The total number of shares of capital stock which the Corporation shall have the authority to issue is 75,000,000 consisting of (a) 60,000,000 shares of Common Stock, par value $0.01 per share, and (b) 15,000,000 shares of Preferred Stock, par value $0.01 per share. SECTION 4.2. Each holder of a share of Common Stock shall be entitled to one vote for each share of Common stock held of record by such holder and to such other powers, rights and preferences as are normally available to holders of Common Stock pursuant to the General Corporation Law of the State of Delaware. Except as may be otherwise provided in this Restated Certificate of Incorporation or in a Preferred Stock Designation (defined in Section 4.3), the holders of the Common Stock shall have the exclusive right to vote for the election of directors and for all other purposes, and the holders of Preferred Stock shall not be entitled to receive notice of any meeting of stockholders at which they are not entitled to vote. The Common Stock shall be subject to the express terms of the Preferred Stock and any series thereof. SECTION 4.3. The Preferred Stock may be issued at any time and from time to time in one or more series. The Board of Directors is hereby authorized to provide for the issuance of shares of Preferred Stock in series and, by filing a certificate of designation pursuant to the applicable provisions of the General Corporation Law of the State of Delaware (hereinafter referred to as a "Preferred Stock Certificate of Designation"), to establish from time to time the number of shares to be included in each such series and to fix the designation, powers, preferences and rights of shares of each such series and the qualifications, limitations and restrictions thereof. The authority of the Board of Directors with respect to each such series shall include, but not be limited to, determination of the following: (a) The designation of the series, which may be by distinguishing number, letter or title; (b) The number of shares of the series, which number the Board of Directors may thereafter (except where otherwise provided in the applicable Preferred Stock Designation) increase or decrease (but not below the number of shares thereof then outstanding); (c) Whether dividends, if any, shall be cumulative or noncumulative and the dividend rate of the series; (d) The date on which dividends, if any, shall be payable; (e) The redemption rights and price or prices, if any, for shares of the series; (f) The terms and amount of any sinking fund provided for the purchases or redemption of shares of the series; (g) The amounts payable on shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation; (h) Whether the shares of the series shall be convertible or exchangeable into shares of any other class or series, or any other security, of the Corporation or any other corporation, and, if so, the specification of such other class or series or such other security, the conversion or exchange price or prices or rate or rates, any adjustments thereof, the date or dates as of which such shares shall be convertible or exchangeable and all other terms and conditions upon which such conversion or exchange may be made; (i) Restrictions on the issuance of shares of the same series or of any other class or series; and (j) The voting rights, if any, of the holders of shares of the series. 2 SECTION 4.4. The Corporation shall be entitled to treat the person in whose name any share of its stock is registered as the owner thereof for all purposes and shall not be bound to recognize any equitable or other claim to or interest in, such share on the part of any other person, whether or not the Corporation shall have notice thereof, except as expressly provided by applicable law. ARTICLE V The Board of Directors is hereby authorized to create and issue, whether or not in connection with the issuance and sale of any of its stock or other securities or property, rights entitling the holders thereof to purchase from the Corporation shares of stock or other securities of the Corporation or any other corporation. The times at which and the terms upon which such rights are to be issued will be determined by the Board of Directors and set forth in the contracts or instruments that evidence such rights. The authority of the Board of Directors with respect to such rights shall include, but not be limited to, determination of the following: (a) the initial purchase price per share or other unit of the stock or other securities or property to be purchased upon exercise of such rights; (b) Provisions relating to the times at which and the circumstances under which such rights may be exercised or sold or otherwise transferred, either together with or separately from any other stock or other securities of the Corporation; (c) Provisions which adjust the number or exercise price of such rights, or amount or nature of the stock or other securities or property receivable upon exercise of such rights, in the event of a combination, split or recapitalization of any stock of the Corporation, a change in ownership of the Corporation's stock or other securities or a reorganization, merger, consolidation, sale of assets or other occurrence relating to the Corporation or any stock of the Corporation and provisions restricting the ability of the Corporation to enter into any such transaction absent an assumption by the other party or parties thereto of the obligations of the Corporation under such rights; (d) Provisions which deny the holder of a specified percentage of the outstanding stock or other securities of the Corporation the right to exercise such rights and/or cause the rights held by such holder to become void; (e) Provisions which permit the Corporation to redeem such rights; and (f) The appointment of a rights agent with respect to such rights. ARTICLE VI In furtherance and not in limitation of the powers conferred upon it by law, the Board of Directors is expressly authorized to adopt, repeal, alter or amend the By-laws of the Corporation by the vote of a majority of the entire Board of Directors. In addition to any requirements of law and any other provision of this Restated Certificate of Incorporation, the stockholders of the Corporation may adopt, repeal, alter or amend any provision of the By-laws upon the affirmative 3 vote of the holders of a majority or more of the combined voting power of the then outstanding stock of the Corporation entitled to vote generally in the election of directors. ARTICLE VII SECTION 7.1. The business and affairs of the Corporation shall be managed by or under the direction of its Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by law or by this Restated Certificate of Incorporation directed or required to be exercised or done by the stockholders. SECTION 7.2. The number of directors constituting the initial Board of Directors shall be five and, thereafter, the number of directors shall be fixed from time to time by resolution of the Board of Directors pursuant to the By-laws of the Corporation, provided that the number shall at no time be less than three or more than fifteen. The Board of Directors shall be divided into three classes, designated Classes I, II and III, which shall be as nearly equal in number as possible. Directors of Class I shall be elected to hold office for a term expiring at the annual meeting of stockholders to be held in 1998; directors of Class II shall be elected to hold office for a term expiring at the annual meeting of stockholders to be held in 1999; and directors of Class III shall be elected to hold office for a term expiring at the annual meeting of stockholders to be held in 2000. At each succeeding annual meeting of stockholders following such initial classification and election, the respective successors of each class shall be elected for three-year terms. SECTION 7.3. Advance notice of nominations for elections for the election of directors shall be given in the manner and to the extent provided in the By-laws of the Corporation. SECTION 7.4. The holders of a majority of the shares then entitled to vote at an election of directors may remove any director or the entire Board of Directors, but only for cause. ARTICLE VIII SECTION 8.1. A director shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that this provision shall not eliminate or limit the liability of a director (1) for any breach of his duty of loyalty to the Corporation or its stockholders, (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law, (3) under Section 174 of the General Corporation Law of the State of Delaware or (4) for any transaction from which the director derives an improper personal benefit. If the General Corporation Law of the State of Delaware is amended after the filing of this Restated Certificate of Incorporation to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law of the State of Delaware, as so amended. SECTION 8.2. Any repeal or modification of the foregoing paragraph by the stockholders of the Corporation shall not adversely affect any right or protection of a director or the Corporation existing at the time of such repeal or modification. 4 ARTICLE IX SECTION 9.1. Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director or officer of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (hereinafter an "indemnitee"), whether the basis of such proceeding is alleged action or omission in an official capacity as a director or officer or in any other capacity while serving as a director or officer, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the General Corporation Law of the State of Delaware, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than permitted prior thereto), against all expense, liability and loss (including, without limitation, attorneys' fees, judgments, fines, excise taxes or penalties and amounts paid or to be paid in settlement) incurred or suffered by such indemnitee in connection therewith, and such indemnification shall continue with respect to an indemnitee who has ceased to be a director or officer and shall inure to the benefit of the indemnitee's heirs, executors and administrators; provided, however, that, except as provided in Section 9.2 with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such indemnitee in connection with a proceeding initiated by such indemnitee only if such proceeding was authorized by the Board of Directors of the Corporation. The right to indemnification conferred in this Article IX shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition (hereinafter an "advancement of expenses"); provided, further, that, if required by the General Corporation Law of the State of Delaware, an advancement of expenses incurred by an indemnitee shall be made only upon delivery to the Corporation of an undertaking (hereinafter, an "undertaking"), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter, a "final adjudication") that such indemnitee is not entitled to be indemnified for such expenses under this Article IX or otherwise. SECTION 9.2. If a claim under Section 9.1 is not paid in full by the Corporation within 60 days after a written claim has been received by the Corporation (except in the case of a claim for an advancement of expenses, in which case the applicable period shall be 20 days), the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, the indemnitee shall also be entitled to be paid the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses), it shall be a defense that, and (ii) in any suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met the applicable standard of conduct set forth in the General Corporation Law of the State of Delaware. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the General Corporation Law of the State of Delaware nor an actual determination by 5 the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the indemnitee has not met the applicable standard of conduct shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder or by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled under this Article IX or otherwise to be indemnified, or to such advancement of expenses, shall be on the Corporation. SECTION 9.3. The rights to indemnification and to the advancement of expenses conferred in this Article IX shall not be exclusive of any other right which any person may have or hereafter acquire under this Restated Certificate of Incorporation or any bylaw, contract, agreement, vote of stockholders or disinterested directors or otherwise. SECTION 9.4. The Corporation may maintain insurance, at its expense, to protect itself and any indemnitee against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the General Corporation Law of the State of Delaware. SECTION 9.5. The Corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification and to the advancement of expenses to any employee or agent of the Corporation to the fullest extent of the provisions of this Article IX or as otherwise permitted under the General Corporation Law of the State of Delaware with respect to the indemnification and advancement of expenses of directors and officers of the Corporation. ARTICLE X A director of the Corporation, in determining what he reasonably believes to be in the best interests of the Corporation, shall consider the interests of the Corporation's stockholders and, in his discretion, may consider any of the following: (a) The interests of the Corporation's employees, independent contractors, agents, suppliers, creditors and customers; (b) The economy of the nation; (c) Community and societal interests; and (d) The long-term as well as short-term interests of the Corporation and its stockholders, including the possibility that these interests may be best served by the continued independence of the Corporation. ARTICLE XI Election of directors at an annual or special meeting of stockholders need not be by written ballot unless the By-laws of the Corporation shall so provide. 6 ARTICLE XII Cumulative voting for the election of directors shall not be permitted. ARTICLE XIII Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation, and the ability of the stockholders to consent in writing to the taking of any action is hereby specifically denied. The foregoing sentence shall take effect on the day following the date on which the Corporation first has more than 35 stockholders of record. Except as otherwise required by law, special meetings of stockholders of the Corporation may be called only by the Chairman of the Board, the Board of Directors pursuant to a resolution approved by a majority of the entire Board of Directors, by the Chief Executive Officer if one is appointed, otherwise by the President or as otherwise provided in the By-laws of the Corporation. ARTICLE XIV The vote of stockholders of the Corporation required to approve Business Combinations (as hereinafter defined) shall be as set forth in this Article XIV. SECTION 14.1. In addition to any affirmative vote required by law or by this Restated Certificate of Incorporation, and except as otherwise expressly provided in Section 14.3 of this Article XIV: (a) any merger or consolidation of the Corporation with (1) any Interested Stockholder or (2) any other corporation (whether or not itself an Interested Stockholder) which is, or after such merger or consolidation would be, an Affiliate or Associate of an Interested Stockholder; (b) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Stockholder or any Affiliate or Associate of any Interested Stockholder of (1) all or substantially all the assets of the Corporation or (2) assets of the Corporation or any of its Subsidiaries representing in the aggregate more than 75% of the total value of the assets of the Corporation and its consolidated Subsidiaries as reflected on the most recent consolidated balance sheet of the Corporation and its consolidated Subsidiaries prepared in accordance with generally accepted accounting principles then in effect; (c) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Stockholder or any Affiliate or Associate of any Interested Stockholder of any assets of the Corporation or of any Subsidiary having an aggregate Fair Market Value of $10,000,000 or more, but less than the amount referred to in clause (ii) of paragraph (b) of this Section 14.1 or (ii) any merger or consolidation of any Subsidiary of the Corporation having assets with an aggregate Fair Market Value of $10,000,000 or more in a transaction not covered by paragraph (b) of this Section 14.1 with (x) any Interested Stockholder or (y) any other corporation (whether or not itself an Interested Stockholder) which is, or after such merger or consolidation would be, an Affiliate or Associate of an Interested Stockholder; 7 (d) the issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of transactions) to any Interested Stockholder or any Affiliate or Associate of any Interested Stockholder of any securities of the Corporation or any Subsidiary in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value of $10,000,000 or more, other than the issuance of securities upon the conversion of convertible securities of the Corporation or any Subsidiary which were not acquired by such Interested Stockholder (or such Affiliate or Associate) from the Corporation or a Subsidiary; (e) The adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of any Interested Stockholder or any Affiliate or Associate of any Interested Stockholder; or (f) any reclassification of securities (including any reverse stock split) or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving any Interested Stockholder), which in any such case has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class or series of stock or securities convertible into stock of the Corporation or any Subsidiary which is directly or indirectly beneficially owned by any Interested Stockholder or any Affiliate or Associate of any Interested Stockholder shall not be consummated without (5) the affirmative vote of the holders of at least 75% of the combined voting power of the then outstanding shares of stock of all classes and series of the Corporation entitled to vote generally in the election of directors (the "Voting Stock") and (6) the affirmative vote of a majority of the combined voting power of the then outstanding shares of Voting Stock held by Disinterested Stockholders, in each case voting together as a single class. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law or by this Restated Certificate of Incorporation or by a registered securities association or in any agreement with any national securities exchange or otherwise. SECTION 14.2. The term "Business Combination" as used in this Article XIV shall mean any transaction which is referred to in any one or more of paragraphs (a) through (f) of Section 14.1 of this Article XIV. SECTION 14.3. The provisions of Section 14.1 shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote as is required by law and any other provision of this Restated Certificate of Incorporation, if all the conditions specified in any of the following paragraphs (a), (b) or (c) are met: (a) such Business Combination shall have been approved by a majority of the Disinterested Directors and (ii) the Interested Stockholder involved in such Business Combination (x) acquired such status as an Interested Stockholder in a manner substantially consistent with an agreement or memorandum of understanding approved by the Board of Directors (including a majority of the Disinterested Directors) prior to the time such Interested Stockholder became an Interested 8 Stockholder and (y) has complied with all requirements imposed by such agreement or memorandum of understanding; or (b) in the case of any Business Combination described in paragraph (a) or (f) of Section 14.1, (i) such Business Combination shall have been approved by a majority of the Disinterested Directors, (ii) such Business Combination shall not have resulted, directly or indirectly, in an increase of more than 10% in the total amount of shares of any class or series of stock or securities convertible into stock of the Corporation or any Subsidiary which was directly or indirectly beneficially owned by an Interested Stockholder and all Affiliates and Associates of such Interested Stockholder at the time of the approval of such Business Combination by a majority of the Disinterested Directors and (iii) such Business Combination shall not have been consummated within a period of two years after the consummation of any other Business Combination described in paragraph (a), (b), (c), (d), (e) or (f) of Section 14.1 (whether or not such other Business Combination shall have been approved by a majority of the Disinterested Directors) which had the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class or series of stock or securities convertible into stock of the Corporation or any Subsidiary which was directly or indirectly beneficially owned by such Interested Stockholder or any Affiliate or Associate of such Interested Stockholder; or (c) in the case of any Business Combination described in paragraph (c) or (d) of Section 14.1, such Business Combination shall have been approved by a majority of the Disinterested Directors. SECTION 14.4. For the purposes of this Article XIV: (a) A "PERSON" shall mean any individual, group, firm, corporation, partnership, trust or other entity. (b) "INTERESTED STOCKHOLDER" shall mean any person (other than the Corporation, any Subsidiary and other than any group consisting of the directors and officers of the Corporation which may be deemed to be a group solely by reason of each of them being directors or officers of the Corporation or members of a slate proposed by the Corporation as directors) who or which: (1) is the beneficial owner, directly or indirectly, of 10% or more of the combined voting power of the then outstanding shares of Voting Stock; or (2) is an Affiliate of the Corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of 10% or more of the combined voting power of the then outstanding shares of Voting Stock; or (3) is an assignee of or has otherwise succeeded to the beneficial ownership of any shares of Voting Stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by any Interested Stockholder, if such assignment or succession shall have 9 occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. (c) "DISINTERESTED STOCKHOLDER" shall mean a stockholder of the Corporation who is not an Interested Stockholder or an Affiliate or an Associate of an Interested Stockholder. (d) a person shall be a "BENEFICIAL OWNER" of any Voting Stock: (1) which such person or any of its Affiliates or Associates beneficially owns, directly or indirectly; or (2) which such person or any of its Affiliates or Associates has (a) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise or (b) the right to vote or to direct the vote pursuant to any agreement, arrangement or understanding; or (3) which are beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Voting Stock. (e) For the purposes of determining whether a person is an Interested Stockholder pursuant to paragraph (b) of this Section 14.4, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned by such person through application of paragraph (d) of this Section 14.4 but shall not include any other shares of Voting Stock which may be issuable to other persons pursuant to any agreement, arrangement or understanding or upon exercise of conversion rights, exchange rights, warrants or options or otherwise. (f) "AFFILIATE" and "ASSOCIATE" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on February 1, 1993. (g) "SUBSIDIARY" shall mean any Corporation more than 50% of whose outstanding stock having ordinary voting power in the election of directors is owned by the Corporation, by a Subsidiary or by the Corporation and one or more Subsidiaries; provided, however, that for the purposes of the definition of Interested Stockholder set forth in paragraph (b) of this Section 14.4, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned by the Corporation, by a Subsidiary or by the Corporation and one or more Subsidiaries. (h) "DISINTERESTED DIRECTOR" means any member of the Board of Directors of the Corporation who is unaffiliated with, and not a nominee of, the Interested Stockholder and was a member of the Board of Directors prior to the time that the Interested Stockholder became an Interested Stockholder, and any successor of a Disinterested Director who is 10 unaffiliated with, and not a nominee of, the Interested Stockholder and who is recommended to succeed a Disinterested Director by a majority of Disinterested Directors then on the Board of Directors. (i) "FAIR MARKET VALUE" means: (1) in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock on the New York Stock Exchange Composite Tape or, if such stock is not quoted on the Composite Tape, on the New York Stock Exchange or, if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed or, if such stock is not listed on any such exchange, the highest closing sales price or bid quotation with respect to a share of such stock during the 30-day period preceding the date in question on the Nasdaq Stock Market or, if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by a majority of the Disinterested Directors in good faith; and (2) in the case of stock of any class or series which is not traded on any securities exchange or in the over-the-counter market or in the case of property other than cash or stock, the fair market value of such stock or property, as the case may be, on the date in question as determined by a majority of the Disinterested Directors in good faith. SECTION 14.5. A majority of the Disinterested Directors of the Corporation shall have the power and duty to determine, on the basis of information known to them after reasonable inquiry, all facts necessary to determine compliance with this Article XIV, including, without limitation, (a) whether a person is an Interested Stockholder, (b) the number of shares of Voting Stock beneficially owned by any person, (c) whether a person is an Affiliate or Associate of another person, (d) whether the requirements of Section 14.3 have been met with respect to any Business Combination and (e) whether the assets which are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by the Corporation or any Subsidiary in any Business Combination has, (i) an aggregate Fair Market Value of $10,000,000 or more or (ii) represent in the aggregate more than 75% of the total value of the assets of the Corporation and its consolidated Subsidiaries prepared in accordance with generally accepted accounting principles then in effect; and the good faith determination of a majority of the Disinterested Directors on such matters shall be conclusive and binding for all purposes of this Article XIV. SECTION 14.6. Nothing contained in this Article XIV shall be construed to relieve an Interested Stockholder from any fiduciary obligation imposed by law. ARTICLE XV The Corporation reserves the right at any time and from time to time to amend, alter, change or repeal any provision contained in this Restated Certificate of Incorporation, and any other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted, in the manner now or hereafter prescribed herein or by applicable law, and all rights, preferences and privileges of whatsoever nature conferred upon stockholders, directors or any other persons whomsoever by and pursuant to this Restated Certificate of Incorporation in its present form or as hereafter amended are granted subject to the right reserved in this Article XV; 11 provided, however, that any amendment or repeal of Article VIII or Article IX of this Restated Certificate of Incorporation shall not adversely affect any right or protection existing hereunder immediately prior to such amendment or repeal; and provided, further, that Articles V, VI, VII, VIII, IX, X, XII, XIII, XIV and XV of this Restated Certificate of Incorporation shall not be amended, altered, changed or repealed without the affirmative vote of the holders of at least a majority of the then outstanding stock of the Corporation entitled to vote generally in the election of directors." 12 IN WITNESS WHEREOF, the undersigned hereby certifies that the facts herein above stated are true and correct and that the execution hereof is my voluntary act and deed and the voluntary act and deed of said corporation, under penalties of perjury on this 24th day of April, 2000. TRANSGENOMIC, INC. By: /s/ Mitchell L. Murphy ------------------------------------------- Mitchell L. Murphy, Controller and Secretary of Transgenomic, Inc. 13 EX-5 5 EXHIBIT 5 Exhibit 5 May 16, 2000 Transgenomic, Inc. 5600 South 42nd Street Omaha, NE 68107 Re: Transgenomic, Inc. Registration Statement on Form S-1 for 4,600,000 Shares of Common Stock Ladies and Gentlemen: We have acted as counsel for Transgenomic, Inc., a Delaware corporation, (the "Company"), in connection with the filing of a Registration Statement on Form S-1 (the "Registration Statement") under the Securities Act of 1933, as amended, with respect to the registration of 4,600,000 shares of common stock of the Company (the "Shares") to be sold by the Company. This opinion is being furnished in accordance with the requirements of Item 16(a) of Form S-1 and Item 601(b)(5)(i) of Regulation S-K. In the course of such representation, we have examined, among other things, the form of underwriting agreement filed as an exhibit to an amendment to the Registration Statement (the "Underwriting Agreement") and such corporate records, certificates of public officials and other documents we deemed relevant and appropriate. Based on the foregoing, we are of the opinion that, when sold in accordance with the terms of the Underwriting Agreement, the Shares will be legally issued, fully paid and nonassessable. We hereby consent to the filing of this opinion letter as an exhibit to the Registration Statement and to the reference to this firm under the heading "Legal Matters" in the prospectus which is part of the Registration Statement. In giving this consent, we do not thereby admit that we are within the category of persons whose consent is required under Section 7 of the Act, the rules and regulations of the Securities and Exchange Commission promulgated thereunder, or Item 509 of Regulation S-K. Transgenomic, Inc. May 16, 2000 Page 2 This opinion letter is rendered as of the date first written above and we disclaim any obligation to advise you of facts, circumstances, events or developments which hereafter may be brought to our attention and which may alter, affect or modify the opinion expressed herein. Our opinion is expressly limited to the matters set forth above and we render no opinion, whether by implication or otherwise, as to any other matters relating to the Company or the Shares. Very truly yours, /s/ KUTAK ROCK LLP KUTAK ROCK LLP EX-10.9 6 EXHIBIT 10.9 Exhibit 10.9 EMPLOYMENT AGREEMENT THIS AGREEMENT is made as of April 1, 2000, by and between Transgenomic, Inc., a Delaware corporation (the "Company"), and William P. Rasmussen ("Employee"). The Company and Employee desire to enter into an Employment Agreement (this "Agreement"). Accordingly, the Company and Employee agree as follows: Section 1. EFFECTIVE DATE; POSITION; TERM. This Agreement shall become effective on April 1, 2000 (the "Effective Date"). The Company shall employ Employee as Chief Financial Officer and Treasurer. The initial term of the Agreement will be for a term ending at the 2001 annual meeting of the Board of Directors or until his successor has been elected and qualified, which will be approximately one (1) year from the Effective Date. Section 2. POSITION AND DUTIES. During the Employment Period: (a) Employee shall have the normal responsibilities, duties and authorities of Chief Financial Officer and Treasurer. (b) Employee shall report to the Chief Executive Officer of the Company and Employee shall perform faithfully the executive duties assigned to him to the best of his ability in a diligent, trustworthy, businesslike and efficient manner and will devote his full business time and attention to the business and affairs of the Company and its Subsidiaries and Affiliates; provided, however, that Employee may serve as a director of or a consultant to other corporations which do not compete with the Company, nonprofit corporations, civic organizations, professional groups and similar entities. (c) For purposes of this Agreement, "Subsidiary" shall mean any corporation or other entity of which securities having a majority of the voting power in electing directors or comparable management are, at the time of determination, owned by the Company, directly or through one or more Subsidiaries. (d) For purposes of this Agreement, "Affiliate" of any particular person means any other person controlling, controlled by or under common control with such particular person. Section 3. BASIC COMPENSATION. (a) BASE SALARY. As compensation for his services hereunder, the Company shall pay to Employee during the Employment Period an initial base salary of $130,000 per year. Base Salary shall be payable in equal installments in arrears on a biweekly basis or as otherwise may be mutually agreed upon. The salary shall be increased over the previous year's salary as mutually agreed to. Section 4. BONUS. In addition to the Base Salary, Employee shall be eligible to receive an annual bonus based on Employee's performance in conjunction with specific mutually agreed goals and objectives defined prior to such calendar year payable at such time or times during or following each calendar year as shall be determined by the Chief Executive Officer and the Board of Directors (the "Board") or a committee thereof in its sole discretion and based on formulas to be determined each year by the Board or such committee in its sole discretion for the Company's management bonus plan. Section 5. PARTICIPATION IN EMPLOYEE BENEFIT PLANS. Employee will be entitled to participate in all Company salaried employee benefit plans and programs, subject to the terms and conditions of each such employee benefit plan or program and to the extent commensurate with his position as Chief Financial Officer and Treasurer. Section 6. OTHER BENEFITS. (a) VACATION. Employee shall initially be entitled to four weeks' paid vacation each year. (b) INSURANCE. The Company shall make available to Employee health, hospitalization, major medical insurance and dental insurance (including dependent coverage), and other benefits from time to time provided to employees Section 7. BUSINESS EXPENSES. The Company shall reimburse Employee for all reasonable expenses incurred by him in the course of performing his duties under this Agreement which are consistent with the Company's policies in effect from time to time with respect to travel, entertainment and other business expenses, subject to the Company's requirements with respect to report and documentation of such expenses. 2 Section 8. STOCK OPTIONS AND OPTION SHARES. Employee has been granted stock options for 50,000 shares at $5.00 per share on December 1, 1998. These options vest 20,000 shares on December 1, 1999, 20,000 shares on December 1, 2000, and 10,000 shares on December 1, 2001. Employee shall be granted options to purchase an additional 50,000 shares at $13.00 per share of which 25,000 shares to vest on March 31, 2000 and 25,000 shares to vest on March 31, 2001. Section 9. TERMINATION OF EMPLOYMENT. (a) EVENTS OF TERMINATION AND SEVERANCE PAYMENT. In the event that, during the term of this Agreement, Employee is discharged for any reason other than for Just Cause (as defined below), Employee shall be entitled to receive certain payment (the "Severance Payment") following termination of employment. Severance Payment will be made at the Employees then current base salary for an amount equal to 12 (twelve) months' salary. In addition, in case of such discharge, Employee will retain all vested stock options. All unvested stock options will vest. (b) "Just Cause" means embezzlement or misappropriation of corporate funds, other acts of dishonesty, significant activities materially harmful to the reputation of the Company as reasonably defined by the Company, commission of a felony, willful refusal to perform or substantial disregard of the duties properly assigned, significant violation of any statutory or common law, duty of loyalty to the Company or a material violation of Section 11 or 12 below, or takes any other action materially detrimental to the best interest of the Company as reasonably determined by the Company. (c) EFFECT OF BREACH OF NONCOMPETITION PROVISIONS. In the event Employee breaches or otherwise fails to comply with the provisions of Section 11 or 12 below, then, in addition to any other remedies provided herein or at law or in equity, the Company shall have the right to require return of any severance payment made to the Employee. Return of such Severance Payment pursuant to the preceding sentence shall not relieve Employee's obligations pursuant to Section 11 or 12 below. Section 10. ASSIGNMENT AND SUCCESSION. (a) The rights and obligations of the Company under this Agreement shall inure to the benefit of and be binding upon its respective successors and assigns, and Employee's rights and obligations hereunder shall inure to the benefit of and be binding upon his successors and permitted assigns, whether so expressed or not. 3 (b) Employee acknowledges that the services to be rendered by him hereunder are unique and personal. Accordingly, Employee may not pledge or assign any of his rights or delegate any of his duties or obligations under this Agreement without the express prior written consent of the Company. (c) The Company may not assign its interest in or obligations under this Agreement without the prior written consent of Employee. Section 11. CONFIDENTIAL INFORMATION. (a) Employee acknowledges that the information, observations and data obtained by him during the course of his performance under this Agreement concerning the business or affairs of the Company and its Subsidiaries is the property of the Company or such Subsidiary, as the case may be. Therefore, during the Employment Period and at all times thereafter, Employee will not directly or indirectly use, divulge, furnish or make accessible to any unauthorized person or use for his own account any confidential or proprietary information or trade secrets of the Company or any of its Subsidiaries without the Board's prior written consent except and to the extent required by law (and upon prompt written notice of such requirement to the Company and such Subsidiary) any of such information, observations or data without the Board's prior written consent unless and to the extent that the aforementioned matters become generally known to and available for use by the public other than as a result of Employee's acts or omissions to act. In the event Employee shall be required by law to make any disclosure as set forth above, Employee shall promptly notify the Company and such Subsidiary in writing of the basis for and the extent of the required disclosure and shall cooperate with the Company and such Subsidiary to preserve in full the confidentiality of all intellectual property, trade secrets, confidential information and other proprietary rights of the Company and such Subsidiary. For purposes hereof, confidential information does not include any information that has become publicly known or are made generally available through no wrongful act of Employee or of any other person who is subject to a confidentiality agreement with the Company. (b) Employee agrees to deliver to the Company at the termination of his employment, or at any other time upon written request by the Company, all memoranda, notes, plans, records, reports and other documents relating to the business of the Company and its Subsidiaries which he may then possess or have under his control. Section 12. COVENANT NOT TO COMPETE. (a) Employee agrees that during the Employment Period, and for one year after the Termination Date (the "Noncompete Period"), he will neither directly nor indirectly engage in, have any interest in, own, manage, operate, control, be connected with as a stockholder, joint venturer, officer, employee, partner or consultant or invest or participate in a business competing with any of the businesses then 4 conducted (or, to the knowledge of Employee, planned to be conducted within one year) by the Company or any of its successors or then Subsidiaries, within any geographical area in which the Company or its Subsidiaries engage or plan within one year to engage in any such businesses. During the Noncompete Period, Employee shall not directly or indirectly through another entity (i) induce or attempt to induce any employee of the Company or any Subsidiary to leave the employ of the Company or such Subsidiary, or in any way interfere with the relationship between the Company or any Subsidiary and any employee thereof, (ii) hire any person who was an employee of the Company or any Subsidiary at any time during the Employment Period or (iii) induce or attempt to induce any customer, supplier, licensee or other business relation of the Company or any Subsidiary to cease doing business with the Company or such Subsidiary, or in any way interfere with the relationship between any such customer, supplier, licensee or business relation and the Company or any Subsidiary. (b) Nothing contained in this Section 12 shall prevent Employee from owning up to a 5% interest in any corporation or entity having one or more classes of its securities listed on a national securities exchange or publicly traded in the over-the-counter market, provided Employee is not actively involved in the operation or management of such corporation or entity. Nothing contained herein shall prevent Employee from serving as a paid consultant to other companies or serving as a member of the Board of Directors of other corporations. (c) If, under the circumstances existing at the time of enforcement of this Section 12, the period, scope or geographic area described in this Section 12 shall be found or held to be unreasonable, the parties hereto agree that the maximum period, scope or geographic area reasonable under the circumstances shall be substituted for the stated period, scope or geographic area. Section 13. CONFLICTS OF INTEREST POLICIES. Employee shall diligently adhere to the Company's Conflict of Interest Policy as adopted by the Board and in effect from time to time. Section 14. ARBITRATION AND EQUITABLE REMEDIES. (a) Except as provided in Section 14(b) hereof, the parties agree that any dispute or controversy arising out of, relating to, or concerning the interpretation, construction, performance or breach of this Agreement, shall be settled by arbitration to be held in Nebraska, in accordance with the Employment Dispute Resolution rules of the American Arbitration Association then in effect. The arbitrator may grant injunctions or other relief in such dispute or controversy and the decision of the arbitrator shall be final, conclusive and binding on the parties to the arbitration. Judgment may be entered on the arbitrator's decision in any court having jurisdiction. The Company and Employee shall each pay one-half of the costs and expenses of such arbitration, and each shall separately pay the fees and expenses of their respective legal counsel. 5 THIS ARBITRATION CLAUSE CONSTITUTES A WAIVER OF EMPLOYEE'S RIGHT TO A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO ALL ASPECTS OF THE EMPLOYER/EMPLOYEE RELATIONSHIP. (b) Notwithstanding paragraph (a) of this Section 14, the parties agree that, in the event of the breach or threatened breach of Sections 11, 12 or 13 of this Agreement by Employee, monetary damages alone would not be an adequate remedy to the Company and its Subsidiaries for the injury that would result from such breach, and that the Company and its Subsidiaries shall be entitled to apply to any court of competent jurisdiction for specific performance and/or injunctive relief (without posting bond or other security) in order to enforce or prevent any violation of such provisions of this Agreement. Employee further agrees that any such injunctive relief obtained by the Company or any of its Subsidiaries shall be in addition to monetary damages. Section 15. INDEMNIFICATION. The Company agrees to indemnify and hold harmless Employee for any and all actions taken by Employee in carrying out his duties under this Agreement. Section 16 ENTIRE AGREEMENT. This Agreement represents the entire agreement between the parties relating to the subject matters covered hereby and shall supersede any prior understandings, agreements or representations by or between the parties, written or oral, which may have related to the subject matter hereof in any way and shall not be amended or waived except in a writing signed by the parties hereto. Section 17. NOTICES. Any notice or request required or permitted to be given hereunder shall be in writing and will be deemed to have been given (i) when delivered personally, sent by telecopy (with hard copy to follow) or overnight express courier or (ii) five days following mailing by certified or registered mail, postage prepaid and return receipt requested, to the addresses below unless another address is specified by such party in writing: To the Company: Transgenomic, Inc. 5600 South 42nd Street Omaha, NE 68107 Attention: Chief Executive Officer Telephone: (402) 738-5480 Telecopy: (402) 733-1264 6 To the Employee: William P. Rasmussen 1305 South 83rd Street Omaha, NE 68124 Telephone: (402) 614-7365 (H) (402) 738-5438 (W) Telecopy: (402) 733-1264 Section 18. HEADINGS. The article and section headings herein are for convenience of reference only and shall not define or limit the provisions hereof. Section 19. APPLICABLE LAW. The corporate law of the State of Delaware will govern all questions concerning the relative rights of the Company and its stockholders. All other questions concerning the construction, validity and interpretation of this Agreement shall be governed by the internal laws of the State of Nebraska. Section 20. SEVERABILITY. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held prohibited by, invalid or unenforceable in any respect under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. Section 21. AMENDMENTS AND WAIVERS. Any provision of this Agreement may be amended or waived only with the prior written consent of the Company and Employee. Section 22. NO STRICT CONSTRUCTION. The language used in this Agreement will be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction will be applied against any party hereto. Section 23. COUNTERPARTS. This Agreement may be executed in separate counterparts, each of which is deemed to be an original and all of which taken together constitute one and the same agreement. Section 24. EMPLOYEE REPRESENTATIONS. Employee hereby represents and warrants to the Company that (i) the execution, delivery and performance of this Agreement by Employee does not and will not conflict with, breach, violate or cause a default under any contract, agreement, instrument, order, judgment or decree to which Employee is a party or by which he is bound, (ii) Employee is not a party to or bound by any employment agreement, noncompete agreement or confidentiality agreement with any other person or entity and (iii) upon the execution and delivery of this Agreement by the Company, this Agreement shall be the valid and binding obligation of Employee, enforceable in accordance with its terms. 7 Section 25. SURVIVAL. Sections 8, 11, 12 and 15 shall survive and continue in full force in accordance with their terms notwithstanding any termination of the Employment Period. IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by its duly authorized officer and Employee has signed this Agreement as of the date first written above. TRANSGENOMIC, INC. By /s/ Collin D'Silva ------------------------------------- Name: Collin D'Silva Title: Chief Executive Officer EMPLOYEE /s/ William P. Rasmussen ---------------------------------------- Name: William P. Rasmussen 8 EX-10.19 7 EXHIBIT 10.19 FIRST NATIONAL BANK OF OMAHA LETTERHEAD March 7, 2000 Mr. William Rasmussen Transgenomic Inc. 5600 S. 42 St Omaha, NE 68107 Dear Bill: First National Bank of Omaha officially waives Transgenomic's non-compliance with the following covenants as defined in the Loan Agreement September 17, 1997, which has been amended from time to time, effective as of the company's fiscal year end of December 31, 1999: 1. Maintain no less than $8,250,000 of Tangible Net Worth; 2. Maintain a maximum Debt to Tangible Net Worth of not more than 1.2:1.0. 3. Maintain a minimum Working Capital of $4,250,000. 4. Restrict the purchase or lease of fixed assets to an amount that does not exceed the depreciation taken in the company's fiscal year. This waiver is based on the draft copy of the Audit showing a Tangible Net Worth of $6,868,980; Debt to Tangible Net Worth of 1.47:1.0; Working Capital of $3,493,881; and fixed asset purchases of $1,894,093 and depreciation of $1,364,246. Sincerely, /s/ Mark McMillan Mark McMillan Vice President EX-10.20 8 EXHIBIT 10.20 ================================================================================ BUSINESS PROPERTY LEASE (Triple Net) ================================================================================ THIS LEASE is entered into this 20th day of April, 2000, between TODD SMITH, ("Landlord") and TRANSGENOMIC, INC. ("Tenant"). PREMISES 1. Landlord leases to Tenant at 12325 Emmet Street, Omaha, Douglas County, Nebraska, (the "Premises"), containing 17,400 usable square feet of area as depicted by Attachment "A", on the following terms and conditions. TERM 2. This Lease shall be for a term of eighty four (84) months beginning on August 1, 2000 , and ending on July 31, 2007 , unless terminated earlier as provided in this Lease. Premises shall be delivered to Tenant to complete Tenant's work commencing on or before April 1, 2000. If Premises are delivered to Tenant by Landlord on any date prior to April 1, 2000, the Lease will commence upon one hundred and twenty (120) days after such delivery of the Premises by Landlord to Tenant in order for Tenant to complete Tenant's work. Upon delivery of Premises to Tenant, Tenant will transfer all utilities into Tenant's name and Tenant will pay for his pro rata share of Operating Expenses. The Lease will commence no later than August 1, 2000. USE OF PREMISES 3. The Premises are leased to Tenant, and are to be used by Tenant, for the purpose of a general office and auxiliary uses consistent with City of Omaha zoning ordinances (CC) for the Property and for no other purpose. Tenant agrees to use the Premises in such a manner as to not interfere with the rights of other tenants in the Real Estate, to comply with all applicable governmental laws, ordinances, and regulations in connection with its use of the Premises, to keep the Premises in a clean and sanitary condition, to keep the Premises and all sidewalks and approaches thereto in a safe condition free and clear of all matter which may be dangerous to the public and free of all obstructions, and to use all reasonable precaution to prevent waste, damage, or injury to the Premises. RENT 4. (a) Base Rent. The total Base Rent under this Lease is one million, three hundred and twenty five thousand, eight hundred and eighty dollars ($1,325,880.00). Landlord will invoice Tenant for rent due and Tenant agrees to pay rent to Landlord at 17509 Harney Street, Omaha NE 68118, or at any other place Landlord may designate in writing, in lawful money of the United States, in monthly installments in advance, within five business days of first day of each month, as follows: For the period from 8/01/00 to 7/31/01: $10.25 per sf ($14,862.50 per month). For the period from 8/01/01 to 7/31/02: $10.46 per sf ($15,167.00 per month). For the period from 8/01/02 to 7/31/03: $10.66 per sf ($15,457.00 per month). For the period from 8/01/03 to 7/31/04: $10.88 per sf ($15,776.00 per month). For the period from 8/01/04 to 7/31/05: $11.09 per sf ($16,080.50 per month). For the period from 8/01/05 to 7/31/06: $11.32 per sf ($16,414.00 per month). For the period from 8/01/06 to 7/31/07: $11.54 per sf ($16,733.00 per month). Page 1 (b) OPERATING EXPENSES. In addition to the Base Rent, Tenant shall pay its Pro Rata share of operating expenses of the real estate of which the Premises are part, parking areas, and grounds ("Real Estate"). "Operating expenses" shall mean all costs of maintaining and operating the Real Estate, including but not limited to all taxes and special assessments levied upon the Real Estate, fixtures, and personal property used by Landlord at the Real Estate, all insurance costs, common area utilities, all costs of labor, material and supplies for maintenance, repair, replacement, and operation of the Real Estate, including but not limited to line painting, lighting, snow removal, landscaping, cleaning, depreciation of machinery and equipment used for such maintenance, repair and replacement, and management costs. Irrespective of the preceding, during the term of the Lease. Tenant will provide, at its sole cost and expense, the maintenance of the Common Areas including the grounds and parking lot in a manner acceptable to Landlord. Tenant will provide the specific Common Area services to include snow removal, routine lawn and shrubbery care and maintenance, and routine lot and property clean-up. As long as Tenant continues to provide those Common Area Services as described, those services and the related expenses will not be considered a part of the Operating Expenses, however should Landlord provide those services, such services will be considered part of Operating Expenses. Landlord reserves the right to maintain the Building's Common Areas if in Landlord's sole discretion, Tenant is not maintaining the Common Areas in a manner acceptable to Landlord after Landlord has provided Tenant written notice with ten (10) days to cure. Operating Expenses shall not include property additions and capital improvements to the Real Estate, alterations made for specific tenants, depreciation of the Real Estate, any expense paid by Tenant, debt service on any debt or income taxes paid by Landlord. "Tenant's Pro Rata Share" shall mean the percentage determined by dividing the square feet of the Premises as shown in paragraph 1 by the square feet of store area of the Real Estate, as defined by the American National Standard, published by Building Owners and Managers Association, which at the date hereof is agreed to be 18,800 square feet. Tenant's Pro Rata Share of the Operating Expenses shall be determined on an annual basis for each calendar year ending December 31, and shall be pro rated for the number of months Tenant occupied the Premises if Tenant did not occupy the Premises the full year. Tenant shall pay $1,667.50 per month, representing the estimated Operating Expenses for real estate taxes, insurance, and those other expenses and services not provided by Tenant, on the first of each month in advance with rent for Tenant's estimated pro rata share of the Operating Expenses. Landlord may change this amount at any time upon an accounting of actual expenses as provided for and incurred on an annual basis upon written notice to Tenant. As the end of each year, an analysis of the total year's Operating Expenses shall be presented to Tenant and Tenant shall pay the amount, if any, by which the Tenant's pro rata share of the Operating Expenses for the year exceeded the amount of the Operating Expenses paid by Tenant. Tenant shall pay any such excess charge to the Landlord within thirty (30) days after receiving the statement. In the event this Lease terminates at any time other than the last day of the year, the excess Operating Expenses shall be determined as of the date of termination. Upon termination of this Lease, any overpayment of Operating Expenses by Tenant shall be applied to the amounts due Landlord from Tenant under this Lease and any remaining overpayment shall be refunded to Tenant within thirty (30) days of lease termination. (c) PAYMENT OF RENT. Tenant agrees to pay the Base Rent when due, together with Tenant's Operating Expenses and all other amounts as required to be paid by Tenant under this Lease. In the event of nonpayment of any amounts due under this Lease, whether or not designated as rent, Landlord shall have all the rights and remedies provided in this Lease or by law for failure to pay rent. (d) LATE CHARGE. If the Tenant fails to pay the Base Rent together with the Tenant's Operating Expenses and all other amounts required to be paid by Tenant under this Lease, on or before the fifth business day of each month, Tenant agrees to pay Landlord a late charge of five percent (5%) of the unpaid amount or one hundred dollars ($100.00) whichever is less. Page 2 (e) SECURITY DEPOSIT. As partial consideration for the execution of this Lease, the Tenant has delivered to Landlord the sum of $14,862.50 as a Security Deposit. The Security Deposit will be returned to Tenant within 30 days of the expiration of this Lease if Tenant has fully complied with all covenants and conditions of this Lease. SERVICES 5. Landlord shall furnish No Services to the Premises during normal business hours, and at such other times as Landlord may deem necessary or desirable, in the manner customary to the Real Estate. Landlord shall have the right to discontinue any service during any period for which rent is not promptly paid by Tenant. Landlord shall not be liable for damages, nor shall the rental be abated, for failure to furnish, or delay in furnishing, any service when failure to furnish, or delay in furnishing, is occasioned in whole or in part by needful repairs, renewals, or improvements, or by any strike or labor controversy, or by any accident or casualty whatsoever, or by any unauthorized act or default of any employee of Landlord, or for any other cause or causes beyond the control of Landlord. Tenant shall pay when due, all water, gas, electricity, sewer use fees, incurred at or chargeable to the Premises. ASSIGNMENT OR SUBLEASE 6. Tenant shall not assign this Lease or sublet the whole or any part of the Premises, transfer this Lease by operation of law or otherwise, or permit any other person except agents, subsidiaries, affiliates and employees of Tenant to occupy the Premises, or any part thereof, without the prior written consent of Landlord, as long as such use by an affiliate or subsidiary is consistent with this lease. Landlord may consider the following in determining whether to withhold consent: (a) financial responsibility of the new tenant, (b) identity and business character of the new tenant, (c) nature and legality of the proposed use of the Premises. Landlord shall have the right to assign its interest under this Lease or the rent reserved hereunder. TENANT'S IMPROVEMENTS 7. Tenant shall have the right to place partitions and fixtures and make improvements or other alterations in the interior of the Premises at its own expense. Prior to commencing any such work, Tenant shall first obtain the written consent of Landlord for the proposed work. Tenant shall give sufficient security that the Premises will be completed free and clean of liens and in a manner satisfactory to Landlord. Tenant may remove its trade fixtures at the termination of this Lease provided Tenant is not then in default and provided further that Tenant repairs any damage caused by such removal. Notwithstanding the foregoing, Landlord shall provide to Tenant the sum of three hundred thousand dollars ($300,000) towards Tenant's improvements to the Premises, upon the satisfactory evidence of completion of Tenant's work payable monthly upon receipt of invoices from Transgenomic. REPAIRS 8. Landlord agrees to maintain in good condition, and repair as necessary the foundations, exterior walls and the roof of the Premises. Tenant agrees that it will make, at its own cost and expense, all repairs and replacements to the Premises not required to be made by Landlord, including, but not limited to, all interior and exterior Page 3 doors, door frames, windows, plate glass, and the heating, air conditioning, plumbing and electrical systems servicing the Premises. Tenant agrees to do all redecorating, remodeling, alteration, and painting required by it during the term of the Lease at its own cost and expense, to pay for any repairs to the Premises or the Real Estate made necessary by any negligence or carelessness of Tenant or any of its agents or employees or persons permitted on the Real Estate by Tenant, and to maintain the Premises in a safe, clean, neat, and sanitary condition. Tenant shall be entitled to no compensation for inconvenience, injury, or loss of business arising from the making of any repairs by Landlord, Tenant, or other tenants to the Premises or the Real Estate. CONDITION OF PREMISES 9. Except as provided herein, Tenant agrees that no promises, representations, statements, or warranties have been made on behalf of Landlord to Tenant respecting the condition of the Premises, or the manner of operating the Real Estate, or the making of any repairs to the Premises. By taking possession of the Premises, Tenant acknowledges that the Premises were in good and satisfactory condition when possession was taken. Tenant shall, at the termination of this Lease, by lapse of time or otherwise, remove all of Tenant's property and surrender the Premises to Landlord in as good condition as when Tenant took possession, normal wear excepted. Not withstanding the foregoing, Landlord shall have the heating, air conditioning, plumbing, and electrical systems inspected prior to Tenant's occupancy and such systems shall be in good working order at the time of possession. PERSONAL PROPERTY AT RISK OF TENANT 10. All personal property in the Premises shall be at the risk of Tenant only. Landlord shall not be liable for any damage to any property of Tenant or its agents or employees in or on the Premises caused by steam, electricity, sewage, gas or odors, or from water, rain, or snow which may leak into, issue or flow into the Premises from any part of the Real Estate, or from any other place, or for any damage done to Tenant's property in moving same to or from the Real Estate or the Premises. Tenant shall give Landlord, or its agents, prompt written notice of any damage to or defects in water pipes, gas or warming or cooling apparatus in the Premises. LANDLORD'S RESERVED RIGHTS 11. With one day notice to Tenant, without liability to Tenant for damages or injury to property, person, or business, and without effecting an eviction of Tenant or a disturbance of Tenant's use or possession or giving rise to any claim for setoff or abatement of rent, Landlord shall have the right to: (a) Change the name or street address of the Real Estate with 30 days prior written notice. (b) Install and maintain signs on the Real Estate during the last nine months of occupancy. (c) At reasonable times, to decorate, and to make, at its own expense, repairs, alterations, additions, and improvements, structural or otherwise, in or to the Premises, the Real Estate, or part thereof, and any adjacent building, land, street, or alley, and during such operations to take into and through the Premises or any part of the Real Estate all materials required, and to temporarily close or suspend operation of entrances, doors, corridors, elevator, or other facilities to do so. (d) Possess passkeys to the Premises. (e) Show the Premises to prospective tenants at reasonable times during the final 9 months of the lease term.. Page 4 (f) Take any and all reasonable measures, including inspections or the making of repairs, alterations, and additions and improvements to the Premises or to the Real Estate, which Landlord deems necessary or desirable for the safety, protection, operation, or preservation of the Premises or the Real Estate. (g) Approve all sources furnishing signs, painting, and/or lettering to the Premises, and approve all signs on the Premises prior to installation thereof, which such approval shall not be unreasonably withheld.. INSURANCE 12. Tenant shall not use or occupy the Premises or any part thereof in any manner which could invalidate any policies of insurance now or hereafter placed on the Real Estate or increase the risk covered by insurance on the Real Estate or necessitate additional insurance premiums or policies of insurance, even if such use may be in furtherance of Tenant's business purposes. In the event any policies of insurance are invalidated by acts or omissions of Tenant, Landlord shall have the right to terminate this Lease or, at Landlord's option, to charge Tenant for extra insurance premiums required on the Real Estate on account of the increased risk caused by Tenant's use and occupancy of the Premises. Each party hereby waives all claims for recovery from the other for any loss or damage to any of its property insured under valid and collectible insurance policies to the extent of any recovery collectible under such policies. Provided, that this waiver shall apply only when permitted by the applicable policy of insurance. INDEMNITY 13. Tenant shall indemnify, hold harmless, and defend Landlord from and against, and Landlord shall not be liable to Tenant on account of, any and all costs, expenses, liabilities, losses, damages, suits, actions, fines, penalties, demands, or claims of any kind, including reasonable attorney's fees, asserted by or on behalf of any person, entity, or governmental authority arising out of or in any way connected with either (a) a failure by Tenant to perform any of the agreements, terms, or conditions of this Lease required to be performed by Tenant; (b) a failure by Tenant to comply with any laws, statutes, ordinances, regulations or orders of any governmental authority; or (c) any accident, death, or personal injury, or damage to, or loss or theft of property which shall occur on or about the Premises, or the Real Estate, except as the same may be the result of the negligence of Landlord, its employees, or agents. Landlord shall indemnify, hold harmless, and defend Tenant from and against, and Tenant shall not be liable to Landlord on account of, any and all costs, expenses, liabilities, losses, damages, suits, actions, fines, penalties, demands, or claims of any kind, including reasonable attorney's fees, asserted by or on behalf of any person, entity, or governmental authority arising out of or in any way connected with either (a) a failure by Landlord to perform any of the agreements, terms, or conditions of this Lease required to be performed by Landlord; (b) a failure by Landlord to comply with any laws, statutes, ordinances, regulations or orders of any governmental authority; or (c) any accident, death, or personal injury, or damage to, or loss or theft of property which shall occur on or about the Premises, or the Real Estate, except as the same may be the result of the negligence of Tenant, its employees, or agents. LIABILITY INSURANCE 14. Tenant agrees to procure and maintain continuously during the entire term of this Lease, a policy or policies of insurance in a company or companies acceptable to Landlord, at Tenant's own cost and expense, insuring Landlord and Tenant from all claims, demands or actions: such comprehensive insurance shall protect and name the Tenant as the Insured and shall provide coverage of at least $2,000,000, for injuries to any one person, $2,000,000 for injuries to persons in any one accident and Page 5 $2,000,000 for damage to property, made by or on behalf of any person or persons, firm or corporation arising from, related to, or connected with the conduct and operation of Tenant's business in the Premises, or arising out of and connected with the use and occupancy of sidewalks and other Common Areas by the Tenant. All such insurance shall provide that Landlord shall be given a minimum of ten (10) days notice by the insurance company prior to cancellation, termination or change of such insurance. Tenant shall provide Landlord with copies of the policies or certificates evidencing that such insurance is in full force and effect and stating the term and provisions thereof. If Tenant fails to comply with such requirements for insurance, Landlord may, but shall not be obligated to, obtain such insurance and keep the same in effect, and Tenant agrees to pay Landlord, upon demand, the premium cost thereof. DAMAGE BY FIRE OR OTHER CASUALTY 15. If, during the term of this Lease, the Premises shall be so damaged by fire or any other cause except Tenant's negligent or intentional act so as to render the Premises untenantable, the rent shall be abated while the Premises remain untenantable; and in the event of such damage, Landlord shall elect whether to repair the Premises or to cancel this Lease, and shall notify Tenant in writing of its election within thirty (30) days after such damage. In the event Landlord elects to repair the Premises, the work or repair shall begin promptly and shall be carried on without unnecessary delay. In the event the necessary repairs cannot be completed within seventy-five (75) days of said notice to Tenant, Tenant may elect to terminate this lease, effective upon the date of damage. In the event Landlord elects not to repair the Premises, the Lease shall be deemed canceled as of the date of the damage Tenant shall be liable for no further payments, and any amounts due Tenant shall be refunded. Such damage shall not extend the Lease term. CONDEMNATION 16. If the whole or any part of the Premises shall be taken by public authority under the power of eminent domain, then the term of this Lease shall cease on that portion of the Premises so taken, from the date of possession, and the rent shall be paid to that date, with a proportionate refund by Landlord to Tenant of such rent as may have been paid by Tenant in advance. If the portion of the Premises taken is such that it prevents the practical use of the Premises for Tenant's purposes, then Tenant shall have the right either (a) to terminate this Lease by giving written notice of such termination to Landlord not later than thirty (30) days after the taking; or (b) to continue in possession of the remainder of the Premises, except that the rent shall be reduced in proportion to the area of the Premises taken. In the event of any taking or condemnation of the Premises, in whole or in part, the entire resulting award of damages shall be the exclusive property of the Landlord, including all damages awarded as compensation for diminution in value to the leasehold, without any deduction for the value of any unexpired term of this Lease, or for any other estate or interest in the Premises now or hereafter vested in Tenant. DEFAULT OR BREACH 17. Each of the following events shall constitute a default or a breach of this Lease by Tenant: (a) If Tenant fails to pay Landlord any rent or other payments when due herein under; (b) If Tenant files a petition in bankruptcy or insolvency or for reorganization under any bankruptcy act, or voluntarily takes advantage of any such act by answer or otherwise, or makes an assignment for the benefit of creditors; (c) If involuntary proceedings under any bankruptcy or insolvency act shall be instituted against Tenant, or if a receiver or trustee shall be appointed of all or substantially all of the property of Page 6 Tenant, and such proceedings shall not be dismissed or the receivership or trusteeship vacated within thirty (30) days after the institution or appointment; or (d) If Tenant fails to perform or comply with any other term or condition of this Lease and if such nonperformance shall continue for a period of ten (10) days after notice thereof by Landlord to Tenant, time being of the essence. EFFECT OF DEFAULT 18. In the event of any default or breach hereunder, in addition to any other right or remedy available to Landlord, either at law or in equity, Landlord may exert any one or more of the following rights provided, however, that Landlord shall use all reasonable effort to relet the Premises to another party: (a) Landlord may re-enter the Premises immediately and remove the property and personnel of Tenant, and shall have the right, but not the obligation, to store such property in a public warehouse or at a place selected by Landlord, at the risk and expense of Tenant. (b) Landlord may retake the Premises and may terminate this Lease by giving written notice of termination to Tenant. Without such notice, Landlord's retaking will not terminate the Lease. On termination, Landlord may recover from Tenant all damages approximately resulting from the breach, including the cost of recovering the Premises and the difference between the rent due for the balance of the Lease term, as though the Lease had not been terminated, and the reasonable rental value of the Premises, which sum shall be immediately due Landlord from Tenant. (c) Landlord may relet the Premises or any part thereof for any term without terminating this Lease, at such rent and on such terms as it may choose. Landlord may make alterations and repairs to the Premises. In addition to Tenant's liability to Landlord for breach of this Lease, Tenant shall be liable for all expenses of the reletting, for any alterations and repairs made, and for the rent due for the balance of the Lease term, which sum shall be immediately due Landlord from Tenant. The amount due Landlord will be reduced by the net rent received by Landlord during the remaining term of this Lease from reletting the Premises or any part thereof. If during the remaining term of this Lease, Landlord receives more than the amount due Landlord under this sub-paragraph, the Landlord shall pay such excess to Tenant, but only to the extent Tenant has actually made payment pursuant to this sub-paragraph. SURRENDER - HOLDING OVER 19. Tenant shall, upon termination of this Lease, whether by lapse of time or otherwise, peaceably and promptly surrender the Premises to Landlord. If Tenant remains in possession after the termination of this Lease, without a written lease duly executed by the parties, Tenant shall be deemed a trespasser. If Tenant pays, and Landlord accepts, rent for a period after termination of this Lease, Tenant shall be deemed to be occupying the Premises only as a Tenant from month to month, subject to all the terms, conditions, and agreements of this Lease, except that the rent shall be one and one-half times the monthly rent specified in the lease immediately before termination. SUBORDINATION AND ATTORNMENT 20. Landlord reserves the right to place liens and encumbrances on the Premises superior in lien and effect to this Lease. This Lease, and all rights of Tenant hereunder, shall, at the option of Landlord, be subject and subordinate to any liens and encumbrances now or hereafter imposed by Landlord upon the Premises or the Real Estate or any part thereof, and Tenant agrees to execute, acknowledge, and deliver to Page 7 Landlord, upon request, any and all instruments that may be necessary or proper to subordinate this Lease and all rights herein to any such lien or encumbrance as may be required by Landlord. In the event any proceedings are brought for the foreclosure of any mortgage on the Premises, Tenant will attorn to the purchaser at the foreclosure sale and recognize such purchaser as the Landlord under this Lease. The purchaser by virtue of such foreclosure shall be deemed to have assumed, as substitute Landlord, the terms and conditions of this Lease until the resale or other disposition of its interest. Such assumption, however, shall not be deemed an acknowledgment by the purchaser of the validity of any then existing claims of Tenant against the prior Landlord. Tenant agrees to execute and deliver such further assurances and other documents, including a new Lease upon the same terms and conditions contained herein, confirming the foregoing, as such purchaser may reasonably request. Tenant waives any right of election to terminate this Lease because of any such foreclosure proceedings. NOTICES 21. Any notice to be given hereunder shall be given in writing and personally delivered or sent by registered or certified mail to Landlord at 17509 Harney Street, Omaha Nebraska, 68118, Attention Todd Smith and to Tenant at 12325 Emmet Street, Omaha, Nebraska 68154 or at such other address as either party may from time to time designate in writing. Each such notice shall be deemed to have been given at the time it shall be personally delivered to such address or deposited in the United States mail in the manner prescribed herein. RULES AND REGULATIONS 22. Tenant and Tenant's agents, employees and invitees shall fully comply with all rules and regulations of the Real Estate, as amended from time to time, which are made a part of this Lease as if fully set forth herein. Landlord shall have the right to amend such rules and regulations, as Landlord deems necessary or desirable for the safety, care, cleanliness, or proper operation of the Premises and the Real Estate. NET LEASE 23. This is a net-net-net Lease and all parties agree and understand that Tenant shall pay Tenant's proportionate share of the real estate taxes, special assessments, insurance and all other Operating Expenses as described in subparagraph 4.b of this Lease. MISCELLANEOUS 24. (a) BINDING ON ASSIGNS. All terms, conditions, and agreements of this Lease shall be binding upon, apply, and inure to the benefit of the parties hereto and their respective heirs, representatives, successors, and assigns. (b) AMENDMENT IN WRITING. This Lease contains the entire agreement between the parties and may be amended only by subsequent written agreement. (c) WAIVER-NONE. The failure of Landlord to insist upon strict performance of any of the terms, conditions and agreements of this Lease shall not be deemed a waiver of any of its rights or remedies hereunder and shall not be deemed a waiver of any subsequent breach or default of any of such terms, conditions, and agreements. The doing of anything by Landlord which Landlord is not obligated to Page 8 do hereunder shall not impose any future obligation on Landlord nor otherwise amend any provisions of this Lease. (d) NO SURRENDER. No surrender of the Premises by Tenant shall be effected by Landlord's acceptance of the keys to the Premises or of the rent due hereunder, or by any other means whatsoever, without Landlord's written acknowledgment that such acceptance constitutes a surrender. (e) CAPTIONS. The captions of the various paragraphs in this Lease are for convenience only and do not define, limit, describe, or construe the contents of such paragraphs. (f) BROKERS. Landlord has been represented in this transaction by Grubb & Ellis/Pacific Realty. Tenant has been represented in this transaction by the P. J. Morgan Company. (g) APPLICABLE LAW. This Lease shall be governed by and construed in accordance with the laws of the State of Nebraska. ADDITIONAL PROVISIONS 25. ADDITIONAL SPACE: Tenant will lease the approximately 1,400 usable square feet now occupied, on or before August 1, 2001. Additional Space will be leased at the same terms and conditions as the initial leased Premises as defined in this lease. Landlord shall provide to Tenant the sum of twenty thousand dollars ($20,000) towards Tenant improvements of the Additional Space, upon the satisfactory evidence of completion of Tenant's work. 26. RIGHT OF FIRST REFUSAL: During the term of this lease, Landlord grants to Tenant a "Right of First Refusal" to purchase the Property in total. Tenant will have five (5) business days to respond to all bonafide offers. 27. SIGNAGE: Tenant, at its sole cost and expense, shall be permitted to install signage on the north fascia of the Property in accordance with all applicable city codes and regulations. All signage shall require the prior written approval of Landlord, with such approval not to be unreasonably withheld. OPTION TO EXTEND TERM 28. Tenant shall have two (2) options to renew this lease and lease of Additional Space of 1,400 square feet by providing landlord with nine (9) months prior written notice. Each option shall be for a term of five (5) years. The rental rate for the first option will be $10.25 per usable square foot, plus Operating Expenses. The rental rate for the second option will be negotiated at the time of the renewal. Both option rental rates will include an annual rental rate escalation equal to two (2) percent per year over the preceding year. Until this Lease is executed on behalf of all parties hereto, it shall be construed as an offer to lease of Tenant to Landlord. Page 9 IN WITNESS WHEREOF, the parties hereto have executed this Lease by day and year first above written. LANDLORD: TODD SMITH /s/ Todd Smith --------------------------------- By: Todd Smith ------------------------------ TENANT: TRANSGENOMIC, INC. /s/ William P. Rasmussen --------------------------------- By: William P. Rasmussen ------------------------------ Title: Chief Financial Officer --------------------------- Page 10 RULES AND REGULATIONS A. The Tenant, shall not place nor permit to be placed any signs, advertisements or notices upon any part of the Building, and shall not place merchandise or show-cases in front of the Building, without the Landlord's written consent, such consent not to be unreasonably withheld. B. The Tenant shall not put up nor operate any boiler of any kind, nor place any explosive therein, nor have over a five gallon quantity of any kerosene or oils or burning fluids in the Premises without first obtaining the written consent of the Landlord, such consent by Landlord not to be unreasonably withheld. C. If the Tenant desires telegraphic or telephonic connections, the Landlord will direct the electricians as to where and how the wires are to be introduced, and without such written directions no boring or cutting for wires will be permitted. D. No additional locks shall be placed upon any doors of the Premises without first obtaining the written consent of the Landlord. Upon termination of this lease the Tenant shall surrender all keys of said Premises and of the Building, and shall give to the Landlord the combination of all locks on any vaults and safes. E. The Landlord shall have the right to make such other and further reasonable rules and regulations as, in the judgment of the Landlord, may from time to time be needed for the safety, care and cleanliness and general appearance of the Premises and for the preservation of good order therein. Page 11 EX-10.21 9 EXHIBIT 10.21 Exhibit 10.21 FIRST AMENDMENT TO AMENDED AND RESTATED REVOLVING LOAN AGREEMENT THIS AGREEMENT, made as of the 15th day of May, 2000, by and between Transgenomic, Inc. a Delaware corporation ("BORROWER") and First National Bank of Omaha, a national banking association with principal business offices in Omaha, Nebraska ("BANK"). W I T N E S S E T H: Background. BANK and BORROWER executed an Amended and Restated Revolving Loan Agreement dated March 8, 2000, (herein, the "AGREEMENT"). Whereas, the parties hereto desire to amend the AGREEMENT. Therefore, in consideration of the promises herein contained, and each intending to be legally bound thereby, the parties agree as follows: 1. Terms, which are typed herein as all capitalized words and are not defined herein, shall have the same meanings as when described in the AGREEMENT. 2. Section I. Paragraph 5 and 6 of the AGREEMENT is hereby amended to read, effective immediately: 5. "BORROWING BASE" means, at any time, the amount computed as Total Borrowing Base on the BORROWING BASE CERTIFICATE most recently delivered to, and accepted by, the BANK in accordance with this AGREEMENT, and equal to the lesser of: A. $5,000,000.00; or B. The aggregate of (i) eighty percent (80%) of ELIGIBLE ACCOUNTS of the BORROWER, plus (ii) fifty percent (50%) of the Ending Inventory of BORROWER at cost, provided, however, that amounts attributable to Inventory in such computation shall not exceed $1,200,000.00. It is further provided, that for purposes of the foregoing computation, no more than fifty percent (50%) of ELIGIBLE ACCOUNTS used in the foregoing computation may consist of Accounts due from non-United States entities. It is further provided, that no demonstration Inventory of BORROWER located outside of the United States shall be included in such computation. 6. "BORROWING BASE CERTIFICATE" means a fully completed certificate certified by the chief financial officer of the BORROWER to be correct and delivered to, and accepted by, the BANK. 1 Attached hereto, marked Exhibit "A" and by this reference made a part hereof is a form of BORROWING BASE CERTIFICATE, acceptable to BANK, which shall, effective immediately, be used by the parties. 3. Section VI. Paragraph 1.A. 3. of the AGREEMENT is hereby amended to read, effective immediately: A. The BORROWER will furnish the BANK: 3. Each week (and at any additional time in the discretion of the BANK or if any material deterioration in the BORROWING BASE would be disclosed thereby) and at the time of any request for an advance by BORROWER, a BORROWING BASE CERTIFICATE, as of the end of such period. In the case of a BORROWING BASE CERTIFICATE at the time of an advance request, the same shall be as of the BUSINESS DAY immediately preceding the request. Each BORROWING BASE CERTIFICATE shall be effective only as accepted by the BANK (and with such revisions, if any, as the BANK may require as a condition to such acceptance); 4. BORROWER acknowledges and agrees that BANK is not required to fund any overdrafts on BORROWER's accounts at BANK. 5. Except as amended hereby the parties ratify and confirm as binding upon them all of the terms of the AGREEMENT. IN WITNESS WHEREOF, the parties hereto have duly executed this AGREEMENT as of the day and year first above written. FIRST NATIONAL BANK OF OMAHA TRANSGENOMIC, INC. By: /s/ Mark McMillan By: /s/ Mitchell L. Murphy --------------------------- ----------------------------------------- Title: Vice President Title: Controller ------------------------ ----------- Exhibit A - Borrowing Base Certificate Exhibit B - Promissory Note #93435.2 2 EX-10.22 10 EXHIBIT 10.22 Exhibit 10.22 May 15, 2000 Mr. William Rasmussen Transgenomic Inc 5600 S 42 St Omaha, NE 68107 Dear Bill: First National Bank of Omaha officially waives Transgenomic's non-compliance with the following covenants as defined in the Loan Agreement dated March 8, 2000, as amended from time to time, as of the company's quarterly statement dated March 31, 2000: 1. Covenant requiring Borrower to maintain a maximum Debt to Tangible Net Worth of not more than 1.5:1.0. As of 3-31-2000 the company's Debt to Tangible Net Worth was 1.87:1.0. 2. Covenant requiring Borrower to maintain a minimum Working Capital of $3,000,000. As of 3-31-2000 the Borrower's Working Capital was $2,643,493. 3. Covenant requiring Borrower to maintain Borrowing Base in excess of balance due Bank. The Borrower exceeded the Borrowing Base by $295,431. This waiver is based on the Borrower's internally prepared March 31, 2000 balance sheet and operating statement. This letter does NOT waive Borrower's obligation to perform any other covenants or requirements contained in the said Loan Agreement, nor does it constitute a waiver of the above covenants for any future date. The above waiver is limited to the compliance measured as to the above covenants, as of March 31, 2000. Sincerely, /s/ Mark McMillan Vice President EX-23.1 11 EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 1 to Registration Statement No. 333-32174 of Transgenomic, Inc. and subsidiaries of our report dated March 7, 2000 appearing in the Prospectus, which is part of this Registration Statement, and to the reference to us under the headings "Selected Financial Data" and "Experts" in such Prospectus. /s/ DELOITTE & TOUCHE LLP Omaha, Nebraska May 16, 2000 EX-27 12 EXHIBIT 27
5 3-MOS 3-MOS DEC-31-1999 DEC-31-2000 JAN-01-1999 JAN-01-2000 MAR-31-1999 MAR-31-2000 0 142,870 0 0 0 5,271,943 0 188,401 0 2,595,069 0 13,306,400 0 4,666,898 0 1,563,387 0 18,829,780 0 10,662,906 0 12,781,453 0 0 0 0 0 130,250 0 (4,744,829) 0 18,829,780 5,227,462 6,943,749 5,227,462 6,943,749 2,703,607 3,830,519 6,747,191 9,972,690 0 0 0 0 92,917 468,968 (1,612,646) (3,497,909) (634,588) 0 (978,058) (3,497,909) 0 0 0 0 0 0 (978,058) (3,497,909) (0.08) (0.27) (0.08) (0.27)
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