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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
[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 000-31141
DISCOVERY PARTNERS INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
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State of Incorporation: Delaware I.R.S. Employer Identification No.: 33-0655706
Address of Principal Executive Offices: Telephone Number: (858) 455-8600
9640 Towne Centre Drive
San Diego, California 92121
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N/A
(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 for 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 [ ] No [X]
As of August 31, 2000 a total of 23,808,045 shares of the Registrant's Common
Stock, $0.001 par value, were issued and outstanding.
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DISCOVERY PARTNERS INTERNATIONAL, INC.
FORM 10-Q
TABLE OF CONTENTS
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at June 30, 2000 3
and December 31, 1999
Condensed Consolidated Statements of Operations for the 4
Three Months and Six Months Ended June 30, 2000 and 1999
Condensed Consolidated Statements of Cash Flows for the 5
Six Months Ended June 30, 2000 and 1999
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
</TABLE>
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DISCOVERY PARTNERS INTERNATIONAL, INC.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DISCOVERY PARTNERS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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JUNE 30, 2000 DECEMBER 31, 1999
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(Unaudited)
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ASSETS
Current assets:
Cash and cash equivalents $ 3,633,349 $ 2,884,639
Accounts receivable 9,188,897 2,785,618
Inventories 9,692,293 1,517,297
Prepaid and other current assets 488,997 201,284
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Total current assets 23,003,536 7,388,838
Property and equipment, net 9,052,507 4,655,227
Restricted cash and cash equivalents and other assets 3,401,141 2,264,200
Patent and license rights, net 3,467,341 1,137,625
Goodwill, net 46,867,326 6,205,830
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Total assets $ 85,791,851 $ 21,651,720
============ ============
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable & accrued expenses $ 5,978,420 $ 2,348,226
Deferred business acquisition payment - 1,721,775
Current portion of obligations under capital leases, equipment
notes payable, line of credit and promissory notes 2,952,182 1,184,921
Deferred revenue 3,691,667 1,935,249
Notes payable to stockholders - 3,861,920
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Total current liabilities 12,622,269 11,052,091
Obligations under capital leases, equipment notes payable,
and promissory notes less current portion 846,465 1,910,177
Deferred rent 58,876 51,906
Minority interest in Structural Proteomics 700,729 -
Redeemable convertible preferred stock, $.001 par value,
9,033,333 shares authorized, 6,562,278 and 7,954,781 issued
and outstanding at December 31, 1999 and June 30, 2000,
respectively; liquidation preference and redemption value -
$39,188,429 at June 30, 2000 39,028,543 27,906,717
Stockholders' equity (deficit):
Common stock, $.001 par value, 12,000,000 shares authorized,
1,611,763 and 9,432,542 issued and outstanding at
December 31, 1999 and June 30, 2000, respectively 9,433 1,612
Additional paid-in capital 66,285,674 1,399,376
Deferred compensation (2,757,446) (642,282)
Note receivable from stockholder (240,000) (240,000)
Accumulated other comprehensive loss (84,770) (55,448)
Accumulated deficit (30,677,922) (19,732,429)
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Total stockholders' equity (equity) 32,534,969 (19,269,171)
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Total liabilities, redeemable preferred stock and
stockholders' equity (deficit) $ 85,791,851 $ 21,651,720
============ ============
</TABLE>
See accompanying notes.
3
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DISCOVERY PARTNERS INTERNATIONAL, INC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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3 MONTHS ENDED JUNE 30, 6 MONTHS ENDED JUNE 30,
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2000 1999 2000 1999
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Revenues $ 9,527,883 $ 3,363,181 $ 14,700,926 $ 6,259,346
Cost of revenues (exclusive of $4,149, $1,207, $7,812 and
$1,207 for the three months ended June 30, 2000 and 1999,
and for the six months ended June 30, 2000 and 1999,
respectively, of stock-based compensation) 4,723,746 2,165,204 7,776,739 3,927,709
------------ ------------ ------------ ------------
Gross margin 4,804,137 1,197,977 6,924,187 2,331,637
Cost and expenses:
Research and development (exclusive of $138,940, $6,987,
$226,786, and $14,451 for the three months ended June 30,
2000 and 1999, and for the six months ended June 30, 2000
and 1999, respectively, of stock-based compensation) 1,876,641 743,687 2,495,622 1,712,990
Selling, general & administrative (exclusive of $203,062, $58,693,
$374,920, and $121,388 for the three months ended June 30, 2000
and 1999, and for the six months ended June 30, 2000 and 1999,
respectively, of stock-based compensation) 2,171,158 961,962 3,690,443 2,054,946
Amortization of stock-based compensation 346,151 66,887 609,518 137,045
Amortization of goodwill 845,322 - 1,000,468 -
Write-off of in-process research and development 9,000,000 - 9,000,000 -
------------ ------------ ------------ ------------
Total operating expenses 14,239,272 1,772,536 16,796,051 3,904,981
------------ ------------ ------------ ------------
Loss from operations (9,435,135) (574,559) (9,871,864) (1,573,344)
Interest income (expense) 22,495 66,192 (1,299,930) 142,411
Foreign currency gains (losses) 64,925 (43,588) 193,696 (93,489)
Minority interest in Structural Proteomics 32,604 - 32,604 -
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Net loss $ (9,315,111) $ (551,955) $(10,945,494) $ (1,524,422)
============ ============ ============ ============
Historical net loss per share, basic and diluted $ (1.03) $ (0.50) $ (2.12) $ (1.44)
============ ============ ============ ============
Shares used in calculating historical net loss
per share, basic and diluted 9,020,848 1,103,322 5,172,849 1,058,870
============ ============ ============ ============
Pro forma net loss per share, basic and diluted $ (0.55) $ (0.07) $ (0.88) $ (0.20)
============ ============ ============ ============
Shares used in calculating pro forma net loss
per share, basic and diluted 17,037,260 7,706,896 12,488,470 7,662,444
============ ============ ============ ============
</TABLE>
See accompanying notes.
4
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DISCOVERY PARTNERS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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SIX MONTHS ENDED JUNE 30,
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2000 1999
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OPERATING ACTIVITIES
Net loss $(10,945,494) $ (1,524,422)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 1,124,537 358,130
Amortization of purchased intangibles (lease, workforce) 122,000 -
Amortization of goodwill 1,000,468 -
Amortization of deferred compensation 609,518 137,045
Noncash interest expense for warrants issued 1,243,847 -
Write-off of In-Process R&D 9,000,000 -
Change in operating assets and liabilities: -
Accounts receivable (4,598,772) 117,315
Inventories (1,320,846) 223,293
Other current assets (176,880) (318,951)
Accounts payable and accrued expenses 1,653,440 (1,123,707)
Deferred revenue 828,640
Deferred rent 6,970
Restricted cash 29,600 (1,000,000)
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Net cash used in operating activities (1,422,972) (3,131,297)
INVESTING ACTIVITIES
Purchases of property and equipment (2,072,993) (638,386)
Deposits and other assets (1,052,730) 192,590
Additional cash consideration for acquisition of
Discovery Technologies (1,721,775) -
Purchase of Axys Advanced Technologies 50,031
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Net cash used in investing activities (4,797,467) (445,796)
FINANCING ACTIVITIES
Proceeds from equipment lease line 747,150 -
Principal payments on capital leases, equipment notes payable,
and line of credit (555,121) (136,300)
Issuance of preferred stock, net of issuance costs 5,004,801 -
Issuance of common stock 93,174 3,005
Proceeds from convertible notes payable 2,000,000 -
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Net cash provided by financing activities 7,290,004 (133,295)
Effect of exchange rate changes (320,855) -
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Net increase (decrease) in cash and cash equivalents 748,710 (3,710,388)
Cash and cash equivalents at beginning of period 2,884,639 10,714,889
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Cash and cash equivalents at end of period $ 3,633,349 $ 7,004,501
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 180,418 $ 30,190
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Conversion of convertible notes payable to
preferred stock $ 6,000,000 $ -
Issuance of common stock for promissory note $ - $ 68,000
Issuance of warrant to purchase preferred stock $ 1,105,767 $ -
</TABLE>
See accompanying notes.
5
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DISCOVERY PARTNERS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2000
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The condensed consolidated balance sheet as of June 30,
2000, condensed consolidated statements of operations for the three and six
months ended June 30, 2000 and 1999, and the condensed consolidated statements
of cash flows for the six months ended June 30, 2000 and 1999 are unaudited, but
include all adjustments (consisting of normal recurring adjustments) which the
Company considers necessary for a fair presentation of the financial position,
results of operations and cash flows for the periods presented. The results of
operations for the three and six months ended June 30, 2000 shown herein are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000. For more complete financial information, these financial
statements, and notes thereto, should be read in conjunction with the audited
consolidated financial statements for the year ended December 31, 1999 included
in the Company's Form S-1 registration statement as declared effective on July
27, 2000 by the Securities and Exchange Commission.
The consolidated financial statements include all the accounts of the
Company and its wholly owned or majority owned subsidiaries, IRORI Europe, Ltd.,
Discovery Technologies, Ltd., ChemRx Advanced Technologies, Inc., and Structural
Proteomics, Inc. All intercompany accounts and transactions have been
eliminated.
2. NET LOSS PER SHARE
Basic and diluted net loss per common share are presented in conformity
with SFAS No. 128, Earnings per Share, and SAB 98, for all periods presented.
Under the provisions of SAB 98, common stock and redeemable convertible
preferred stock that has been issued or granted for nominal consideration prior
to the anticipated effective date of the initial public offering must be
included in the calculation of basic and diluted net loss per common share as if
these shares had been outstanding for all periods presented. To date, the
Company has not issued or granted shares for nominal consideration.
In accordance with SFAS No. 128, basic and diluted net loss per share
has been computed using the weighted-average number of shares of common stock
outstanding during the period; less shares subject to repurchase. Pro forma
basic and diluted net loss per common share, as presented in the statements of
operations, has been computed for the three and six month periods ended June 30,
2000 and 1999 as described above, and also gives effect to the conversion of
preferred stock which automatically converted to common stock immediately prior
to the completion of the Company's initial public offering on July 27, 2000
(using the "as if converted" method) from the original date of issuance.
The Company has excluded all convertible preferred stock, outstanding
stock options and warrants, and shares subject to repurchase from the
calculation of diluted net loss per common share because all such securities are
anti-dilutive for all applicable periods presented.
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3. ACQUISITION OF AXYS ADVANCED TECHNOLOGIES, INC.
On April 28, 2000, the Company acquired Axys Advanced Technologies, Inc.
(AAT), a wholly owned subsidiary of Axys Pharmaceuticals, Inc. The acquisition
was accounted for as a purchase in accordance with the provisions of APB No. 16.
The Company and Axys will make certain income tax elections so that the total
cost of the acquisition will be allocated to the income tax basis of the assets
acquired. The Company has obtained a report from Houlihan Valuation Advisors, an
independent valuation firm and performed other procedures necessary to complete
the purchase price allocation.
A summary of the AAT acquisition costs and allocation to the assets
acquired and liabilities assumed is as follows:
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Total acquisition costs:
Cash paid at acquisition $ 50,000
Issuance of promissory note 550,334
Issuance of common stock, warrant and stock options 59,769,495
Acquisition-related expenses 345,099
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$ 60,714,928
Allocated to assets and liabilities as follows:
Tangible assets acquired $ 12,252,068
Assumed liabilities (2,866,773)
In-process research and development 9,000,000
Assembled workforce 1,344,067
Below market value lease 1,221,105
Goodwill 39,764,461
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$ 60,714,928
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The goodwill is being amortized on a straight-line basis over a period
of ten years from the date of acquisition. The assembled workforce and below
market lease intangible assets will be amortized on a straight-line basis over a
period of three and four years, respectively, from the date of acquisition.
The value of the in-process research and development was determined
based on a discounted cash flow analysis of projected future earnings for each
project. The revenue stream from each research and development project was
estimated based upon its stage of completion as of the acquisition date. The
discount rates used for the analysis were adjusted based on the stage of
completion to give effect to uncertainties in meeting the projected cash flows.
The discount rates used ranged from 20% to 40%.
Assuming that the acquisition of AAT had occurred on the first day of
the Company's fiscal year ended December 31, 1999, pro forma condensed
consolidated financial information would be as follows:
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Six months ended June 30,
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2000 1999
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Revenues ....................................... $ 19,772,000 $ 13,246,000
Net loss ....................................... (11,791,000) (1,924,000)
Net loss per share, basic and diluted .......... $ (1.16) $ (.23)
</TABLE>
This pro forma information is not necessarily indicative of the actual
results that would have been achieved had AAT been acquired the first day of the
Company's fiscal year ended December 31, 1999, nor is it necessarily indicative
of future results.
4. ACQUISITION OF STRUCTURAL PROTEOMICS, INC.
On May 5, 2000, the Company entered into agreements with Structural
Proteomics, Inc. (SPI) and its shareholders to acquire 75% of the outstanding
shares of SPI in exchange for $1,000,000 in cash and 150,000 shares of DPI
common stock. The acquisition was accounted for as a purchase in accordance with
the provisions of APB No. 16.
7
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5. DEFERRED STOCK COMPENSATION
In conjunction with the Company's initial public offering completed on
July 27, 2000, the Company reviewed its exercise prices and arrived at the
estimated fair value for each option grant in 1999 and the first six months of
2000. With respect to the grant of stock options and sale of restricted stock
to employees during the year ended December 31, 1999 and the six months ended
June 30, 2000, the Company has recorded deferred stock compensation totaling
approximately $3.7 million, representing the difference at the date of grant
between the exercise or purchase price and the estimated fair value of the
Company's common stock as estimated by the Company's management for financial
reporting purposes in accordance with APB No. 25. Deferred compensation is
included as a reduction of stockholders' equity and is being amortized to
expense on an accelerated basis in accordance with Financial Accounting
Standards Board Interpretation No. 28 over the vesting period of the options
and restricted stock. During the six months ended June 30, 2000, the Company
recorded amortization of stock-based compensation expense of approximately $0.6
million.
8
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DISCOVERY PARTNERS INTERNATIONAL, INC.
PART I
FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIS FORM 10-Q CONTAINS CERTAIN STATEMENTS THAT ARE NOT STRICTLY HISTORICAL AND
ARE "FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 AND INVOLVE A HIGH DEGREE OF RISK AND UNCERTAINTY.
THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWORD-LOOKING STATEMENTS DUE TO RISKS AND UNCERTAINTIES THAT EXIST IN THE
COMPANY'S OPERATIONS, DEVELOPMENT EFFORTS AND BUSINESS ENVIRONMENT, INCLUDING
INTEGRATION OF ACQUIRED BUSINESSES, THE TREND TOWARD CONSOLIDATION OF THE
PHARMACEUTICAL INDUSTRY, QUARTERLY SALES VARIABILITY, TECHNOLOGICAL ADVANCES BY
COMPETITORS, AND OTHER RISKS AND UNCERTAINTIES DESCRIBED IN THIS DOCUMENT.
OVERVIEW
We sell a broad range of products and services to pharmaceutical and
biotechnology companies to make the drug discovery process for our customers
faster, less expensive and more effective at generating drug candidates. We
focus on the portion of the drug discovery process that begins after
identification of a drug target through when a drug candidate is ready for
clinical trials. We develop, produce and sell collections of chemical compounds
that pharmaceutical companies test for their potential use as new drugs or for
use as the chemical starting point for new drugs. We also develop, manufacture
and sell proprietary instruments and the associated line of consumable supplies
that are used by the pharmaceutical industry in their own in-house drug
discovery chemistry operations. Additionally, we provide testing services to the
pharmaceutical industry in which chemical compounds are tested for their
biological activity as potential drugs. We also provide computational software
tools that guide the entire process of chemical compound design, development and
testing. We recently acquired three businesses, Discovery Technologies (DTL),
Axys Advanced Technologies (AAT) and Structural Proteomics (SPI).
9
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RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Revenue. Total revenue increased 183% from the three months ended June
30, 1999 to the three months ended June 30, 2000, and increased 135% from the
six months ended June 30, 1999 to the six months ended June 30, 2000. The
increases in revenue result from internal growth as well as contributions by our
recently acquired businesses: Discovery Technologies (completed in December,
1999), Axys Advanced Technologies (completed in April, 2000), and Structural
Proteomics (completed in May, 2000).
Gross Margin. Gross margins increased from 35.6% for the three months
ended June 30, 1999 to 50.4% for the three months ended June 30, 2000, and
increased from 37.3% for the six months ended June 30, 1999 to 47.1% for the six
months ended June 30, 2000. The gross margin improvement results from higher
margins from our screening revenue and compound library revenue related to our
recently acquired businesses, as well as improved margins on our historical
product lines.
Research and development expenses. Research and development expenses
consist primarily of salaries and benefits, supplies and expensed development
materials, and facilities costs and equipment depreciation. Research and
development expenses increased 144% or $1.1 million from the three months ended
June 30, 1999 to the three months ended June 30, 2000 and increased 42% or
$723,000 from the six months ended June 30, 1999 to the six months ended June
30, 2000. Research and development expenses increased primarily as a result of
the three acquisitions we completed within the last six months. As a percentage
of revenues, research and development expenses decreased from 22.1% for the
three months ended June 30, 1999 to 19.7% for the three months ended June 30,
2000, and from 27.4% for the six months ended June 30, 1999 to 17.0% for the six
months ended June 30, 2000.
Selling, general and administrative expenses. Selling, general and
administrative expenses consist primarily of salaries and benefits for sales and
marketing and administrative personnel, advertising and promotional expenses,
professional services, and facilities costs. Selling, general and administrative
expenses increased 123% or $1.2 million from the three months ended June 30,
1999 to the three months ended June 30, 2000 and increased 79% or $1.6 million
from the six months ended June 30, 1999 to the six months ended June 30, 2000.
Selling, general and administrative expenses decreased as a percentage of
revenue, from 28.6% for the three months ended June 30, 1999 to 22.8% for the
three months ended June 30, 2000, and from 32.8% for the six months ended June
30, 1999 to 25.1% for the six months ended June 30, 2000.
Stock-based compensation. During the three months and six months ended
June 30, 2000, we granted stock options with exercise prices that were less than
the estimated fair value of the underlying shares of common stock on the date of
grant. As a result, we have recorded and will continue to record stock-based
compensation expense over the period that these options vest. The deferred
stock-based compensation expense for the three months ended June 30, 2000 was
approximately $346,000, compared to approximately $67,000 for the three months
ended June 30, 1999. The deferred stock-based compensation expense for the six
months ended June 30, 2000 was approximately $610,000, compared to approximately
$137,000 for the six months ended June 30, 1999.
Amortization of goodwill. We recognized approximately $837,000 and
$993,000 in goodwill amortization expense for the three months and six months
ended June 30, 2000, in connection with the three acquisitions we completed
during the last six months. All three acquisitions were accounted for as
purchases. There was no goodwill amortization expense during the first six
months of 1999.
In-Process Research and Development. We recorded $9.0 million in expense
during the three months ended June 30, 2000, as a result of the write-off of
in-process research and development acquired as part of the AAT acquisition.
Interest income. We realized net interest income of approximately
$49,000 for the three months ended June 30, 2000, as compared to net interest
income of approximately $66,000 for the three months ended June 30,
10
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1999. We realized net interest expense of approximately $1.3 million for the
six months ended June 30, 2000, as compared to net interest income of
approximately $142,000 for the six months ended June 30, 1999. The net interest
expense incurred during the first six months of 2000 was primarily a result of
approximately $1.2 million in imputed interest expense equal to the fair value
of warrants that were issued in connection with certain notes payable. We
anticipate interest income to increase significantly as a result of the $96.3
million in net proceeds we received in August, 2000 from our initial public
offering.
Net loss from operations. Net loss from operations decreased from a loss
of $.6 million for the three months ended June 30, 1999 to a loss of $9.4
million for the three months ended June 30, 2000, and from a loss of $1.6
million for the six months ended June 30, 1999 to a loss of $9.9 million for the
six months ended June 30, 2000. Excluding goodwill amortization and the one-time
write-off of in-process research and development associated with our recent
acquisitions, net profit (loss) from operations increased to a profit of $.4
million for the three months ended June 30, 2000 and a profit of $.1 for the six
months ended June 30, 2000.
Liquidity and Capital Resources
We have funded our operations principally with $39.0 million of private
equity financings and $3.7 million in short-term and long-term debt and
equipment financing arrangements. Equity investments came from a series of five
preferred stock offerings over the period October 1995 through April 2000.
At June 30, 2000, cash and cash equivalents totaled approximately $3.6
million, compared to $2.9 million at December 31, 1999.
On July 27, 2000 we completed an initial public offering which generated
net proceeds to the Company of approximately $83.7 million. On August 25, 2000
the Company's underwriters exercised in full their over-allotment option, which
generated an additional $12.6 million in net proceeds to the Company.
Net cash used in operating activities for the six months ended June 30,
2000 was approximately $1.4 million. A net loss of $10.9 million was offset by
non-cash charges of $13.0 million, including a $9.0 write-off of purchased
in-process research and development. Accounts receivable increased by $4.6
million of cash (offset by an increase in accounts payable of $1.7 million), due
to increased revenue and associated expenses during the period.
In April 2000, we issued 1,392,503 shares of Series E redeemable
convertible preferred stock at $8.00 per share in exchange for the conversion of
$6.1 million in outstanding promissory notes and accrued interest and $5.0
million in additional cash.
In April 2000, we acquired AAT, a wholly-owned subsidiary of Axys
Pharmaceuticals, Inc. in exchange for 7,429,641 shares of our common stock, a
promissory note in the principal amount of $550,344 and $50,031 in cash.
In May 2000, we acquired 75% of the outstanding shares of Structural
Proteomics for total consideration of $1.0 million in cash and 150,000 shares of
our common stock. We paid the 150,000 shares of our common stock directly to two
shareholders of Structural Proteomics, while we invested the $1.0 million in
Structural Proteomics as consideration for newly issued shares.
We anticipate investing up to $7.0 million through December 31, 2001 in
leasehold improvements and capital equipment necessary to support future revenue
growth. Our actual future capital requirements will depend on a number of
factors, including our success in increasing sales of both existing and new
products and services, expenses associated with unforeseen litigation,
regulatory changes and competition and technological developments, and potential
future merger and acquisition activity. We believe our existing cash and cash
equivalents, including the net proceeds from our initial public offering
completed on July 27, 2000, plus any cash generated from operations, will be
sufficient to fund our operating expenses, debt obligations and capital
requirements through at least December 31, 2001.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Short-term investments. Our interest income is sensitive to changes in
the general level of U.S. interest rates, particularly since a significant
portion of our investments are and will be in short-term marketable securities.
Due to the nature and maturity of our short-term investments, we have concluded
that there is no material market risk exposure.
Foreign currency rate fluctuations. The functional currency for the
European operations of our IRORI group is the U.S. dollar, and the functional
currency for our Discovery Technologies group is the Swiss franc. Our subsidiary
accounts are translated from their local currency to the U.S. dollar using the
current exchange rate in effect at the balance sheet date for the balance sheet
accounts, and using the average exchange rate during the period for revenues and
expense accounts. The effects of translation for the European operations of our
IRORI group are recorded as foreign currency gains (losses) in the consolidated
statement of operations. The effects of translation for our Discovery
Technologies group are recorded as a separate component of stockholders' equity.
Our European subsidiaries conduct their business with customers in local
currencies. Exchange gains and losses arising from these transactions are
recorded using the actual exchange differences on the date of the transaction.
We have not taken any action to reduce our exposure to changes in foreign
currency exchange rates, such as options or futures contracts, with respect to
transactions with our European subsidiaries or transactions with our worldwide
customers. The net tangible assets of our two European subsidiaries combined
were $6.1 million at June 30, 2000. A 1% decrease in the value of the British
pound and Swiss franc relative to the U.S. dollar would result in a foreign
translation loss of $61,000.
Inflation. We do not believe that inflation has had a material impact on
our business or operating results during the periods presented.
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RISKS AND UNCERTAINTIES
In addition to the other information contained herein, you should
carefully consider the following risk factors in evaluating our company.
RISKS RELATED TO OUR BUSINESS
WE RECENTLY HAVE ACQUIRED SEVERAL BUSINESSES AND FACE RISKS ASSOCIATED WITH
INTEGRATING THESE BUSINESSES AND POTENTIAL FUTURE ACQUISITIONS.
We recently completed the acquisitions of Axys Advanced Technologies
(AAT), Discovery Technologies and 75% of the stock of Structural Proteomics, and
are in the process of integrating these businesses. We plan to continue to
review potential acquisition candidates in the ordinary course of our business
and our strategy includes building our business through acquisitions.
Acquisitions involve numerous risks, including among others, difficulties and
expenses incurred in the consummation of acquisitions and assimilation of the
operations, personnel and services or products of the acquired companies,
difficulties of operating new businesses, the diversion of management's
attention from other business concerns and the potential loss of key employees
of the acquired company. For example, distance and cultural differences may make
it difficult for us to successfully assimilate the operations of our recently
acquired assay development and high throughput screening operations (Discovery
Technologies) located in Switzerland with our medicinal chemistry operations
located in San Diego. Further, integrating the chemistry operations performed by
AAT with our existing chemistry operations will cause some key employees to have
overlapping functional roles, which may lead to their departure if they are
unable or unwilling to assume new or different roles within our merged
organization. If we do not successfully integrate the three businesses we
recently acquired or any businesses we may acquire in the future, our business
will suffer. Additionally, acquisition candidates may not be available in the
future or may not be available on terms and conditions acceptable to us.
Acquisitions of foreign companies also may involve additional risks of
assimilating different business practices, overcoming language and cultural
barriers and foreign currency translation. We currently have no agreements or
commitments with respect to any acquisition and we may never successfully
complete any additional acquisitions.
WE MAY NOT ACHIEVE OR SUSTAIN PROFITABILITY IN THE FUTURE.
We are at an early stage of executing our business plan. We have
incurred operating and net losses and negative cash flow from operations since
our inception. As of June 30, 2000, we had an accumulated deficit of $30.7
million. For the years ended December 31, 1997, 1998 and 1999 and the six months
ended June 30, 2000, we had net losses of $4.8 million, $6.3 million, $3.4
million, and $10.9 million, respectively. We may also in the future incur
operating and net losses and negative cash flow from operations, due in part to
anticipated increases in expenses for research and product development,
acquisitions of complementary businesses and technologies and expansion of our
sales and marketing capabilities. We incurred no goodwill charges in the years
ended 1997, 1998 and 1999. We incurred goodwill charges in the amount of $1.0
million for the six months ended June 30, 2000. Beginning in July 2000, goodwill
charges for acquisitions we have already made will be at a straight-line rate of
$397,000 per month, or $4.8 million per year, for the next ten years. Given our
acquisition strategy, we expect significant goodwill charges to affect our net
income (loss) for the foreseeable future. We may not be able to achieve or
maintain profitability. Moreover, if we do achieve profitability, the level of
any profitability cannot be predicted and may vary significantly from quarter to
quarter.
WE MAY INCUR EXCHANGE LOSSES WHEN FOREIGN CURRENCY USED IN INTERNATIONAL
TRANSACTIONS IS CONVERTED INTO U.S. DOLLARS.
For the six months ending June 30, 2000, 8.8% of our actual revenue was
invoiced and our corresponding expenses were incurred in foreign currency,
including the British pound, the Swiss franc and the Euro. Currency fluctuations
between the U.S. dollar and the currencies in which we do business will cause
foreign currency translation gains and losses. We cannot predict the effects of
exchange rate fluctuations on our future operating results because of the number
of currencies involved, changes in the percentage of our revenue which will be
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invoiced in foreign currencies, the variability of currency exposure and the
potential volatility of currency exchange rates. We do not currently engage in
foreign exchange hedging transactions to manage our foreign currency exposure.
IF OUR PRODUCTS AND SERVICES DO NOT BECOME WIDELY USED IN THE PHARMACEUTICAL AND
BIOTECHNOLOGY INDUSTRIES, IT IS UNLIKELY THAT WE WILL BE PROFITABLE.
We have a limited history of offering our products and services,
including our NanoKan System, informatics tools and collections of chemical
compounds. It is uncertain whether our current customers will continue to use
these products and services or whether new customers will use these products and
services. In order to be successful, our products and services must meet the
requirements of the pharmaceutical and biotechnology industries, and we must
convince potential customers to use our products and services instead of
competing technologies. Market acceptance will depend on many factors, including
our ability to:
- convince potential customers that our technologies are attractive
alternatives to other technologies for drug discovery;
- manufacture products and conduct services in sufficient quantities
with acceptable quality and at an acceptable cost;
- convince potential customers to purchase drug discovery products and
services from us rather than developing them internally; and
- place and service sufficient quantities of our products.
Because of these and other factors, our products and services may not gain
market acceptance.
WE MAY FAIL TO EXPAND CUSTOMER RELATIONSHIPS THROUGH INTEGRATION OF PRODUCTS AND
SERVICES.
We may not be successful in selling our offerings in combination across
the range of drug discovery disciplines we serve because integrated combinations
of our products and services may not achieve time and cost efficiencies for our
customers. In addition, we may not succeed in further integrating our offerings.
We may not be able to use existing relationships with customers in individual
areas of our business to sell products and services in multiple areas of drug
discovery. If we do not achieve integration of our products and services, we may
not be able to take advantage of potential revenue opportunities.
OUR SUCCESS WILL DEPEND ON OUR ABILITY TO MANAGE RAPID GROWTH AND EXPANSION.
Growth in our operations has placed and, if we grow in the future, will
continue to place a significant strain on our operational, human and financial
resources. We recently have acquired three new businesses and we intend to
continue to grow our business. We have not expanded our management and
infrastructure in advance of anticipated growth, nor do we intend to. Therefore,
as we expand our operations we will not necessarily have in place infrastructure
and personnel sufficient to accommodate the increased size of our business. Our
ability to manage effectively any growth through acquisitions or any internal
growth will depend, in large part, on our ability to hire, train and assimilate
additional management, professional, scientific and technical personnel and our
ability to expand, improve and effectively use our operating, management,
marketing and financial systems to accommodate our expanded operations. These
tasks are made more difficult as we acquire businesses in geographically
disparate locations, such as our recent acquisitions of Discovery Technologies
in Switzerland, AAT in the San Francisco area, and Structural Proteomics in New
Jersey.
OUR DIRECTED SORTING PRODUCTS AND OUR LARGE COMPOUND LIBRARIES HAVE LENGTHY
SALES CYCLES, WHICH COULD CAUSE OUR OPERATING RESULTS TO FLUCTUATE
SIGNIFICANTLY FROM QUARTER TO QUARTER.
Sales of our Directed Sorting products and our large compound libraries
typically involve significant technical evaluation and commitment of capital by
our customers. Accordingly, the sales cycles, or the time from finding a
prospective customer through closing the sale, associated with these products
range from six to eighteen
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months. Sales of these products are subject to a number of significant risks,
including customers' budgetary constraints and internal acceptance reviews that
are beyond our control. Due to these lengthy and unpredictable sales cycles, our
operating results could fluctuate significantly from quarter to quarter. We
expect to continue to experience significant fluctuations in quarterly operating
results due to a variety of factors, such as general and industry specific
economic conditions which may affect the research and development expenditures
of pharmaceutical and biotechnology companies.
A large portion of our expenses, including expenses for facilities,
equipment and personnel, are relatively fixed. Accordingly, if revenues decline
or do not grow as anticipated, we might not be able to correspondingly reduce
our operating expenses. Failure to achieve anticipated levels of revenues could
therefore significantly harm our operating results for a particular fiscal
period.
Due to the possibility of fluctuations in our revenues and expenses, we
believe that quarter-to-quarter comparisons of our operating results are not a
good indication of our future performance.
WE DEPEND ON THIRD-PARTY PRODUCTS AND SERVICES AND SOLE OR LIMITED SOURCES OF
SUPPLY TO MANUFACTURE SOME COMPONENTS OF OUR DIRECTED SORTING PRODUCTS.
We rely on outside vendors to manufacture components and subassemblies
used in our Directed Sorting products. Some of these components and
subassemblies are obtained from a single supplier or a limited group of
suppliers. We depend on sole-source suppliers for the mesh component of our
reactors, the radio frequency (RF) tags used in our commercial products and the
two-dimensional bar code tags used in our NanoKan System. These materials are
obtained from suppliers on standard commercial terms, and we do not have
long-term supply agreements with any of these suppliers. Our reliance on outside
vendors generally, and a sole or limited group of suppliers in particular,
involves several risks, including:
- the inability to obtain an adequate supply of required components due
to manufacturing capacity constraints, a discontinuance of a product
by a third-party manufacturer or other supply constraints;
- reduced control over quality and pricing of components; and
- delays and long lead times in receiving materials from vendors.
WE HAVE NOT YET DELIVERED OUR NANOKAN SYSTEM; ALSO, WE FACE RESTRICTIONS ON OUR
ABILITY TO SELL THIS PRODUCT TO ADDITIONAL CUSTOMERS.
We have not yet delivered our NanoKan System which we currently are
developing for sale to Bristol-Myers Squibb and Aventis. We may not be able to
successfully complete development of the NanoKan System and, after development,
it may not meet our customers' expectations. Further, under agreements with
Bristol-Myers Squibb and Aventis, we are prohibited from delivering the NanoKan
System to any additional customers until one year following the delivery of both
systems to Bristol-Myers Squibb and Aventis. We expect to deliver both systems
in 2000; however, delivery may be delayed beyond 2000 due to factors beyond our
control, such as unexpected development problems or natural disasters. If
delivery to Bristol-Myers Squibb or Aventis is delayed, we will not be able to
deliver additional NanoKan Systems for a longer period of time and therefore,
potential revenues for future sales may be delayed or lost.
OUR CUSTOMERS MAY RESTRICT OUR USE OF SCIENTIFIC INFORMATION, WHICH COULD
PREVENT US FROM USING THIS INFORMATION FOR ADDITIONAL REVENUE.
We plan to generate and use information that is not proprietary to our
customers and that we derive from performing drug discovery services for our
customers. However, our customers may not allow us to use information such as
the general interaction between types of chemistries and types of drug targets
that we generate when performing drug discovery services for them. Our current
contracts restrict our use of scientific information we generate for our
customers, such as the biological activity of chemical compounds with respect to
drug targets, and future contracts also may restrict our use of scientific
information. To the extent that our use of information is
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restricted, we may not be able to collect and aggregate scientific data and take
advantage of potential revenue opportunities.
OUR OPERATIONS COULD BE INTERRUPTED BY DAMAGE TO OUR FACILITIES.
Our results of operations are dependent upon the continued use of our
highly specialized laboratories and equipment. Our operations are primarily
concentrated in facilities in San Diego, California and near San Francisco,
California and Basel, Switzerland. Natural disasters, such as earthquakes, could
damage our laboratories or equipment and these events may materially interrupt
our business. We maintain business interruption insurance to cover lost revenues
caused by such occurrences. However, this insurance would not compensate us for
the loss of opportunity and potential adverse impact on relations with existing
customers created by an inability to meet our customers' needs in a timely
manner.
RISKS RELATED TO OPERATING IN OUR INDUSTRY
THE CONCENTRATION OF THE PHARMACEUTICAL INDUSTRY AND THE CURRENT TREND TOWARD
INCREASING CONSOLIDATION COULD HURT OUR BUSINESS PROSPECTS.
The market for our products and services is highly concentrated, with
approximately 50 large pharmaceutical companies conducting drug discovery
research. The continuation of the current trend toward consolidation of the
pharmaceutical industry may reduce the number of our potential customers even
further. Accordingly, we expect that a relatively small number of customers will
account for a substantial portion of our revenues. Before our recent
acquisitions of AAT, Discovery Technologies and Structural Proteomics, in 1999
our net revenue from our three largest customers represented approximately 22%,
20% and 7% of total net revenue, respectively.
Additional risks associated with a highly concentrated customer base
include:
- fewer customers for our products and services;
- larger companies may develop in-house technology and expertise rather
than using our products and services;
- larger customers may negotiate price discounts or other terms for our
products and services that are unfavorable to us; and
- the market for our products and services may become saturated.
For example, because of the heavy concentration of the pharmaceutical
industry and the high cost of our NanoKan System, we expect to sell only a small
number of NanoKan Systems before we saturate the market for this product. When
we are no longer able to sell additional NanoKan Systems, we will be dependent
upon the sale of consumables for revenue from this product line. Similarly,
there are signs that the market for our AutoSort System is becoming saturated.
THE DRUG DISCOVERY INDUSTRY IS COMPETITIVE AND SUBJECT TO TECHNOLOGICAL CHANGE,
AND WE MAY NOT HAVE THE RESOURCES NECESSARY TO COMPETE SUCCESSFULLY.
We compete with companies in the United States and abroad that engage in
the development and production of drug discovery products and services. These
competitors include companies engaged in the following areas of drug discovery:
- Assay, development and screening, including Aurora Biosciences and
Pharmacopeia;
- Combinatorial chemistry instruments, including Argonaut and Bohdan;
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- Compound libraries and lead optimization, including Albany Molecular
Research and Arqule; and
- Informatics, including MSI division of Pharmacopeia and Tripos.
Academic institutions, governmental agencies and other research
organizations also conduct research in areas in which we provide services,
either on their own or through collaborative efforts. Also, essentially all of
our pharmaceutical company customers have internal departments which provide
some of the products and services which we sell, so these customers may have
limited needs for our products and services. Many of our competitors, including
Pharmacopeia, have access to greater financial, technical, research, marketing,
sales, distribution, service and other resources than we do.
Moreover, the pharmaceutical and biotechnology industries are
characterized by continuous technological innovation. We anticipate that we will
face increased competition in the future as new companies enter the market and
our competitors make advanced technologies available. Technological advances or
entirely different approaches that we or one or more of our competitors develop
may render our products, services and expertise obsolete or uneconomical. For
example, advances in informatics and virtual screening may render some of our
technologies, such as our large compound libraries, obsolete. Additionally, the
existing approaches of our competitors or new approaches or technologies that
our competitors develop may be more effective than those we develop. We may not
be able to compete successfully with existing or future competitors.
OUR SUCCESS WILL DEPEND ON THE PROSPECTS OF THE PHARMACEUTICAL AND BIOTECHNOLOGY
INDUSTRIES AND THE EXTENT TO WHICH THESE INDUSTRIES USE THIRD-PARTY
ASSISTANCE WITH ONE OR MORE ASPECTS OF THEIR DRUG DISCOVERY PROCESS.
Our revenues depend to a large extent on research and development
expenditures by the pharmaceutical, biotechnology and agricultural industries
and companies in these industries outsourcing research and development projects.
These expenditures are based on a wide variety of factors, including the
resources available for purchasing research equipment, the spending priorities
among various types of research and policies regarding expenditures during
recessionary periods. General economic downturns in our customers' industries or
any decrease in research and development expenditures could harm our operations.
Any decrease in drug discovery spending by pharmaceutical and biotechnology
companies could cause our revenues to decline and adversely impact our
profitability.
OUR SUCCESS WILL DEPEND ON OUR ABILITY TO ATTRACT AND RETAIN KEY EXECUTIVES,
AND EXPERIENCED SCIENTISTS AND SALES PERSONNEL.
Our future success will depend to a significant extent on our ability to
attract, retain and motivate highly skilled scientists and sales personnel. In
addition, our business would be significantly harmed if we lost the services of
Riccardo Pigliucci, our chief executive officer, or David Coffen, our chief
scientific officer. Our ability to maintain, expand or renew existing
engagements with our customers, enter into new engagements and provide
additional services to our existing customers depends, in large part, on our
ability to hire and retain scientists with the skills necessary to keep pace
with continuing changes in drug discovery technologies and sales personnel who
are highly motivated. Additionally, it is difficult for us to find qualified
sales personnel in light of the fact that our sales personnel generally hold
Ph.D's. Our employees are "at will" which means that they may resign at any
time, and we may dismiss them at any time. We believe that there is a shortage
of, and significant competition for, scientists with the skills and experience
in the sciences necessary to perform the services we offer. We compete with
pharmaceutical companies, biotechnology companies, combinatorial chemistry
companies, contract research companies and academic institutions for new
personnel. In addition, our inability to hire additional qualified personnel may
require an increase in the workload for both existing and new personnel. We may
not be successful in attracting new scientists or sales personnel or in
retaining or motivating our existing personnel.
THE INTELLECTUAL PROPERTY RIGHTS WE RELY ON TO PROTECT THE TECHNOLOGY UNDERLYING
OUR PRODUCTS AND TECHNIQUES MAY NOT BE ADEQUATE, WHICH COULD ENABLE
THIRD PARTIES TO USE OUR TECHNOLOGY OR VERY SIMILAR TECHNOLOGY AND COULD
REDUCE OUR ABILITY TO COMPETE IN THE MARKET.
Our success will depend on our ability to obtain, protect and enforce
patents on our technology and to protect our trade secrets. We also depend, in
part, on patent rights that third parties license to us. Any patents we
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own or license may not afford meaningful protection for our technology and
products. Others may challenge our patents or the patents of our licensors and,
as a result, these patents could be narrowed, invalidated or rendered
unenforceable. In addition, current and future patent applications on which we
depend may not result in the issuance of patents in the United States or foreign
countries. Competitors may develop products similar to ours which are not
covered by our patents. Further, since there is a substantial backlog of patent
applications at the U.S. Patent and Trademark Office, the approval or rejection
of our or our competitors' patent applications may take several years.
In addition to patent protection, we also rely on copyright protection,
trade secrets, know-how, continuing technological innovation and licensing
opportunities. In an effort to maintain the confidentiality and ownership of our
trade secrets and proprietary information, we require our employees, consultants
and advisors to execute confidentiality and proprietary information agreements.
However, these agreements may not provide us with adequate protection against
improper use or disclosure of confidential information and there may not be
adequate remedies in the event of unauthorized use or disclosure. Furthermore,
like many technology companies, we may from time to time hire scientific
personnel formerly employed by other companies involved in one or more areas
similar to the activities conducted by us. In some situations, our
confidentiality and proprietary information agreements may conflict with, or be
subject to, the rights of third parties with whom our employees, consultants or
advisors have prior employment or consulting relationships. Although we require
our employees and consultants to maintain the confidentiality of all
confidential information of previous employers, their prior affiliations may
subject us or these individuals to allegations of trade secret misappropriation
or other similar claims. Finally, others may independently develop substantially
equivalent proprietary information and techniques, or otherwise gain access to
our trade secrets. Our failure to protect our proprietary information and
techniques may inhibit or limit our ability to exclude certain competitors from
the market.
THE DRUG DISCOVERY INDUSTRY HAS A HISTORY OF INTELLECTUAL PROPERTY LITIGATION
AND WE MAY BE INVOLVED IN INTELLECTUAL PROPERTY LAWSUITS, WHICH MAY BE
EXPENSIVE.
In order to protect or enforce our patent rights, we may have to
initiate legal proceedings against third parties. In addition, others may sue us
for infringing their intellectual property rights or we may find it necessary to
initiate a lawsuit seeking a declaration from a court that we are not infringing
the proprietary rights of others. The patent positions of pharmaceutical,
biotechnology and drug discovery companies are generally uncertain. A number of
pharmaceutical companies, biotechnology companies, independent researchers,
universities and research institutions may have filed patent applications or may
have been granted patents that cover technologies similar to the technologies
owned by, or licensed to, us or our collaborators. For instance, a number of
patents may have been issued or may be issued in the future that could cover
certain aspects of our technology that could prevent us from using technology
that we use or expect to use. In addition, we are unable to determine all of the
patents or patent applications that may materially affect our ability to make,
use or sell any potential products. Legal proceedings relating to intellectual
property would be expensive, take significant time and divert management's
attention from other business concerns, no matter whether we win or lose. The
cost of such litigation could affect our profitability.
Further, an unfavorable judgment in an infringement lawsuit brought
against us, in addition to any damages we might have to pay, could require us to
stop the infringing activity or obtain a license. Any required license may not
be available to us on acceptable terms, or at all. In addition, some licenses
may be nonexclusive, and therefore, our competitors may have access to the same
technology licensed to us. If we fail to obtain a required license or are unable
to design around a patent, we may be unable to sell some of our products or
services.
WE MAY BE SUBJECT TO LIABILITY REGARDING HAZARDOUS MATERIALS.
Our products and services as well as our research and development
processes involve the controlled use of hazardous materials such as acids,
bases, oxidants, and flammable materials. The acids we use include
trifluoroacetic acid and hydrochloric acid; the bases we use include sodium
hydroxide and triethylamine; the oxidants we use include peracids and potassium
permanganate; and the flammable solvents we use include methanol, hexane and
tetrahydrofuran. We are subject to federal, state and local laws and regulations
governing the use, manufacture, storage, handling and disposal of such materials
and certain waste products. We cannot completely eliminate the risk of
accidental contamination or injury from these materials. In the event of such an
accident, we could be held liable for any damages that result, and any such
liability could exceed our resources and disrupt our business. In addition, we
may have to incur significant costs to comply with environmental laws and
regulations related to the
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handling or disposal of such materials or waste products in the future, which
would require us to spend substantial amounts of money.
OTHER RISKS AND UNCERTAINTIES
OUR STOCK PRICE LIKELY WILL BE VOLATILE.
The trading price of our common stock likely will be volatile and could
be subject to fluctuations in price in response to various factors, many of
which are beyond our control, including:
- 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 pharmaceutical and biotechnology
industries;
- announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
- additions or departures of key personnel;
- economic and political factors; and
- sales of our common stock.
In addition, price and volume fluctuations in the stock market in
general, and the Nasdaq National Market and the market for life sciences
companies in particular, have often been unrelated or disproportionate to the
operating performance of those companies. Further, the market prices of
securities of life sciences companies have been particularly volatile.
Conditions or trends in the pharmaceutical and biotechnology industries
generally may cause further volatility in the trading price of our common stock,
because the market may incorrectly perceive us as a pharmaceutical or
biotechnology company. These broad market and industry factors may harm the
market price of our common stock, regardless of our operating performance. In
the past, plaintiffs have often instituted securities class action litigation
following periods of volatility in the market price of a company's securities. A
securities class action suit against us could result in potential liabilities,
substantial costs and the diversion of management's attention and resources,
regardless of whether we win or lose.
OUR EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS OWN A LARGE
PERCENTAGE OF OUR VOTING STOCK AND COULD DELAY OR PREVENT A CHANGE IN
OUR CORPORATE CONTROL OR OTHER MATTERS REQUIRING STOCKHOLDER APPROVAL,
EVEN IF FAVORED BY OUR OTHER STOCKHOLDERS.
Our executive officers, directors and principal stockholders, and their
respective affiliates, beneficially own approximately 64.6% of our outstanding
common stock. These stockholders, if acting together, would be able to control
substantially all matters requiring approval by our stockholders, including the
election of all directors and approval of significant corporate transactions. We
have agreed to include, as director nominees, a number of nominees of Axys
Pharmaceuticals, Inc. which is proportionate to Axys' percentage ownership of
our shares. Axys Pharmaceuticals, Inc. currently has the right to nominate for
election two of seven directors. Axys Pharmaceuticals, Inc., which owns
approximately 32.0% of our common stock, has agreed to vote all of its stock in
favor of management's annual slates of director nominees.
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BECAUSE IT IS UNLIKELY THAT WE WILL PAY DIVIDENDS, YOU WILL ONLY BE ABLE TO
BENEFIT FROM HOLDING OUR STOCK IF THE STOCK PRICE APPRECIATES.
We have never paid cash dividends on our capital stock and do not
anticipate paying any cash dividends in the foreseeable future.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER AND BYLAWS COULD MAKE A THIRD-PARTY
ACQUISITION OF US DIFFICULT.
Our certificate of incorporation and bylaws contain provisions that
could make it more difficult for a third party to acquire us, even if doing so
would be beneficial to our stockholders. These provisions could limit the price
that investors might be willing to pay in the future for shares of our common
stock.
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DISCOVERY PARTNERS INTERNATIONAL, INC.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Recent Sales of Unregistered Securities.
In connection with our initial public offering described in Item
2 (d) below, our company completed a reincorporation merger in which
Discovery Partners International, Inc., a California corporation (our
"Predecessor Corporation") merged with and into Discovery Partners
International, Inc., a Delaware corporation, or the Registrant
hereunder. The following summarizes sales of unregistered securities by
our Predecessor Corporation during the three months ended June 30, 2000.
The number of shares involved equate to numbers of our common shares
after we reincorporated into Delaware in July, 2000.
(1) On April 7, 2000, our Predecessor Corporation sold an
aggregate of 1,392,503 shares of Series E preferred stock at a
price of $8.00 per share to a group of private investors for an
aggregate purchase price of $11,140,024. Our Predecessor
Corporation received $5,023,000 in cash from this private sale,
the remaining $6,117,024 was used to retire several promissory
notes held by certain of the investors in this Series E
financing. All such issuances were made pursuant to the exemption
from registration provided by Section 4(2) of the Securities Act
of 1933, as amended (the "1933 Act").
(2) On April 11, 2000, our Predecessor Corporation issued (i)
7,425,000 shares of common stock valued at $7.50 per share and a
warrant to purchase an additional 200,000 shares of common stock
at an exercise price of $8.00 per share to Axys Pharmaceuticals,
Inc., and (ii) 4,641 shares of common stock to a minority
stockholder of AAT in connection with our Predecessor
Corporation's acquisition of AAT by merger. Such issuances were
made pursuant to the exemption from registration provided by
Section 4(2) of the 1933 Act.
(3) On May 5, 2000, in conjunction with our Predecessor
Corporation's acquisition of 75% of the stock of Structural
Proteomics, Inc., our Predecessor Corporation issued 150,000
shares of its common stock to two founders of Structural
Proteomics. Such issuances were made pursuant to the exemption
from registration provided by Section 4(2) of the 1933 Act.
(4) During the three months ended June 30, 2000, our Predecessor
Corporation granted options to purchase an aggregate of 232,351
shares of common stock at a weighted average exercise price of
$8.89 per share pursuant to our Predecessor Corporation's 1995
Stock Option/Stock Issuance Plan to certain directors, officers
and employees. The issuance of these options was made pursuant to
the exemption from registration provided by Rule 701 promulgated
under the 1933 Act.
(d) Use of Proceeds.
On August 1, 2000, we closed the sale of 5,000,000 shares of our
Common Stock, $0.001 par value, in our initial public offering (the
"Offering"), and on August 30, 2000 we closed the sale of an additional
750,000 shares of Common Stock pursuant to the exercise of the
underwriters' overallotment option in the Offering. The managing
underwriters in the Offering were Chase Securities Inc., Lehman Brothers
Inc. and UBS Warburg LLC (the "Underwriters"). The shares of Common
Stock sold in the Offering were registered under the 1933 Act on a
Registration Statement on Form S-1 (the "Registration Statement") (Reg.
No. 333-36638) that was declared effective by the SEC on July 27, 2000.
The Offering commenced on July 27, 2000. All 5,750,000 shares of Common
Stock registered under the Registration Statement, including the shares
covered by the overallotment option, were sold at a price per share of
$18.00. The aggregate price of the Offering amount registered was
$103,500,000. In connection with the Offering, we paid an aggregate of
$7,245,000 in underwriting discounts and commissions to the
Underwriters. In addition, the following table sets forth an estimate of
all expenses incurred in connection with the Offering, other than
underwriting discounts and commissions. All amounts are estimated except
for the fees payable to the SEC, National Association of Securities
Dealers, Inc. ("NASD") and Nasdaq National Market.
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<TABLE>
<S> <C>
SEC registration fee $ 30,360
NASD filing fee 12,000
Nasdaq National Market listing fee 95,000
Legal fees and expenses 500,000
Accounting fees and expenses 350,000
Printing and engraving 150,000
Blue Sky fees and expenses (including legal fees) 5,000
Transfer agent fees 3,500
Miscellaneous 54,140
----------
Total $1,200,000
==========
</TABLE>
After deducting the underwriting discounts and commissions and
the estimated Offering expenses described above, we received net
proceeds from the Offering of approximately $95.1 million. We intend to
use the proceeds to fund our operations, including continued development
and manufacturing of existing products as well as research and
development of additional products and services. We may also use a
portion of the net proceeds to acquire new businesses or technologies,
hire additional personnel and expand our facilities to be able to meet
the growing needs of our business. In addition, we may, if the
opportunity arises, use an unspecified portion of the net proceeds to
acquire or invest in products, technologies or companies. We intend to
use the balance of the net proceeds for general corporate purposes,
including working capital. None of the net proceeds of the Offering were
paid directly or indirectly to any directors, officers, general partners
of our company or their associates, persons owning 10% or more of any
class of our equity securities, or affiliates of ours.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following summarizes matters submitted to a vote of the
security holders of both our Predecessor Corporation and by us during the three
months ended June 30, 2000.
1. On April 4, 2000, in an action by written consent of the
stockholders of our Predecessor Corporation, the holders of 1,248,500 shares of
common stock (out of 1,789,068 shares then outstanding) and the holders of
5,008,064 shares of preferred stock, voting on an as-converted basis (out of
6,623,909 shares outstanding on an as-converted basis), approved the amendment
and restatement of the Articles of Incorporation of our Predecessor Corporation,
which increased the number of authorized shares of common stock and preferred
stock and authorized shares of Series E preferred stock.
2. On April 11, 2000, in an action by written consent of the
stockholders of our Predecessor Corporation, the holders of 1,248,500 shares of
common stock (out of 1,789,068 shares then outstanding) and the holders of
6,013,414 shares of preferred stock, voting on an as-converted basis (out of
8,016,412 shares outstanding on an as-converted basis), approved the acquisition
by our Predecessor Corporation of AAT and the principal terms of the Agreement
and Plan of Merger entered into in connection therewith. The stockholders also
approved an amendment to the Articles of Incorporation of our Predecessor
Corporation to increase the number of authorized shares and to change the
definition of "Additional Stock" in the antidilution provisions.
3. On June 15, 2000, in an action by written consent of the
stockholders of our Predecessor Corporation, the holders of 9,338,110 shares of
common stock (out of 9,432,542 shares then outstanding) and the holders of
7,788,392 shares of preferred stock, voting on an as-converted basis (out of
8,016,412 shares outstanding on an as-converted basis), approved the
reincorporation merger of our Predecessor Corporation with and into us. These
stockholders also approved the adoption of our 2000 Stock Incentive Plan and our
Employee Stock Purchase Plan.
4. On June 15, 2000, in a written consent of the sole
stockholder, our Predecessor Corporation, as our sole stockholder, approved the
merger of our Predecessor Corporation with and into us and the assumption by us
of all of the liabilities and obligations of our Predecessor Corporation
including our 2000 Stock Incentive Plan and our Employee Stock Purchase Plan.
22
<PAGE> 23
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO Description
---------- -----------
<S> <C>
2.1* Agreement and Plan of Merger among us, DPII Newco, LLC, Axys
Pharmaceuticals, Inc. and Axys Advanced Technologies, Inc., dated
April 11, 2000.
2.2* Stock Purchase Agreement among us, Structural Proteomics, Inc.,
Richard Fine and Boris Klebansky, dated May 5, 2000.
10.1* Series E Preferred Stock Purchase Agreement among us and the
investors listed on Schedule A thereto, dated April 7, 2000.
10.2* Second Amended and Restated Investors' Rights Agreement among us
and the investors listed on Schedule A thereto, dated April 28,
2000, as amended.
10.3* Amended and Restated Shareholder's Agreement among us and the
investors listed on Schedule A thereto, dated April 7, 2000, as
amended.
10.4* Amendment No. 3 to Voting Agreement among us and the investors
listed therein, dated April 28, 2000, as amended.
10.5* Technology Assignment and License Agreement between Axys
Pharmaceuticals, Inc. and Axys Advanced Technologies, Inc. dated
April 28, 2000.
10.6* Non-Competition and Non-Disclosure Agreement between us and Axys
Pharmaceuticals, Inc., dated April 28, 2000.
10.7* Indemnity Escrow Agreement between us and Axys Pharmaceuticals,
Inc., dated April 28, 2000.
10.8* Services Agreement between us and Axys Pharmaceuticals, Inc.,
dated April 28, 2000.
10.9* First Amendment to Sublease between Axys Pharmaceuticals, Inc.
and Axys Advanced Technologies, Inc., dated April 28, 2000.
10.10* Compound Purchase Agreement between us and Axys Pharmaceuticals,
Inc., dated April 28, 2000.
10.11* Standstill Agreement between us and Axys Pharmaceuticals, Inc.,
dated April 28, 2000.
10.12* Rights Agreement between us, Structural Proteomics, Inc., Richard
Fine, Boris Klebansky and Arnold Hagler, dated May 5, 2000.
10.13* Letter Agreement terminating Directorship Agreement with Dieter
Hoehn, dated May 8, 2000.
27.1 Financial Data Schedule
</TABLE>
* Previously filed with the Commission as an exhibit to the registration
statement on Form S-1 (File No. 333-36638) and incorporated herein by
reference.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarter ended
June 30, 2000.
23
<PAGE> 24
DISCOVERY PARTNERS INTERNATIONAL, INC.
SIGNATURES
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.
DISCOVERY PARTNERS INTERNATIONAL, INC.
Date: September 8, 2000 By: /s/ RICCARDO PIGLIUCCI
---------------------------------
Riccardo Pigliucci
Chief Executive Officer
Date: September 8, 2000 By: /s/ JACK FITZPATRICK
---------------------------------
Jack Fitzpatrick
Chief Financial Officer, Vice President
Finance and Administration and Secretary
(Principal Financial and Accounting Officer)
24
