<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 June 30, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-27118
PHARMACOPEIA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0557266
--------------------------------------------------------------------------------
(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
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
--------------------------------------------------------------------------------
(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 August 4, 2000
------------------------------ --------------------------------
Common Stock, $.0001 par value 23,117,335 shares
<PAGE>
PHARMACOPEIA, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Unaudited Financial Statements:
Balance Sheets - June 30, 2000 and December 31, 1999 3
Statements of Operations - Three and Six Months Ended
June 30, 2000 and 1999 4
Statements of Cash Flows - Six Months Ended June 30, 2000 and 1999 5
Notes to Consolidated Unaudited 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 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
Exhibits 18
</TABLE>
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>
June 30, December 31,
2000 1999
--------------------- ---------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 65,568 $ 17,157
Marketable securities 112,803 51,875
Trade receivables, net of allowance for doubtful accounts
of $642 and $624, respectively 19,096 26,836
Prepaid expenses and other current assets 3,767 5,251
--------- ---------
Total current assets 201,234 101,119
Property and equipment - net 10,883 11,362
Capitalized software - net 6,169 3,353
Goodwill and other intangibles - net 23,530 9,071
Other assets 1,108 1,354
--------- ---------
Total assets $ 242,924 $ 126,259
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,905 $ 3,479
Accrued liabilities 14,984 18,409
Deferred revenue, current portion 21,425 20,212
Notes payable, current portion 39 292
--------- ---------
Total current liabilities 39,353 42,392
Notes payable, long-term portion 203 -
Other long-term liabilities 59 69
Deferred revenue, long-term 4,846 5,052
Commitments and Contingencies
Stockholders' equity:
Capital stock 2 1
Additional paid-in capital 271,484 148,862
Accumulated deficit (71,778) (69,049)
Accumulated comprehensive loss (1,245) (1,068)
--------- ---------
Total stockholders' equity 198,463 78,746
--------- ---------
Total liabilities and stockholders' equity $ 242,924 $ 126,259
========= =========
</TABLE>
See accompanying notes to these unaudited financial statements.
3
<PAGE>
PHARMACOPEIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue:
Drug discovery services $12,137 $ 8,228 $22,767 $17,304
Software license, service and other 13,990 12,394 26,246 24,817
Hardware 1,764 2,645 2,728 4,439
-------- -------- ---------- ---------
Total revenue 27,891 23,267 51,741 46,560
Cost of revenue:
Drug discovery services 6,223 5,092 12,099 10,929
Software license, service and other 2,117 1,592 3,987 3,429
Hardware 1,511 2,496 2,429 3,973
-------- -------- ---------- ---------
Total cost of revenue 9,851 9,180 18,515 18,331
-------- -------- ---------- ---------
Gross Margin 18,040 14,087 33,226 28,229
Operating costs and expenses:
Research and development 6,099 7,013 11,790 13,710
Sales, general and administrative 10,783 9,378 20,036 18,328
Amortization of goodwill 745 123 1,072 123
Write-off of in-process research and development - - 6,400 -
-------- -------- ---------- ---------
Total operating costs and expenses 17,627 16,514 39,298 32,161
-------- -------- ---------- ---------
Operating income (loss) 413 (2,427) (6,072) (3,932)
Interest and other income, net 3,050 863 3,862 1,842
-------- -------- ---------- ---------
Income (loss) before provision for income taxes 3,463 (1,564) (2,210) (2,090)
Provision for income taxes 394 28 519 68
-------- -------- ---------- ---------
Net income (loss) $ 3,069 $(1,592) $(2,729) $(2,158)
======== ======== ========== =========
Net income (loss) per share - Basic $ 0.13 $ (0.08) $ (0.12) $ (0.11)
======== ======== ========== =========
Net income (loss) per share - Diluted $ 0.12 $ (0.08) $ (0.12) $ (0.11)
======== ======== ========== =========
Weighted average number of common stock
outstanding - Basic 22,997 19,656 22,051 19,465
Weighted average number of common stock
outstanding - Diluted 24,723 19,656 22,051 19,465
</TABLE>
See accompanying notes to these unaudited financial statements.
4
<PAGE>
PHARMACOPEIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,729) $ (2,158)
Adjustments to reconcile net loss to net cash
provided by (used in) operations
Depreciation 2,601 2,762
Amortization 2,683 1,058
Contribution of stock to 401 (k) members 464 442
Write-off of in-process research and development 6,400 -
Changes in assets and liabilities:
Accounts receivable 8,309 4,419
Prepaid and other current assets 1,768 (1,066)
Accounts payable (664) (2,189)
Accrued liabilities (4,931) (6,185)
Deferred revenue 386 (1,148)
Other 245 (1,628)
-------- -------
Net cash provided by (used in) operating activities 14,532 (5,693)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,576) (1,650)
Purchases of marketable securities (153,136) (29,852)
Proceeds from sales of marketable securities 92,088 40,506
Acquisition of Synopsys, net of cash acquired (23,169) -
Acquisition of distribution rights and joint venture interest - (10,037)
Increase in capitalized software development costs (1,014) (959)
-------- -------
Net cash used in investing activities (86,807) (1,992)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 120,959 1,535
Principal payments on notes payable (239) (700)
Principal payments under capital lease obligations (57) (353)
-------- -------
Net cash provided by financing activities 120,663 482
Exchange rate effect on cash and equivalents 23 (122)
-------- -------
Net increase (decrease) in cash and equivalents 48,411 (7,325)
Cash and equivalents, beginning of period 17,157 36,863
-------- -------
Cash and equivalents, end of period $ 65,568 $ 29,538
======== =======
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 17 $ 188
======== =======
Income taxes $ 212 $ 43
======== =======
</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 adjustments
(consisting of normal recurring accruals) considered 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, as amended, for the year ended December 31, 1999.
NOTE (2) - SEGMENT INFORMATION
The Company operates in two business segments: drug discovery services and
software (which includes software licenses, maintenance, hardware and other).
Summarized information concerning industry segment operations for the three and
six month periods ended June 30, 2000 and 1999, and for industry segment assets
as of June 30, 2000 and December 31, 1999, is presented below.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 2000 June 30, 2000
------------------------------------------- ----------------------------------------------
Drug Drug
Discovery Discovery
Software Services Total Software Services Total
----------- -------------- -------------- ------------ --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Drug discovery services $ - $ 12,137 $ 12,137 $ - $ 22,767 $ 22,767
Software licenses, service and other 13,990 - 13,990 26,246 - 26,246
Hardware 1,764 - 1,764 2,728 - 2,728
=========== ============== ============== ============ =============== ================
Total revenue $ 15,754 $ 12,137 $ 27,891 $28,974 $ 22,767 $ 51,741
=========== ============== ============== ============ =============== ================
Operating income (loss) $ (1,295) $ 1,708 $ 413 $ (8,458) $ 2,386 $ (6,072)
=========== ============== ============== ============ =============== ================
Total assets - June 30, 2000 $ 65,654 $177,270 $242,924
=========== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
------------------------------------------ -----------------------------------------------
Drug Drug
Discovery Discovery
Software Services Total Software Services Total
----------- -------------- ------------- ------------ --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Drug discovery services $ - 8,228 $ 8,228 $ - $ 17,304 $ 17,304
Software licenses, service and other 12,394 - 12,394 24,817 - 24,817
Hardware 2,645 - 2,645 4,439 - 4,439
=========== ============== ============= ============ =============== ================
Total revenue $ 15,039 $ 8,228 $ 23,267 $29,256 $ 17,304 $ 46,560
=========== ============== ============= ============ =============== ================
Operating income (loss) $ 93 $ (2,520) $ (2,427) $ 597 $ (4,529) $ (3,932)
=========== ============== ============= ============ =============== ================
Total assets - December 31, 1999 $ 59,985 $ 66,274 $126,259
=========== ============== =============
</TABLE>
6
<PAGE>
NOTE (3) - ACQUISITION OF SYNOPSYS
On February 29, 2000, the Company acquired Synopsys Scientific Systems, Ltd.
("Synopsys"), a U.K.-based company providing chemical database software,
chemical data content and system integration services to the pharmaceutical,
biotechnology and chemical industries. The Company paid $25.6 million for
Synopsys, consisting of $23.7 million in cash, $0.7 million in transaction
costs, and 19,142 shares of the Company's common stock valued at $1.2 million.
The common stock issued in this transaction was unregistered and was valued at
$62.62 per share (representing an 8% discount to its traded market value at the
time the transaction closed).
The acquisition has been accounted for by the purchase method of accounting and,
accordingly, the assets acquired and liabilities assumed have been recorded at
their estimated fair values. Based on an independent valuation, the Company
recorded a first quarter 2000 charge of $6.4 million related to the write-off of
the portion of the purchase price that was allocated to in-process research and
development. The remainder of the purchase price was allocated $0.3 million to
net tangible assets (including cash acquired of $0.5 million), $3.0 million to
developed software, $3.4 million to customer lists and other identified
intangible assets, and $12.5 million to goodwill. The developed software,
customer lists and other identified intangible assets are being amortized over
three years, and the goodwill is being amortized over five years.
The operating results of Synopsys have been included in the Company's results of
operations since the acquisition date. Assuming that the acquisition of Synopsys
had occurred on January 1, 1999, pro forma consolidated results of operations
would be as follows (in thousands except per share amounts):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
------------------
<S> <C> <C>
Total revenue $52,435 $47,343
Net income (loss) (3,656) (5,456)
Earnings (loss) per share:
Basic $ (0.17) $ (0.28)
Diluted $ (0.17) $ (0.28)
</TABLE>
NOTE (4) - RECENT DEVELOPMENT
On August 9, 2000, the Company announced that it and Oxford Molecular Group Plc
("Oxford") had signed a definitive agreement pursuant to which the Company will
acquire Oxford's software subsidiaries, subject to approval by the shareholders
of Oxford, for approximately $27 million, comprised of cash and the assumption
of certain liabilities. Oxford designs and markets bioinformatics and
cheminformatics products for the pharmaceutical, biotechnology and chemical
industries, and its software business generated revenues from continuing
products of approximately $15 million in 1999.
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 of Pharmacopeia, Inc. ("Pharmacopeia" or the "Company") should be
read in conjunction with the Unaudited Financial Statements and related notes
included elsewhere in this Form 10-Q, and also in conjunction with the
Consolidated Financial Statements and related notes included in the Company's
amended Form 10-K for the year ended December 31, 1999. This Management's
Discussion and Analysis of Financial Condition and Results of Operations and
other parts of this Form 10-Q contain forward-looking statements that involve
risks and uncertainties that may cause actual results, levels of activity,
performance, or achievements to be materially different from any future
results, levels of activity, performance, or achievements expressed or
implied by such forward-looking statements. In some cases, forward-looking
statements can be identified by terminology such as "may," "will," "should,"
"could," "would," "expect," "plan," "anticipate," "believe," "estimate,"
"continue," or the negative of such terms or expressions. All forward-looking
statements included in this document are based on information available to
the Company on the date hereof, and the Company assumes no obligation to
update any such forward-looking statements.
The Company's registration statement on Form S-3 (Reg. No. 333-34478) and most
recent Form 10-K describe certain risk factors and uncertainties that may cause
actual results, levels of activity, performance, or achievements to be
materially different from any future results, levels of activity, performance,
or achievements expressed or implied by such forward-looking statements. These
risk factors and uncertainties should be considered in connection with any
investment in the Company's common stock. These uncertainties include the
acceptance by potential customers of combinatorial chemistry and analysis of
compounds provided by the Company as an effective tool in drug discovery, the
ability of the Company to establish additional collaborative or licensing
arrangements on terms favorable to the Company, the expertise of third parties
in developing and commercializing products based on library compounds produced
and lead compounds discovered by the Company, and the ability of the Software
Segment to achieve increased market acceptance and penetration.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
Total revenue grew 20% to $27.9 million in the second quarter of 2000 compared
to $23.3 million in the second quarter of 1999.
Drug discovery services revenue increased 48% to $12.1 million in the quarter
ended June 30, 2000 compared to $8.2 million in the second quarter of 1999. This
increase was primarily attributable to a $2.5 million non-recurring termination
fee received in June 2000 as a result of the termination of a lead discovery
research agreement. In addition, the Company recorded $1.3 million of milestone
payments in the quarter ended June 30, 2000. Drug discovery services revenue for
the quarter ended June 30, 1999 included no milestone or termination fee
payments. Absent the benefit of milestone and termination fee payments, drug
discovery services revenue in the 2000 second quarter increased by $0.1 million,
or 1%, compared to the second quarter of 1999.
8
<PAGE>
Total revenue (including software license, service, and other revenue and
hardware revenue) generated from the Software Segment increased 5% to $15.8
million in the second quarter of 2000 compared to $15.0 million in the
comparable quarter of 1999. This increase in Software Segment revenue can be
attributed to a $1.6 million increase in software license, service and other
revenue in the 2000 second quarter compared to the 1999 second quarter,
partially offset by a quarter to quarter decrease in hardware revenue of $0.8
million. Hardware revenue decreased 33% to $1.8 million in the second quarter of
2000 compared to $2.6 million in the prior year quarter, primarily because of a
reorganization in the distribution channel of the Company's sole supplier of
hardware for resale at the beginning of 2000.
Software license, service and other revenue increased 13% to $14.0 million in
the second quarter of 2000 compared to $12.4 million in the second quarter of
1999. This increase is due in part to increased revenue of $0.7 million
associated with new consortia product offerings, coupled with revenue totaling
$0.8 million generated from the February 29, 2000 acquisition of Synopsys
Scientific Systems, Ltd. (see also Notes to Financial Statements included
elsewhere herein). Absent the benefit resulting from the acquisition of
Synopsys, software license, service and other revenue in the 2000 second quarter
increased by $0.8 million, or 6%, compared to the second quarter of 1999.
Gross margin generated from the Drug Discovery Services Segment increased 89% to
$5.9 million (49% of related sales) in the second quarter of 2000 compared to
$3.1 million (38% of related sales) in the comparable quarter of 1999. This
improvement resulted from the second quarter termination fee and milestone
payments described above, offset partially by increased overhead costs.
Collaborative research projects now absorb a larger portion of overhead as a
result of the Company's decision to decrease its internally funded drug
discovery efforts.
Gross margin generated from the Software Segment increased 11% to $12.1 million
(77% of related sales) in the 2000 second quarter compared to $11.0 million (73%
of related sales) in the 1999 second quarter. The increase in the amount of
gross margin resulted from the increase in Software Segment revenue. The
increase in gross margin as a percentage of related sales resulted from a change
in the mix of sales which led to a higher proportion of higher margin software
license, service and other sales relative to lower margin hardware sales.
Research and development expenses declined 13% to $6.1 million in the second
quarter of 2000 compared to $7.0 million in the second quarter of 1999. Research
and development costs include costs associated with internal drug discovery
programs, software development, ultra high-throughput screening and informatics.
The decline in research and development expenses is attributable to a $1.6
million reduction at the Drug Discovery Services Segment primarily resulting
from the reduction of internally funded drug development activities, partially
offset by a $0.7 million increase in research and development activity within
the Software Segment, including the effects of the acquisition of Synopsys.
Within its Drug Discovery Services Segment, the Company began to decrease its
internally funded drug discovery efforts in 1999, and the Company has been
focusing primarily on externally funded Drug Discovery Services in 2000.
However, future research and development expenses may increase in total, even as
internally funded drug discovery activities decrease, because the Company may
further expand its software, ultra high-throughput screening,
9
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compound design and development, informatics and other development endeavors.
Sales, general and administrative expenses increased by 15% to $10.8 million
(39% of total revenue) in the second quarter of 2000 compared to $9.4 million
(40% of total revenue) in the second quarter of 1999. The quarter to quarter
increase of $1.4 million is attributable in part to the presence in the second
quarter of 2000 of the Synopsys sales, general and administrative resources and
in part to the Company's annual increase in employee compensation levels. Also
included in the second quarter of 2000 sales, general and administrative
expenses are $0.3 million of amortization expense related to the Synopsys
acquisition.
Amortization of goodwill increased to $0.7 million in the second quarter of 2000
as compared to $0.1 million in the second quarter of 1999. The quarter to
quarter increase of $0.6 million is the result of amortization expense
associated with the acquisition of Synopsys.
The Company recorded interest and other income of $3.1 million and $0.9 million
for the second quarters of 2000 and 1999, respectively. This increase of $2.2
million resulted from increased balances of cash, cash equivalents and
marketable securities and corresponding increased interest income primarily as a
result of a $110 million private placement of common stock by the Company in
March 2000.
The Company recorded an income tax provision of $394,000 for the second quarter
of 2000 and $28,000 for the second quarter of 1999. The 2000 and 1999 tax
provisions are primarily due to foreign and state taxable income generated from
the Software Segment. These provisions differ from the Federal tax rate
primarily because of the effect of permanent book-tax differences, net operating
loss carryforwards, and net operating loss carrybacks.
As a result of the increased revenue, the increased gross margins, the decreased
research and development costs, the increased acquisition related charges, and
the other matters described above, the Company generated net income of $3.1
million ($0.12 per diluted share) in the current quarter compared to a net loss
of $1.6 million ($0.08 per diluted share) in the comparable prior year quarter.
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Total revenue grew 11% to $51.7 million for the six months ended June 30, 2000
compared to $46.6 million for the six months ended June 30, 1999.
Drug discovery services revenue increased 32% to $22.8 million for the six
months ended June 30, 2000 compared to $17.3 million for the six months ended
June 30, 1999. This increase was attributable to a first quarter 2000 technology
out-license fee of $3.0 million, a second quarter 2000 contract termination fee
of $2.5 million, and $1.3 million of milestone payments in the six months ended
June 30, 2000. Drug discovery services revenue for the six months ended June 30,
1999 did not includeany up-front out-license fees, termination fees or milestone
payments.
Absent the out-license, termination and milestone payments described above, drug
discovery services revenue decreased $1.3 million, or 8%, primarily because of a
decrease in collaborative, lead optimization work and library outlicensing
revenue. This decrease resulted from the expiration of certain lead optimization
and library outlicensing contracts in the second quarter of
10
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1999. Since that time, the Company's strategy has been to replace this work
primarily with high-throughput screening based Lead Discovery Service (LDS)
work, but this transition is not yet complete.
Total revenue (including software license, service, and other revenue and
hardware revenue) generated from the Software Segment decreased 1% to $29.0
million for the six months ended June 30, 2000 compared to $29.3 million for the
six months ended June 30, 1999. This slight decrease in Software Segment revenue
can be attributed to a $1.7 million decrease in year over year hardware revenue
offset by a $1.4 million increase in software license, service and other revenue
for the six months ended June 30, 2000 as compared to the comparable period in
1999. Hardware revenue decreased 39% to $2.7 million for the six months ended
June 30, 2000 compared to $4.4 million for the six months ended June 30, 1999,
primarily because of a reorganization in the distribution channel of the
Company's sole supplier of hardware for resale at the beginning of 2000.
Software license, service and other revenue increased 6% to $26.2 million for
the six months ended June 30, 2000 compared to $24.8 million for the six months
ended June 30, 1999. This increase is primarily the result of revenue totaling
$1.3 million generated from the February 29, 2000 Synopsys acquisition that is
more fully described in the Notes to Financial Statements included elsewhere
herein.
Gross margin generated from the Drug Discovery Services Segment increased 67% to
$10.7 million (47% of related sales) for the six months ended June 30, 2000
compared to $6.4 million (37% of related sales) for the six months ended June
30, 1999. This improvement resulted from the up-front out-license, termination
and milestone payments described above, offset partially by increased overhead
costs. Collaborative research projects now absorb a larger portion of overhead
as a result of the Company's decision to decrease its internally funded drug
discovery efforts.
Gross margin generated from the Software Segment increased 3% to $22.6 million
(78% of related sales) for the six months ended June 30, 2000 compared to $21.9
million (75% of related sales) for the six months ended June 30, 1999. The
increase in the amount of gross margin and the increase in gross margin as a
percentage of related sales resulted from a change in the mix of sales which led
to a higher proportion of higher margin software license, service and other
sales relative to lower margin hardware sales.
Research and development expenses declined 14% to $11.8 million for the six
months ended June 30, 2000 compared to $13.7 million for the six months ended
June 30, 1999. Research and development costs include costs associated with
internal drug discovery programs, software development, ultra high-throughput
screening and informatics. The decline in research and development expenses is
attributable to a $2.6 million reduction at the Drug Discovery Services Segment
primarily resulting from the reduction of internally funded drug development
activities, partially offset by a $0.7 million increase in research and
development activity within the Software Segment, including the effects of the
acquisition of Synopsys.
Sales, general and administrative expenses increased by 9% to $20.0 million (39%
of total revenue) for the six months ended June 30, 2000 compared to $18.3
million (39% of total revenue) for the six months ended June 30, 1999. The year
to year increase of $1.7 million is attributable in part to the presence of the
Synopsys sales, general and administrative resources since the Company acquired
Synopsys on February 29, 2000 and in part to the Company's annual
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increase in employee compensation levels. Also included in sales, general and
administrative expenses are $0.4 million of amortization expense related to the
Synopsys acquisition.
Amortization of goodwill increased to $1.1 million for the six months ended June
30, 2000 as compared to $0.1 million for the six months ended June 30, 1999. The
year to year increase of $1.0 million is primarily the result of four months of
amortization expense totaling $0.8 million in 2000 associated with the
acquisition of Synopsys. In addition, goodwill amortization expense for the six
months ended June 30, 2000 includes six months of amortization expense
associated with the Company's March 1999 acquisition of Japanese distribution
rights and remaining joint venture interest as compared to three months of
amortization expense for the comparable period in 1999.
As a result of the February 2000 acquisition of Synopsys, the Company recorded a
first quarter 2000 charge of $6.4 million related to the write-off of the
portion of the Synopsys purchase price that was allocated to in-process research
and development. There were no write-offs of in-process research and development
for the six months ended June 30, 1999.
The Company recorded interest and other income of $3.9 million and $1.8 million
for the six months ended June 30, 2000 and 1999, respectively. This increase of
$2.1 million resulted primarily from increased balances of cash, cash
equivalents and marketable securities and corresponding increased interest
income primarily as a result of a $110 million private placement of common stock
by the Company in March 2000.
The Company recorded an income tax provision of $519,000 for the six months
ended June 30, 2000 compared to $68,000 for the six months ended June 30, 1999.
The 2000 and 1999 tax provisions are primarily due to foreign and state taxable
income generated from the Software Segment. These provisions differ from the
Federal tax rate primarily because of the effect of permanent book-tax
differences, net operating loss carryforwards, and net operating loss
carrybacks.
As a result of the increased revenue, the increased gross margins, the
decreased research and development costs, the increased acquisition related
charges, and the other matters described above, the Company generated a net
loss of $2.7 million ($0.12 per diluted share) for the six months ended June
30, 2000 compared to a net loss of $2.2 million ($0.11 per diluted share) for
the six months ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its activities to date primarily through the sale of
equity securities, drug discovery services, software licenses, software
maintenance services and hardware. As of June 30, 2000, the Company had working
capital of $161.9 million compared to $58.7 million as of December 31, 1999. The
majority of this $103.2 million increase in working capital was generated from a
$110 million private placement of common stock by the Company in March 2000 and
from $10.0 million received by the Company upon the exercise of stock options,
offset by the $23.2 million of net cash paid for the acquisition of Synopsys
which is described more fully in the Notes to Financial Statements included
elsewhere herein.
As of June 30, 2000, the Company's cash, cash equivalents and marketable
securities totaled $178.4 million, which are invested in U.S. Treasury and
government agency obligations,
12
<PAGE>
investment grade commercial paper and other short-term money market instruments.
This represents an increase of $109.4 million from the 1999 year end level of
$69.0 million. This increase was primarily the result of the factors
contributing to the $103.2 million increase in working capital described above,
plus an $8.3 million reduction in accounts receivable, offset by a $5.6 million
decrease in accounts payable and accrued liabilities.
As of June 30, 2000, the Company had outstanding commitments for equipment
purchases totaling $0.6 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 internally funded 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 drug
discovery 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 factors described earlier in this paragraph will impact
the Company's future capital requirements and the adequacy of its available
funds.
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 second quarter of 2000, approximately
32% of the Company's consolidated revenue was derived from customers outside the
United States. Approximately 23% of the Company's revenue was derived from
customers in Europe and approximately 9% 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 June
30, 2000, 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. A hypothetical 100 basis point adverse move in interest rates
along the entire interest rate yield curve would not materially affect the fair
value of the Company's interest-sensitive financial instruments as of June 30,
2000.
The Company does not have exposure to market risks associated with changes in
interest rates because it has no variable interest rate debt outstanding. The
Company does not believe 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
The Annual Meeting of Stockholders was held on May 3, 2000.
The following actions were approved at the meeting:
(a) The following persons were elected to serve as Directors
of the Company:
<TABLE>
<CAPTION>
Abstentions and
Broker Non-Votes
For Against
<S> <C> <C>
Frank Baldino, Jr. 17,016,760 358,295 -
Edith W. Martin 17,016,660 358,395 -
James J. Marino 17,016,760 358,295 -
</TABLE>
The following persons are incumbent directors who were not
subject to re-election at the Annual Meeting:
Joseph A. Mollica, Gary E. Costley, Charles A. Sanders, Paul
A. Bartlett and C. Peter W. Booth
(b) The 1994 Incentive Stock Plan was amended to increase the
number of shares of common stock authorized for issuance
thereunder from 3,7000,000 shares to 4,700,000 shares.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
7,397,289 6,249,534 443,639 3,284,593
</TABLE>
(c) The 1995 Director Stock Option Plan was amended to
increase the number of shares of common stock authorized for
issuance thereunder from 150,000 shares to 300,000 shares.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
12,392,507 1,085,780 612,175 3,284,593
</TABLE>
15
<PAGE>
(d) The appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending December 31,
2000 was ratified.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C> <C>
17,367,014 3,515 4,526 -
</TABLE>
ITEM 5. Other Information - None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See Exhibit Index on Page 18
(b) Reports on Form 8-K - No reports on Form 8-K were filed during
the three months ended June 30, 2000.
16
<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
Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer and Chief
Accounting Officer)
Date: August 14, 2000
17
<PAGE>
PHARMACOPEIA, INC.
INDEX TO EXHIBITS
No. EXHIBIT
10.54 Amendment No. 8 to Pharmacopeia, Inc. 1994 Incentive Stock Plan
27.1 Financial Data Schedule, June 30, 2000
18
