<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-27118
PHARMACOPEIA, INC.
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(Exact name of registrant as specified in its charter)
Delaware 33-0557266
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
CN 5350, Princeton, New Jersey 08543-5350
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(Address of principal executive offices) (Zip code)
(609) 452-3600
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days -- Yes X No _
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
CLASS OUTSTANDING AT OCTOBER 29, 1999
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Common Stock, $.0001 par value 19,960,079
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PHARMACOPEIA, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
ITEM PAGE
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Unaudited Financial Statements:
Balance Sheets - September 30, 1999 and December 31, 1998 3
Statements of Operations - Three and Nine Months Ended
September 30, 1999 and 1998 4
Statements of Cash Flows - Nine Months Ended September 30,
1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
Exhibits 17
2
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHARMACOPEIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
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<S> <C> <C>
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $ 15,328 $ 36,863
Marketable securities 48,620 44,235
Trade receivables, net of allowance for doubtful accounts
of $582 and $609, respectively 20,615 23,307
Prepaid expenses and other current assets 5,118 5,238
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Total current assets 89,681 109,643
Property and equipment - net 12,059 13,700
Software development costs - net 3,493 3,492
Goodwill - net 9,581 -
Other assets 1,755 1,030
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Total assets $ 116,569 $ 127,865
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,192 $ 5,158
Accrued liabilities 13,585 21,427
Deferred revenue, current portion 25,806 24,415
Notes payable, current portion 420 1,316
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Total current liabilities 42,003 52,316
Notes payable, long-term portion 36 328
Other long-term liabilities - 1,240
Deferred revenue, long-term 1,686 1,764
Commitments and Contingencies
Stockholders' equity:
Capital stock 1 1
Additional paid-in capital 147,928 145,499
Accumulated deficit (74,642) (72,820)
Accumulated other comprehensive loss (443) (463)
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Total stockholders' equity 72,844 72,217
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Total liabilities and stockholders' equity $ 116,569 $ 127,865
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</TABLE>
See accompanying notes to these unaudited financial statements.
3
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PHARMACOPEIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Laboratory services $ 7,935 $ 6,971 $ 25,239 $ 20,426
Software license, maintenance and other 14,149 12,309 38,966 36,822
Hardware 2,166 1,791 6,605 4,671
-------- -------- -------- --------
Total revenue 24,250 21,071 70,810 61,919
Cost of revenue:
Laboratory services 4,482 5,462 15,411 14,597
Software license, maintenance and other 1,587 1,170 5,016 3,609
Hardware 1,953 1,565 5,926 3,985
-------- -------- -------- --------
Total cost of revenue 8,022 8,197 26,353 22,191
Gross margin 16,228 12,874 44,457 39,728
Operating costs and expenses:
Research and development 7,243 6,722 20,953 20,687
Sales, general and administrative 9,702 8,737 28,153 24,751
Merger related costs - - - 7,998
-------- -------- -------- --------
Total operating costs and expenses 16,945 15,459 49,106 53,436
-------- -------- -------- --------
Operating loss (717) (2,585) (4,649) (13,708)
Interest and other income, net 1,089 1,052 2,931 3,001
-------- -------- -------- --------
Income (loss) before provision for income taxes 372 (1,533) (1,718) (10,707)
Provision for income taxes 36 550 104 542
-------- -------- -------- --------
Net income (loss) $ 336 $ (2,083) $ (1,822) $(11,249)
-------- -------- -------- --------
Net income (loss) per share - Basic $ 0.02 $ (0.11) $ (0.09) $ (0.60)
-------- -------- -------- --------
-------- -------- -------- --------
Net income (loss) per share - Diluted $ 0.02 $ (0.11) $ (0.09) $ (0.60)
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average number of common stock
outstanding - Basic 19,819 18,968 19,583 18,905
Weighted average number of common stock
outstanding - Diluted 20,896 18,968 19,583 18,905
</TABLE>
See accompanying notes to these unaudited financial statements.
4
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PHARMACOPEIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,822) $(11,249)
Adjustments to reconcile net loss to net cash
used in operations
Depreciation and amortization 5,649 4,820
Equity in undistributed earnings of joint venture - 1,013
Changes in assets and liabilities:
Accounts receivable 2,692 3,565
Prepaid and other current assets 293 1,866
Accounts payable (2,966) (639)
Accrued liabilities (7,841) (1,179)
Deferred revenue 1,313 (7,771)
Other (1,000) 409
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Net cash used in operating activities (3,682) (9,165)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,436) (3,492)
Purchase of marketable securities (47,192) (49,556)
Sales of marketable securities 42,807 76,925
Acquisition of distribution rights and joint venture
interest (10,037)
Issuance of note receivable (1,000) -
Principal collected on note receivable 71 -
Increase in capitalized software development costs (1,326) (1,309)
--------- ---------
Net cash provided by (used in) investing
activities (19,113) 22,568
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 2,429 864
Principal payments on notes payable (1,187) (1,690)
--------- ---------
Net cash provided by (used in) financing
activities 1,242 (826)
Exchange rate effect on cash and equivalents 18 376
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Net increase (decrease) in cash and equivalents (21,535) 12,953
Cash and equivalents, beginning of period 36,863 24,609
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Cash and equivalents, end of period $ 15,328 $ 37,562
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SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 206 $ 323
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Income taxes $ 78 $ 2,019
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</TABLE>
See accompanying notes to these unaudited financial statements.
5
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PHARMACOPEIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE (1) - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, these unaudited financial statements do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all normal recurring adjustments necessary for a fair
presentation of the financial statements have been included.
Interim results are not necessarily indicative of the results that
may be expected for the year. For further information, refer to the financial
statements and footnotes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998, as amended.
Beginning with this interim report, the Company has revised the
format of its statement of operations to segregate costs of revenues from
operating costs and expenses, and to report gross margin from revenue. This
change in presentation format resulted from the recent change in the
Company's primary business focus, from drug research to the sale of
technology products and services. The Company believes that the new format
better presents results of operations. Prior period amounts have been
reclassified to conform to the new presentation. The following supplemental
table presents the Company's quarterly statements of operations under the new
format for 1998 and 1999.
<TABLE>
<CAPTION>
Three Months Ended
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March 31, June 30, September 30, December 31, March 31, June 30, September 30,
1998 1998 1998 1998 1999 1999 1999
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<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Laboratory services $ 6,432 $ 7,023 $ 6,971 $ 9,251 $ 9,076 $ 8,228 $ 7,935
Software license, maintenance and other 13,055 11,458 12,309 17,598 12,423 12,394 14,149
Hardware 1,066 1,814 1,791 3,443 1,794 2,645 2,166
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Total revenue 20,553 20,295 21,071 30,292 23,293 23,267 24,250
Cost of revenue:
Laboratory services 4,420 4,715 5,462 5,710 5,837 5,092 4,482
Software license, maintenance and other 1,193 1,246 1,170 1,677 1,837 1,592 1,587
Hardware 871 1,549 1,565 3,076 1,477 2,496 1,953
------------------------------------------------------------------------------------
Total cost of revenue 6,484 7,510 8,197 10,463 9,151 9,180 8,022
Gross Margin 14,069 12,785 12,874 19,829 14,142 14,087 16,228
Operating costs and expenses:
Research and development 6,758 7,207 6,722 7,969 6,697 7,013 7,243
Sales, general and administrative 8,218 7,796 8,737 11,608 8,950 9,501 9,702
Merger related costs - 7,998 - - - - -
------------------------------------------------------------------------------------
Total operating costs and expenses 14,976 23,001 15,459 19,577 15,647 16,514 16,945
Operating income (loss) (907) (10,216) (2,585) 252 (1,505) 2,427) (717)
Interest and other income, net 1,042 907 1,052 1,201 979 863 1,089
------------------------------------------------------------------------------------
Income (loss) before provision for
(benefit from) income taxes 135 (9,309) (1,533) 1,453 (526) (1,564) 372
Provision for (benefit from) income taxes 928 (936) 550 367 40 28 36
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Net income (loss) $ (793) $(8,373) $(2,083) $ 1,086 $ (566) $(1,592) $ 336
------------------------------------------------------------------------------------
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</TABLE>
6
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NOTE (2) - SEGMENT INFORMATION
The Company operates in two business segments: laboratory services
and software (which includes software licenses, maintenance, hardware and
other). Summarized information concerning industry segment operations for the
three and nine month periods ended September 30, 1999 and 1998, and for
industry segment assets as of September 30, 1999 and December 31, 1998, is
presented below. The operating loss for the nine month period ended September
30, 1998 excludes $8.0 million of merger related costs.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
--------------------------------------- ---------------------------------------
Laboratory Laboratory
Software Services Total Software Services Total
---------- ------------ ------- ---------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Laboratory services $ - $ 7,935 $ 7,935 $ - $25,239 $25,239
Software licenses, maintenance and other 14,149 - 14,149 38,966 - 38,966
Hardware 2,166 - 2,166 6,605 - 6,605
---------- ------------ ------- ---------- ------------ -------
Total $16,315 $ 7,935 $24,250 $45,571 $25,239 $70,810
---------- ------------ ------- ---------- ------------ -------
---------- ------------ ------- ---------- ------------ -------
Operating income (loss) $ 2,053 $(2,770) $ (717) $ 2,652 $(7,301) $(4,649)
---------- ------------ ------- ---------- ------------ -------
---------- ------------ ------- ---------- ------------ -------
Total assets - September 30, 1999 $46,356 $70,213 $116,569
---------- ------------ -------
---------- ------------ -------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
--------------------------------------- -----------------------------------------
Laboratory Laboratory
Software Services Total Software Services Total
---------- ------------ ------- ---------- ------------ ---------
Revenue:
Laboratory services $ - $ 6,971 $ 6,971 $ - $ 20,426 $ 20,426
Software licenses, maintenance and other 12,309 - 12,309 36,822 - 36,822
Hardware 1,791 - 1,791 4,671 - 4,671
---------- ------------ ------- ---------- ------------ ---------
Total $ 14,100 $ 6,971 $21,071 $ 41,493 $ 20,426 $ 61,919
---------- ------------ ------- ---------- ------------ ---------
---------- ------------ ------- ---------- ------------ ---------
Operating income (loss) $ 711 $ (3,296) $(2,585) $ 3,619 $ (9,329) $ (5,710)
---------- ------------ ------- ---------- ------------ ---------
---------- ------------ ------- ---------- ------------ ---------
Total assets - December 31, 1998 $ 50,789 $ 77,076 $ 127,865
---------- ------------ ---------
---------- ------------ ---------
</TABLE>
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of financial condition and
results of operations should be read in conjunction with the unaudited
financial statements included elsewhere in this Form 10-Q.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Total revenue grew 15% to $24.3 million for the quarter ended
September 30, 1999 compared to $21.1 million for the corresponding 1998
quarter.
Laboratory services revenue increased 14% to $7.9 million for the
quarter ended September 30, 1999 compared to $7.0 million for the
corresponding 1998 quarter. This increase was primarily attributable to an
increase in the number and size of collaborations in progress, including
several contracts signed in the latter half of 1998 and in 1999. A
significant portion of third quarter 1999 laboratory services revenue
resulted from the Company's new Lead Discovery Service (LDS) offering,
whereby the Company uses its proprietary high-throughput screening system to
screen the Company's multi-million quantity compound collection against
customer drug targets. Laboratory services revenue for the quarters ended
September 30, 1999 and 1998 included no one-time milestone or up front
license fee payments.
Total revenue generated from the software business segment (software
license, maintenance, hardware and other) increased 16% to $16.3 million for
the quarter ended September 30, 1999 compared to $14.1 million for the
corresponding 1998 quarter. Software license, maintenance and other revenue
increased 15% to $14.1 million for the third quarter of 1999 compared to
$12.3 million for the corresponding 1998 quarter. Hardware revenue increased
21% to $2.2 million for the quarter ended September 30, 1999.
Software business segment revenue continued to grow in the combined
Europe and US regions, increasing 18% for the quarter ended September 30,
1999 compared with the third quarter of 1998. Management believes that this
increase in total revenue for the combined Europe and US regions resulted
primarily from a continuing increase in the size of the molecular simulation
expert software market and from an increase in the Company's market share
within this market.
Software business segment revenue for the Asia region showed an
increase of 4% for the quarter ended September 30, 1999 compared with the
third quarter of 1998. This increase resulted entirely from the positive
currency impact of the strengthening Yen, which offset the 10% decline in Yen
denominated sales. Management believes that this decline in revenues resulted
primarily from the disruption in sales caused by the first quarter 1999
re-negotiation of the Company's distribution arrangements in Japan. However,
the rate of decline in 1999 quarterly revenues compared to 1998 quarterly
revenues decreased substantially in the third quarter, and management expects
further recovery in Asian sales levels in the next several quarters. In
addition, the new distribution agreement in Japan provides for guaranteed
sales order levels for the nine-month period ending December 31, 1999 and for
the year 2000. The effect of these guarantees is that 1999 fourth
8
<PAGE>
quarter software revenues in Japan should exceed the revenues reported in the
fourth quarter of 1998, and that 2000 software revenues in Japan should
exceed 1999 revenues.
Gross margin generated from laboratory services increased 129% to
$3.5 million for the quarter ended September 30, 1999 compared to $1.5
million for the corresponding 1998 quarter. This increase in laboratory
services gross margin resulted from the 14% increase in laboratory services
revenue, from a shift in mix of business from headcount-based research
services to fixed price high-throughput screening services, and from cost
efficiencies achieved by the transition of screening work from 96 to 384 well
formats.
Gross margin generated from the software business segment (software
license, maintenance, hardware and other) increased 12% to $12.8 million for
the quarter ended September 30, 1999 compared to $11.4 million for the
corresponding 1998 quarter. This increase in software business segment gross
margin resulted primarily from the 16% increase in software business segment
revenue, offset slightly by a decrease in margin on hardware sales and by an
increase in maintenance and support costs and higher royalty bearing software
sales.
Research and development expenses increased 8% to $7.2 million for
the quarter ended September 30, 1999, compared to $6.7 million for the
corresponding quarter of 1998. Research and development costs include costs
associated with internal drug discovery programs, software development, ultra
high-throughput screening, and informatics. The increase in research and
development expenses is primarily attributable to an increase in software
development activities, offset by a decrease in internal drug discovery
activities.
Within its laboratory services business segment, the Company intends
to continue to decrease its internal drug discovery efforts over the
remaining portion of 1999, and to focus primarily on funded drug discovery
services beginning in 2000. However, future research and development expenses
may increase in total, even if internal drug discovery activities decrease,
as the Company may further expand its software, ultra high-throughput
screening, informatics and other development endeavors.
Sales, general and administrative expenses increased to $9.7 million
for the quarter ended September 30, 1999, representing 40% of total revenue.
Sales, general and administrative expenses were $8.7 million for the quarter
ended September 30, 1998, representing 41% of total revenue. The quarter to
quarter increase of $1.0 million is primarily attributable to increases in
sales and marketing expenses within the software business segment, which
reflect the expansion of the Company's global selling and marketing capacity
undertaken primarily in the second half of 1998.
The Company recorded interest and other income of $1.1 million for
each of the quarters ended September 30, 1999 and 1998. Third quarter
interest income declined compared to 1998 primarily as a result of lower
balances of cash, cash equivalents and marketable securities. However,
foreign exchange gains offset this decline, primarily as a result of the
positive currency impact of the strengthening Yen.
The Company recorded an income tax provision of $36,000 for the
quarter ended September 30, 1999 and $0.6 million for the comparable 1998
quarter. The 1999 and 1998 tax provisions are primarily due to foreign
taxable income generated from the software business segment.
9
<PAGE>
As a result of the foregoing, the Company generated net income of
$0.3 million or $0.02 per diluted share for the quarter ended September 30,
1999. This compares to a net loss in the third quarter of 1998 of $2.1
million, or $0.11 per diluted share.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Total revenue grew 14% to $70.8 million for the nine months ended
September 30, 1999 compared to $61.9 million for the nine months ended
September 30, 1998.
Laboratory services revenue increased 24% to $25.2 million for the
nine months ended September 30, 1999 compared to $20.4 million for the
comparable 1998 period. This year-to-date increase was primarily attributable
to an increase in the number and size of collaborations in progress,
including several contracts signed in the latter half of 1998 and in 1999. A
significant portion of laboratory service revenue for the nine month period
ended September 30, 1999 resulted from the Company's new Lead Discovery
Service (LDS) offering, whereby the Company uses its proprietary
high-throughput screening system to screen the Company's multi-million
quantity compound collection against customer drug targets. Laboratory
services revenue for the nine months ended September 30, 1999 included no
one-time milestone or up front license fee payments, whereas laboratory
services revenue for the nine months ended September 30, 1998 included a
$750,000 one time milestone payment.
Total revenue generated from the software business segment (software
license, maintenance, hardware and other) increased 10% to $45.6 million for
the nine months ended September 30, 1999 over the comparable 1998 period.
Software license, maintenance and other revenue increased 6% to $39.0 million
for the nine months ended September 30, 1999 compared to $36.8 million for
the corresponding 1998 period. Hardware revenue increased 41% to $6.6 million
for the nine months ended September 30, 1999.
Software business segment revenue continued to grow in the combined
Europe and US regions, increasing by 17% for the nine months ended September
30, 1999 compared with the similar 1998 period. Management believes that the
increase in total revenue for the combined Europe and US regions resulted
primarily from a continuing increase in the size of the molecular simulation
expert software market and from an increase in the Company's market share
within this market.
The revenue increase in software business segment revenue for the
combined Europe and US regions was partially offset by continuing weakness in
the Asia region, where software business segment revenue declined 19% for the
nine months ended September 30, 1999 compared with the similar 1998 period.
Management believes this year-to-date revenue decrease resulted primarily
from the disruption in sales caused by the first quarter 1999 re-negotiation
of the Company's distribution arrangements in Japan. Partially offsetting the
decline in 1999 year-to-date revenues for the Asia region was the positive
currency impact of the strengthening Yen against the dollar in the third
quarter of 1999.
Gross margin generated from laboratory services increased 69% to
$9.8 million for the nine months ended September 30, 1999 compared to $5.8
million for the corresponding 1998 period. This increase in laboratory
services gross margin resulted from the 24% increase in laboratory
10
<PAGE>
services revenue, from a shift in mix of business from headcount-based
research services to fixed price high-throughput screening services, and from
cost efficiencies achieved by the transition of screening work from 96 to 384
well formats.
Gross margin generated from the software business segment (software
license, maintenance, hardware and other) increased 2% to $34.6 million for
the nine months ended September 30, 1999 compared to $33.9 million for the
corresponding 1998 period. This increase in software business segment gross
margin resulted primarily from the 10% increase in software business segment
revenue, offset slightly by a decrease in margin on hardware sales and by an
increase in maintenance and support costs and higher royalty bearing software
sales.
Research and development expenses increased 1% to $21.0 million for
the nine months ended September 30, 1999, compared to $20.7 million for the
corresponding period in 1998. Research and development costs include costs
associated with internal drug discovery programs, software development, ultra
high-throughput screening, and informatics. This slight increase in research
and development expenses is primarily attributable to an increase in software
development activities, offset by a decrease in internal drug discovery
activities.
Sales, general and administrative expenses increased to $28.2
million for the nine months ended September 30, 1999, representing 40% of
total revenue. Sales, general and administrative expenses were $24.8 million
for the nine months ended September 30, 1998, representing 40% of total
revenue. The increase of $3.4 million is primarily attributable to increases
in sales and marketing expenses within the software business segment, which
reflect the expansion of the Company's global selling and marketing capacity
undertaken primarily in the second half of 1998.
The Company recorded interest and other income of $2.9 million for
the nine months ended September 30, 1999 compared to $3.0 million for
corresponding period in 1998. The decline in the average balance of cash,
cash equivalents and marketable securities resulted in lower interest income
in 1999 compared to 1998. However, foreign exchange gains offset this
decline, primarily as a result of the positive currency impact of the
strengthening Yen.
The Company recorded an income tax provision of $0.1 million for the
nine months ended September 30, 1999 and $0.5 million for the comparable 1998
period. The tax provision in 1999 and 1998 is due to foreign taxable income
generated from the software business segment.
As a result of the foregoing, the Company generated a net loss of
$1.8 million or $0.09 per diluted share for the nine months ended September
30, 1999. This compares to a net loss in the corresponding period in 1998 of
$3.3 million, or $0.17 per diluted share, excluding merger related costs of
$8.0 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its activities to date primarily through the
sale of equity securities and through sales of laboratory services, software
licenses, software maintenance services and hardware. As of September 30,
1999, the Company had working capital of $47.7 million compared to $57.3
million as of December 31, 1998. The majority of this $9.6 million decrease
in working capital resulted from the re-purchase of distribution rights to
MSI software in Japan and the acquisition of the remaining 50% interest of a
Japanese joint venture. In 1999 the Company also
11
<PAGE>
invested approximately $2.4 million of cash on capital expenditures,
consisting primarily of computer hardware and laboratory equipment. As of
September 30, 1999, the Company's cash, cash equivalents and marketable
securities totaled $63.9 million, which are invested in U.S. Treasury and
government agency obligations, investment grade commercial paper and other
short-term money market instruments.
As of September 30, 1999, the Company had outstanding commitments
for equipment purchases totaling $0.2 million. The Company anticipates that
its capital requirements may increase in future periods as the Company
expands its research and development activities, expands its facilities, and
acquires additional equipment. However, as the Company curtails its internal
drug discovery activities, these increases may be temporarily offset or
delayed by the Company's redeployment of laboratory equipment and facilities
from internal drug discovery work to collaborative work, if and when needed
for such collaborative work. The Company's capital requirements may also
increase in future periods as the Company seeks to expand its technology
platform through investments, licensing arrangements, technology alliances or
acquisitions.
The Company anticipates that its existing capital resources will be
adequate to fund the Company's operations at least through 2001. However,
there can be no assurance that changes will not occur that would consume
available capital resources before such time. The Company's capital
requirements depend on numerous factors, including the ability of the Company
to extend existing laboratory services agreements and to enter into
additional arrangements, the ability of the Company to continue to generate
software sales, competing technological and market developments, changes in
the Company's existing collaborative relationships, the cost of filing,
prosecuting, defending and enforcing patent claims and other intellectual
property rights and the outcome of related litigation, the purchase of
additional capital equipment, acquisitions of other businesses or
technologies, and the progress of the Company's customers' milestone and
royalty producing activities. There can be no assurance that additional
funding, if necessary, will be available on favorable terms, if at all. The
Company's forecasts of the period of time through which its financial
resources will be adequate to support its operations is forward looking
information, and actual results could vary. The factors described earlier in
this paragraph will impact the Company's future capital requirements and the
adequacy of its available funds.
YEAR 2000
The year 2000 presents concerns for business computing because the
use of certain two digit date formats could cause date sensitive software to
recognize "00" as the year 1900 rather than the year 2000. The problem exists
for many kinds of software and hardware, including mainframes,
mini-computers, PC's and embedded systems. The year 2000 issue could affect
the Company's software products, its internal systems, and the systems used
by its distributors, customers and vendors.
The Company has tested the current versions of its software products
and has developed corrections or updates such that these products are
believed to be year 2000 compliant. These corrections and updates were made
available to customers in the third quarter of 1999. None of these
corrections or updates required a substantial resource commitment or
disrupted the Company's ongoing business activities. The Company has also
developed plans and procedures to verify that versions of its software
products released subsequent to the third quarter of 1999 are year 2000
compliant.
12
<PAGE>
The Company has also tested the readiness of its internal systems,
including information technology (IT) and non-IT systems, for handling the
year 2000, and has substantially completed the remediation and certification
process. The Company has also completed a review of its facilities and
infrastructure. Contingency plans have been developed, where appropriate, in
parallel with the testing and remediation efforts.
The Company has evaluated its third-party distribution and supply
chain to understand their ability to continue providing services and products
through the change to the year 2000. The Company is monitoring and working
directly with key vendors, service providers, hardware manufacturers and
distributors to avoid any business interruption in the year 2000. To date, no
critical third parties with year 2000 issues have been identified.
While year 2000 issues present a potential risk to the Company's
internal systems, distribution and supply chain, and facilities, the Company
is minimizing such risk with a worldwide effort. Pharmacopeia has performed
extensive assessment and testing and has remediated mission critical
components. These components were identified and resolution was nearly
completed by October 1999. Management currently believes that all critical
systems will be ready by the year 2000 and that the total cost to address all
such issues will not exceed $0.5 million.
Despite the efforts the Company is making to address the year 2000
issue with respect to its products, internal systems, key vendors, service
providers and distributors, the Company recognizes that its customers and
potential customers may devote substantial portions of their remaining 1999
information systems resources to addressing their own year 2000 issues rather
than purchasing and installing new software from the Company. These
commitments by customers and potential customers to address their own year
2000 issues may result in the delay or loss of orders for the Company's
software products and services. Any such delays or loss of orders could have
a material adverse impact on the Company's sales volume for the remainder of
1999. Mitigating this concern is the fact that a large portion of the
Company's software revenues are derived from the renewal of existing annual
license arrangements whereby the customer is no longer entitled to use the
software if the renewal is not executed.
13
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's international operations are subject to risks inherent
with exchange rate fluctuations. Through the third quarter of 1999,
approximately 43% of the Company's consolidated revenue was derived from
customers outside the United States. Approximately 32% of the Company's
revenue was derived from customers in Europe and approximately 11% was
derived from customers in the Asia/Pacific region for the same period. The
Company's exchange rate risk is greatest for dollar/euro and dollar/yen
fluctuations. The Company's direct international sales generally are
denominated in local currencies. Fluctuations in the value of currencies in
which the Company conducts business relative to the United States dollar
result in currency transaction gains and losses. When deemed appropriate, the
Company engages in exchange rate-hedging transactions in an attempt to
mitigate the impact of adverse exchange rate fluctuations. At September 30,
1999, the Company had no material hedging transactions in effect.
The Company does not use derivative financial instruments in its
operations or investment portfolio. However, the Company regularly invests
excess cash in overnight repurchase agreements that are subject to changes in
short-term interest rates. The Company believes that market risk arising from
holding these financial instruments is minimal.
The Company does not have exposure to market risks associated with
changes in interest rates as it has no variable interest rate debt
outstanding. The Company does not believe that it has any other material
exposure to market risks associated with interest rates.
14
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is not a party to any material litigation and is
not aware of any threatened material litigation.
ITEM 2. Changes in Securities and Use of Proceeds - None
ITEM 3. Defaults upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders - None
ITEM 5. Other Information - None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See Exhibit Index on Page 17
(b) Reports on Form 8-K - No reports on Form 8-K were filed
during the three months ended September 30, 1999.
15
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PHARMACOPEIA, INC.
By: /S/ BRUCE C. MYERS
------------------------------------
Bruce C. Myers
Senior Vice President, Finance and
Chief Financial Officer
(Duly Authorized Officer and Chief
Accounting Officer)
Date: November 12, 1999
16
<PAGE>
PHARMACOPEIA, INC.
INDEX TO EXHIBITS
No. EXHIBIT
27.1 Financial Data Schedule, September 30, 1999
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 15,328
<SECURITIES> 48,620
<RECEIVABLES> 21,197
<ALLOWANCES> (582)
<INVENTORY> 0
<CURRENT-ASSETS> 89,681
<PP&E> 29,870
<DEPRECIATION> (17,811)
<TOTAL-ASSETS> 116,569
<CURRENT-LIABILITIES> 42,003
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 72,843
<TOTAL-LIABILITY-AND-EQUITY> 116,569
<SALES> 6,605
<TOTAL-REVENUES> 70,810
<CGS> 5,926
<TOTAL-COSTS> 26,353
<OTHER-EXPENSES> 49,106
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,931
<INCOME-PRETAX> (1,718)
<INCOME-TAX> (104)
<INCOME-CONTINUING> (1,822)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,822)
<EPS-BASIC> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
