<PAGE>
--------------------------------------------------------------------------------
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q/A
(Mark One)
[X]QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 2000 PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 0-31781
----------------
MEDICHEM LIFE SCIENCES, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3518660
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12305 South New Avenue, Lemont, 60439
Illinois (Zip Code)
(Address of principal executive
offices)
(630) 257-1500
(Registrant's telephone number, including area code)
----------------
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]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
26,501,029 shares of Common Stock, $.01 par value, outstanding at November
29, 2000.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Website is: http://www.medichem.com
<PAGE>
EXPLANATORY NOTE
The sole purpose of this amendment is to correct a typographical error to
the amount of Net Income (loss) for the nine-month period ended September 30,
2000 contained in the previously filed Form 10-Q.
<PAGE>
MEDICHEM LIFE SCIENCES, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
For Quarter Ended September 30, 2000
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements Condensed Consolidated Balance Sheets........ 3
Condensed Consolidated Statements of Operations....................... 4
Condensed Consolidated Statements of Cash Flows....................... 5
Notes to the Condensed Consolidated Financial Statements.............. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 15
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds......................... 15
Item 6. Exhibits and Reports Filed on Form 8-K............................ 16
Signatures................................................................ 17
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEDICHEM LIFE SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash............................................... $ 1,178,358 $ 8,164,730
Accounts receivable, net........................... 3,159,092 2,225,706
Accounts receivable--related party................. 1,115,227 620,889
Prepaid assets..................................... 307,017 98,447
Other current assets............................... 1,380,219 68,567
------------ -----------
Total current assets............................... 7,139,913 11,178,339
Property and equipment, net......................... 13,718,179 6,376,881
Intangibles, net.................................... 30,878,417 --
Goodwill, net....................................... 23,250,306 --
Other assets........................................ 1,286,810 384,760
------------ -----------
Total assets....................................... $ 76,273,625 $17,939,980
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Note payable to stockholder........................ $ 383,323 $ 3,000,000
Current portion of debt and capital lease
obligations....................................... 261,069 1,954,209
Accounts payable................................... 2,516,198 607,711
Accrued expenses................................... 1,151,050 1,162,512
Taxes payable...................................... 4,826 665,827
Unearned revenue................................... 856,039 396,000
------------ -----------
Total current liabilities.......................... 5,172,505 7,786,259
Debt................................................ 13,183,297 4,607,053
Capital lease obligations........................... 185,499 307,562
Redeemable stock warrants........................... 2,663,554 494,295
Deferred tax liabilities............................ 12,638,025 --
Other............................................... 72,233 70,588
------------ -----------
Total liabilities.................................. $ 33,915,113 $13,265,757
Redeemable preferred stock:
Class A convertible preferred stock, $.0005 par
value, 6,351,120 shares authorized,
issued and outstanding at September 30, 2000 and
December 31, 1999................................. 14,223,541 13,230,000
Class B 5% redeemable preferred stock, $.01 par
value, 1,000 shares authorized, none
issued and outstanding at September 30, 2000 and
December 31, 1999................................. -- --
Class C convertible preferred stock, $.01 par
value, 440,000 shares authorized,400,000
shares issued and outstanding at September 30,
2000 and December 31, 1999........................ 4,000 4,000
------------ -----------
Total redeemable preferred stock................... 14,227,541 13,234,000
Stockholders' equity (deficit):
Class D preferred stock, $.01 par value, 440,000
shares authorized, 400,000 shares issued and
outstanding at September 30, 2000 and December 31,
1999.............................................. 4,000 4,000
Class A common stock, $.0005 par value 18,655,570
shares authorized, 12,491,740
shares issued and outstanding at September 30,
2000 and 7,462,228 shares issued and outstanding
at December 31, 1999.............................. 6,696 4,000
Class B common stock, $.0005 par value, 1,650,234
shares authorized, none issued
and outstanding at September 30, 2000 and December
31, 1999.......................................... -- --
Class C common stock, $.0005 par value, 315,577
shares authorized, none issued
and outstanding at September 30, 2000 and December
31, 1999.......................................... -- --
Additional paid-in capital.......................... 41,512,966 21,542
Deferred compensation............................... (129,381) --
Accumulated deficit................................. (13,263,310) (8,589,319)
------------ -----------
Total stockholders' equity (deficit)............... 28,130,971 (8,559,777)
------------ -----------
Total liabilities and stockholders' equity
(deficit)........................................ $ 76,273,625 $17,939,980
============ ===========
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
3
<PAGE>
MEDICHEM LIFE SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three-month period Nine-month period ended
ended September 30 September 30,
------------------------ ------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Contract revenue.......... $ 4,325,726 $ 3,013,129 $11,859,670 $ 7,848,073
Contract revenue-related
party.................... 842,990 685,446 2,199,475 1,888,341
----------- ----------- ----------- -----------
Total contract revenue..... 5,168,716 3,698,575 14,059,145 9,736,414
Contract service costs:
Contract service costs.... 2,243,489 1,360,100 5,979,147 3,710,360
Contract service costs-
related party............ 275,173 380,807 874,580 808,062
----------- ----------- ----------- -----------
Total contract service
costs..................... 2,518,662 1,740,907 6,853,727 4,518,422
Gross profit............... 2,650,054 1,957,668 7,205,418 5,217,992
Milestone and intellectual
property revenue......... -- -- 222,000 --
Milestone and intellectual
property revenue-related
party.................... 650,000 1,187,613 1,000,000 1,187,613
----------- ----------- ----------- -----------
Total milestone and
intellectual property
revenue................... 650,000 1,187,613 1,222,000 1,187,613
Operating expenses:
Selling, general and
administrative expenses.. 3,077,693 1,604,309 7,322,972 4,320,616
Depreciation and
amortization............. 1,573,406 235,929 2,558,413 548,635
----------- ----------- ----------- -----------
Total operating expenses... 4,651,099 1,840,238 9,881,385 4,869,251
Income (loss) from
operations................ (1,351,045) 1,305,043 (1,453,967) 1,536,354
Other income (expense):
Interest expense.......... (310,334) (221,340) (785,534) (354,127)
Increase in value of
redeemable stock
warrants................. (263,772) -- (2,169,259) --
Other, net................ 30,397 78,748 148,310 90,651
----------- ----------- ----------- -----------
Total other income
(expense)................. (543,709) (142,592) (2,806,483) (263,476)
----------- ----------- ----------- -----------
Income (loss) before income
tax (benefit)............. (1,894,754) 1,162,451 (4,260,450) 1,272,878
Income tax (benefit)....... (580,000) 516,128 (580,000) 573,942
----------- ----------- ----------- -----------
Net income (loss).......... $(1,314,754) $ 646,323 $(3,680,450) $ 698,936
=========== =========== =========== ===========
Less:
Allocation of income to
participating
securities............... -- 213,901 -- 214,974
Accretion to redemption
value of preferred
stock.................... 339,205 307,986 993,541 358,904
----------- ----------- ----------- -----------
Net income (loss)
available to common
stockholders............. $(1,653,959) $ 124,436 $(4,673,991) $ 125,058
=========== =========== =========== ===========
Per share data:
Basic net income (loss)
available to common
stockholders............. $ (0.13) $ 0.02 $ (0.48) $ 0.02
=========== =========== =========== ===========
Diluted net income (loss)
available to common
stockholders............. $ (0.13) $ 0.02 $ (0.48) $ 0.02
=========== =========== =========== ===========
Pro forma basic net income
(loss) available to
common stockholders...... $ (0.09) $ 0.01 $ (0.29) $ 0.01
----------- ----------- ----------- -----------
Pro forma diluted net
income (loss) available
to common stockholders... $ (0.09) $ 0.01 $ (0.29) $ 0.01
=========== =========== =========== ===========
Weighted average number of
common shares
outstanding-basic........ 12,491,732 7,462,228 9,701,642 7,462,228
=========== =========== =========== ===========
Weighted average number of
common shares
outstanding-diluted...... 12,491,732 8,003,613 9,701,642 7,810,880
=========== =========== =========== ===========
Pro forma weighted average
number of shares
outstanding-basic........ 18,842,853 13,813,349 16,052,763 9,974,760
=========== =========== =========== ===========
Pro forma weighted average
number of common shares
outstanding-diluted...... 18,842,853 14,354,734 16,052,763 10,323,413
=========== =========== =========== ===========
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
4
<PAGE>
MEDICHEM LIFE SCIENCES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine-month period ended
September 30,
------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................................. $(3,680,450) $ 698,936
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization.................... 2,558,412 548,635
Bad debt expense................................. 54,447 47,707
Redeemable stock warrant appreciation............ 2,169,259 --
Noncash compensation expense..................... 9,594 21,542
Noncash interest expense......................... 59,525 19,585
Changes in assets and liabilities:
Accounts receivable............................ (1,231,108) (1,836,535)
Prepaid and other current assets............... (1,239,989) (324,088)
Other assets................................... (618,220) (204,332)
Accounts payable............................... 1,358,559 (224,734)
Accrued expenses............................... (1,493,764) 951,353
Other liabilities.............................. (179,919) (119,226)
----------- -----------
Net cash used in operating activities................ (2,233,654) (421,157)
----------- -----------
Cash flows from investing activities:
Capital expenditures............................... (8,071,053) (3,605,735)
Cost of purchased businesses, net of cash
acquired.......................................... (336,744) --
----------- -----------
Net cash provided by (used in) investing activities.. (8,407,797) (3,605,735)
----------- -----------
Cash flows from financing activities:
Deferred financing costs........................... -- (330,428)
Net borrowings under revolving line of credit...... 6,852,209 (580,000)
Proceeds from the issuance of note to stockholder.. -- 3,000,000
Proceeds from the issuance of loans payable........ -- 6,998,000
Repayment of debt.................................. (31,738) (537,135)
Repayment of capital lease obligations............. (165,392) (93,371)
Repayment of debt to stockholder................... (3,000,000) --
Proceeds from the issuance of preferred stock,
net............................................... -- 2,606,502
----------- -----------
Net cash provided by financing activities............ 3,655,079 11,063,568
----------- -----------
Net increase (decrease) in cash...................... (6,986,372) 7,036,676
Cash at beginning of period.......................... 8,164,730 171,462
----------- -----------
Cash at end of period................................ $ 1,178,358 $ 7,208,138
=========== ===========
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
5
<PAGE>
MEDICHEM LIFE SCIENCES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The accompanying condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America and applicable Securities and Exchange Commission
regulations for interim financial statements. These financial statements do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. In the opinion of management, the financial statements presented
contain all adjustments, consisting of normal recurring adjustments, which are
necessary for a fair presentation of the financial position and results of
operations for the periods presented. The results of operations for the nine-
month period ended September 30, 2000 are not necessarily indicative of the
operating results for the full year. These financial statements should be read
in conjunction with our audited financial statements for the year ended
December 31, 1999 included in the Company's Registration Statement on Form S-1
which was declared effective on October 26, 2000
(2) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (FAS 133), which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. FAS 133, as amended by FAS 138,
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (1) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment,
(2) a hedge of the exposure to variable cash flows of a forecasted transaction,
or (3) a hedge of the foreign currency exposure of a net investment in a
foreign operation, an unrecognized firm commitment, an available-for-sale
security, or a foreign-currency-denominated forecasted transaction. The
accounting for changes in the fair value of a derivative (that is, gains and
losses) depends on the intended use of the derivative and resulting
designation.
As amended by FAS 137, FAS 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. At the date of initial application,
an entity shall choose to either (1) recognize as an asset or liability in the
statement of financial position all embedded derivative instruments that are
required to be separated from their host contracts or (2) select either January
1, 1998 or January 1, 1999 as a transition date for embedded derivatives. If
the entity chooses to select a transition date, it shall recognize as separate
assets and liabilities only those derivatives embedded in hybrid instruments
issued, acquired, or substantively modified by the entity on or after the
selected transition date. That choice is not permitted to be applied to only
some of an entity's individual hybrid instruments and must be applied on an
all- or-none basis.
The Company is currently evaluating the impact, if any, of adopting the
provisions of FAS 133. Management does not expect the adoption of the
provisions of FAS 133, as amended by FAS 138, (and the method of adoption) to
have a material impact on the financial position or results of operations of
the Company.
In September 2000, the FASB issued Statement of Financial Accounting
Standards No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities (FAS 140), which replaces Statement of
Financial Accounting Standards No. 125, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities (FAS 125). FAS 140
revises the standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures, but it
carries over most of FAS 125's provisions without reconsideration.
6
<PAGE>
The Company is currently evaluating the impact, if any, of adopting the
provisions of FAS 140. Management does not expect the adoption of the
provisions of FAS 140 to have a material impact on the financial position or
results of operations of the Company.
On December 3, 1999 the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
(SAB 101), which summarizes certain of the SEC Staff's views on applying
generally accepted accounting principles to revenue recognition in financial
statements. In general, SAB 101 provides that if a transaction is within the
scope of specific authoritative literature that provides revenue recognition
guidance, that literature should be applied. However, in the absence of
authoritative literature addressing a specific arrangement or a specific
industry, the SEC staff will consider the existing authoritative accounting
standards as well as the broad revenue recognition criteria specified in the
FASB's conceptual framework that contain basic guidelines for revenue
recognition.
As amended, the guidance contained in SAB 101 is effective October 1, 2000.
Changes in the application of accounting principles resulting from the guidance
contained in SAB 101 are reported as accounting changes in interim financial
statements.
The Company is currently evaluating the impact, if any, of adopting the
provisions of SAB 101. Management does not expect adoption of the provisions of
SAB 101 to have a material impact on the financial position or results of
operations of the Company.
(3) Business Combinations
On May 31, 2000, the Company acquired all of the outstanding common stock of
ThermoGen, Inc. through the issuance of 3,452,909 shares of its Class A common
stock. The acquisition was accounted for using the purchase method of
accounting, and the Company's results of operations include the results of
ThermoGen from the date of its acquisition. As additional consideration,
outstanding stock options of ThermoGen were converted into options to purchase
475,455 shares of Class B common stock of the Company. The total purchase price
for ThermoGen was determined to be $29,730,000 and has been allocated to the
assets acquired and liabilities assumed based on their relative fair value as
follows: patents-$6,886,000; trade name-$3,057,000; contracts and customer
base- $15,629,000; net liabilities assumed-$1,365,000; and goodwill-
$15,622,000. Included in goodwill is approximately $10,101,000 related to the
establishment of deferred tax liabilities in conjunction with the purchase.
On May 31, 2000, the Company acquired all of the outstanding common stock of
Emerald BioStructures, Inc. through the issuance of 1,576,602 shares of its
Class A common stock. The acquisition was accounted for using the purchase
method of accounting, and the Company's results of operations include the
results of Emerald Biostructures from the date of its acquisition. The total
purchase price for Emerald BioStructures was determined to be $12,044,000 and
has been allocated to the assets acquired and liabilities assumed based on
their relative fair value as follows: patents-$1,098,000; trade name-$599,000;
contracts and customer base-$4,437,000; proprietary technology-$289,000; net
assets assumed-$1,000; and goodwill-$8,157,000. Included in goodwill is
approximately $2,537,000 related to the establishment of deferred tax
liabilities in conjunction with the purchase.
The following unaudited pro forma financial information presents combined
results of operations of the Company and its subsidiaries as if ThermoGen and
Emerald BioStructures had been acquired on January 1, 1999. The pro forma
financial information does not necessarily reflect the results of operations
that would have occurred had the acquisitions been consummated on January 1,
1999.
<TABLE>
<CAPTION>
Nine-month period ended
September 30,
------------------------
2000 1999
----------- -----------
<S> <C> <C>
Total contract revenue........................... $15,208,995 $11,755,541
Net loss available to common stockholders........ $(5,893,890) $(2,358,326)
Per share net loss available to common
stockholders-basic and diluted.................. $ (0.47) $ (0.19)
</TABLE>
7
<PAGE>
(4) Debt
The Company has a term loan note payable in the amount of $5,000,000. The
note bears interest at the floating 30 day LIBOR rate plus 5.25%. Interest is
payable monthly. The note is secured by substantially all of the assets of the
Company and is due on June 1, 2005.
The Company maintains a credit facility in the amount of $15,000,000 that is
available for working capital and acquisition purposes. Loans under this
facility bear interest at the floating 30 day LIBOR rate plus 4%. Amounts
borrowed under this credit facility were $4,700,000 and $0 at September 30,
2000 and December 31, 1999, respectively.
The Company has a $12,000,000 construction loan available for draws for the
construction of the Woodridge, Illinois facility. Interest is payable monthly
at the floating prime rate that was 9.5% at September 30, 2000. At September
30, 2000, $3,850,788 had been drawn on the construction loan.
Subsequent to September 30, 2000, the Company repaid the term loan note
payable and all outstanding debt under the working capital credit facility with
a portion of the net proceeds. In addition, the Company terminated the existing
credit facilities.
(5) Income Taxes
The Company applies the provisions of APB Opinion No. 28 in calculating
income taxes for interim periods and accordingly uses an expected annual
effective tax rate to provide for taxes. A $580,000 income tax benefit was
recorded in the three-month period ended September 30, 2000 to reflect expected
utilization of losses generated in the current year by carry-back to prior
years in which taxable income was generated.
(6) Net Earnings (Loss) Per Share
<TABLE>
<CAPTION>
For the three-month period ended
----------------------------------------------------------------------------
September 30, 2000 September 30, 1999
------------------------------------- --------------------------------------
Income
(loss) Average shares Per share Income (loss) Average shares Per share
(numerator) (denominator) amount (numerator) (denominator) amount
----------- -------------- --------- ------------ -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss)...... $(1,314,754) $646,323
Less allocation of
income to
participating
securities.......... -- 213,901
Less accretion to
redemption value of
preferred stock..... 339,205 307,986
----------- ---------- ------ -------- --------- -----
Class A common stock... 12,491,732 7,462,228
Basic earnings (loss)
per share
Net income (loss)
available to common
stockholders........ $(1,653,959) 12,491,732 $(0.13) $124,436 7,462,228 $0.02
====== =====
Effect of dilutive
securities
Add effect of
allocation of income
to participating
securities.......... -- 2,806
Class B common stock
options............... -- 225,807
Class C common stock
warrants.............. -- 315,578
---------- ---------
Diluted earnings per
share
Net income available
to common
stockholders +
assumed
conversions......... $(1,653,959) 12,491,732 $(0.13) $127,242 8,003,613 $0.02
====== =====
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
For the nine-month period ended
------------------------------------------------------------------------
September 30, 2000 September 30, 1999
------------------------------------ -----------------------------------
Income Average Income Average
(loss) shares Per share (loss) shares Per share
(numerator) (denominator) amount (numerator) (denominator) amount
----------- ------------ --------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss)...... $(3,680,450) $698,936
Less allocation of
income to
participating
securities.......... -- 214,974
Less accretion to
redemption value of
preferred stock..... 993,541 358,904
----------- --------
Class A common stock... 9,701,642 7,462,228
Basic earnings (loss)
per share.............
Net income (loss)
available to common
stockholders........ $(4,673,991) 9,701,642 $(0.48) $125,058 7,462,228 $0.02
====== =====
Effect of dilutive
securities............
Add effect of
allocation of income
to participating
securities.......... -- 882
----------- --------
Class B common stock
options............... -- 225,413
Class C common stock
warrants.............. -- 123,239
--------- ---------
Diluted earnings per
share.................
Net income available
to common
stockholders +
assumed
conversions......... $(4,673,991) 9,701,642 $(0.48) $125,940 7,810,880 $0.02
====== =====
</TABLE>
Basic and diluted net earnings (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 earnings
(loss) per common share as if these shares had been outstanding for all periods
presented.
In accordance with SFAS No. 128, basic and diluted net earnings (loss) per
share have been computed using the weighted-average number of shares of common
stock outstanding during the period. Pro forma basic and diluted net earning
(loss) per common share, as presented in the condensed consolidated statements
of operations, has been computed for the three and nine month periods ended
September 30, 2000 and 1999 as described above, and also gives effect to the
conversion of Class A preferred stock which automatically converted to common
stock immediately prior to the completion of the Company's initial public
offering on October 26, 2000 (using the "as if converted" method) from the
original date of issuance.
9
<PAGE>
(7) Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Nine-month period ended
September 30,
-----------------------
2000 1999
----------- -----------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Interest paid........................................ $ 687,083 $ 231,274
Income tax payments.................................. 664,692 73,200
Supplemental disclosure of noncash investing and
financing activities:
Equipment acquired under capital lease............... -- 446,235
Class A convertible preferred stock issued to
stockholder under equity recapitalization........... -- 10,012,000
The company purchased all of the capital stock of
ThermoGen and
Emerald for $43,055,299. Liabilities were assumed as
follows:
Fair Value of assets acquired........................ 44,896,769
Class A common stock issued for capital stock........ 42,718,555
Cash paid, net....................................... 336,744
Liabilities assumed.................................. 1,841,470
</TABLE>
(8) Subsequent Events
On October 2, 2000, Dr. Michael T. Flavin, CEO and majority stockholder,
made a $1.5 million loan to the company. The purpose of this loan was to
provide supplemental working capital. However, since the Company cash balance
was sufficient to accommodate working capital requirements without these funds,
the loan was repaid on October 31, 2000.
In the fourth quarter of 2000, the Company completed an initial public
offering of 7,360,000 shares of common stock. The Company received net proceeds
of $45.5 million. This is net of $2.4 million in expenses relating to the
issuance and distribution of the securities and $3.6 million in underwriting
discounts and commissions. The Company used $9.7 million of the net proceeds to
repay in full and terminate its credit facility, $11.5 million for the
mandatory redemption of outstanding preferred stock and $2.2 million for the
optional redemption of outstanding warrants. Immediately prior to the initial
public offering, the Company reincorporated in Delaware and exchanged its
outstanding shares of Class A convertible preferred stock and Class D preferred
stock into 19,044,747 shares of common stock of the Company, reflecting an
18.65557 for one split of our common stock. The following table provides
information about stockholders' equity as if the initial public offering, use
of proceeds and related corporate actions had occurred as of September 30,
2000.
<TABLE>
<CAPTION>
Pro Forma as
adjusted
Stockholders'
equity
September 30,
2000
-------------
(Unaudited)
<S> <C>
Stockholders' equity (deficit):
Preferred stock, $.01 par value, 10,000,000 shares authorized;
none issued and outstanding at September 30, 2000............. $ --
Common stock, $.01 par value, 100,000,000 shares authorized,
26,404,747 shares issued and outstanding at September 30,
2000.......................................................... 264,047
Additional paid-in capital..................................... 89,390,521
Deferred compensation.......................................... (129,381)
Accumulated deficit............................................ (13,671,983)
------------
Total stockholders' equity................................... $ 75,853,204
============
</TABLE>
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Founded in 1987, we believe we were the first independent chemistry company
to offer a broad array of discovery-related medicinal chemistry services to
pharmaceutical and biotechnology customers. From a company focused exclusively
on medicinal chemistry services, we have evolved into a full-service drug
discovery technology and services company. Our development of strong
relationships with pharmaceutical companies by initially providing basic
medicinal chemistry services helped us to identify their unmet needs in the
later stages of the drug discovery process. In response, we expanded our
service offerings to include process development, analytical and separations
chemistry and chemical synthesis and scale up. To capitalize on recent advances
in genomics, we have developed technology and services in early-stage
proteomics, combinatorial chemistry and biocatalysis.
In November 2000, MediChem and Degussa-Huls, a premier German specialty
chemicals company, announced a three-year, $5.3 million strategic alliance
research and production agreement, which integrates MediChem's drug discovery
and development service offerings with Degussa's cGMP, large-scale production
capabilities. Under the agreement, MediChem is obligated to notify Degussa
promptly of any product opportunity and any project in the field which may lead
to a large scale manufacturing opportunity within one year, commit qualified
and experienced personnel, facilities, equipment and other resources necessary
to perform its obligation under the Research Program, and actively co-market
the combined capabilities of MediChem's discovery research and process
development and Degussa's manufacturing expertise in the field.
Recent Acquisitions
On May 31, 2000, we acquired all the outstanding common stock of ThermoGen
and Emerald BioStructures. The acquisitions were accounted for using the
purchase method of accounting and our results of operations for the nine-month
period ended September 30, 2000 include the operations of ThermoGen and Emerald
BioStructures from their date of acquisition.
Initial Public Offering
On October 31, 2000, we completed our initial public offering of 7,360,000
shares of common stock (which included 960,000 over-allotment shares) at a
public offering price of $7.00 per share.
Results of Operations
Three-month period ended September 30, 2000 compared with the three-month
period ended September 30, 1999
Contract revenue
Total contract revenue including related party increased 40% to $5.2 million
for the three-month period ended September 30, 2000, from $3.7 million for the
three-month period ended September 30, 1999. A portion of this increase was due
to revenue generated from the May 2000 acquisitions, while the remainder of the
increase is due to general sales growth. Contract revenue excluding related
party increased 44% to $4.3 million for the three-month period ended September
30, 2000, from $3.0 million for the three-month period ended September 30,
1999. Increased contract revenue excluding related party was achieved from
chemical process development, chemical synthesis and scale up. Contract
revenue--related party increased 23% to $843,000 for the three-month period
ended September 30, 2000, from $685,000 for the three-month period ended
September 30, 1999.
11
<PAGE>
Gross profit
Gross profit from total contract revenue increased 35% to $2.7 million for
the three-month period ended September 30, 2000, from $2.0 million for the
three- month period ended September 30, 1999. Gross profit excluding related
party increased 26% to $2.1 million for the three-month period ended September
30, 2000, from $1.7 million for the three-month period ended September 30,
1999. Related party gross profit increased 86% to $568,000 for the three-month
period ended September 30, 2000, from $305,000 for the three-month period ended
September 30, 1999.
Gross profit as a percent of total contract revenue decreased to 51% for the
three-month period ended September 30, 2000, from 53% for the three-month
period ended September 30, 1999. Gross profit excluding related party as a
percent of contract revenue decreased to 48% for the three-month period ended
September 30, 2000, from 55% for the three-month period ended September 30,
1999 due to lower utilization of scientific staff. The lower utilization is a
result of new hires in scientific staff to meet the needs associated with
planned revenue growth. Since the scientific staff represents a fixed cost to
the Company, utilization varies with changes in contract service revenue
volume. Related party gross profit increased to 67% of related party contract
revenue for the three-month period ended September 30, 2000, from 44% for the
three-month period ended September 30, 1999. This increase is attributed to a
greater number of projects at higher charge-out rates.
Milestone and intellectual property revenue
Milestone and intellectual property revenue decreased 45% to $650,000 for
the three-month period ended September 30, 2000, from $1.2 million for the
three- month period ended September 30, 1999. The entire milestone revenue
balance represented related party activity and resulted from the achievement of
contract milestones with Advanced Life Sciences.
Operating expenses
Selling, general and administrative expenses increased 92% to $3.1 million
for the three-month period ended September 30, 2000, from $1.6 million for the
three-month period ended September 30, 1999. As a percentage of total contract
revenues, selling, general and administrative expenses increased 17% to 60% for
the three-month period ended September 30, 2000, from 43% for the three-month
period ended September 30, 1999. The increase in selling, general and
administrative expenses was due primarily to an increase in marketing personnel
to support our expanding customer base, and an increase in facility costs
associated with facilities expansion and integration efforts relating to the
ThermoGen and Emerald BioStructures acquisitions.
Depreciation and amortization expenses increased to $1.6 million for the
three- month period ended September 30, 2000, from $236,000 for the three-month
period ended September 30, 1999. The increase was due to higher depreciation
expense associated with facilities expansion and the incurrence of $1.2 million
of amortization expense resulting from intangible assets acquired in the
ThermoGen and Emerald BioStructures acquisitions.
Other expenses, net
Interest income decreased to $30,000 in the three-month period ended
September 30, 2000, from $79,000 in the three-month period ended September 30,
1999, as cash balances decreased due to the payments made for the construction
of the new facility and other working capital requirements.
Other expenses, net increased to $544,000 for the three-month period ended
September 30, 2000, from $143,000 for the three-month period ended September
30, 1999. This increase included a charge of $264,000 which represented mark-
to- market costs associated with a redeemable stock warrant, and it also
included an increase in interest expense on additional borrowings primarily for
the purchase of land in Woodridge, Illinois and general corporate purposes.
12
<PAGE>
Income taxes
A $580,000 income tax benefit was recorded in the three-month period ended
September 30, 2000. This benefit was recorded as a result of expected
utilization of the current year operating loss by carry-back to prior years in
which taxable income was generated.
Nine-month period ended September 30, 2000 compared with the nine-month
period ended September 30, 1999
Contract revenue
Total contract revenue including related party increased 44% to $14.1
million for the nine-month period ended September 30, 2000, from $9.7 million
for the nine-month period ended September 30, 1999. A portion of this increase
was due to revenue generated from the May 2000 acquisitions, while the
remainder of the increase is due to general sales growth. Contract revenue
excluding related party increased 51% to $11.9 million for the nine-month
period ended September 30, 2000, from $7.8 million for the nine-month period
ended September 30, 1999. Increased contract revenue excluding related party
was achieved across all lines of service offerings, with the largest increases
attributable to combinational chemistry, chemical process development, and
analytical and separations chemistry. Contract revenue--related party increased
16% to $2.2 million for the nine-month period ended September 30, 2000, from
$1.9 million for the nine-month period ended September 30, 1999.
Gross profit
Gross profit from total contract revenue increased 38% to $7.2 million for
the nine-month period ended September 30, 2000, from $5.2 million for the nine-
month period ended September 30, 1999. Gross profit excluding related party
increased 42% to $5.9 million for the nine-month period ended September 30,
2000, from $4.1 million for the nine-month period ended September 30, 1999.
Related party gross profit increased 23% to $1.3 million for the nine-month
period ended September 30, 2000, from $1.1 million for the nine-month period
ended September 30, 1999.
Gross profit as a percent of total contract revenue decreased to 51% for the
nine-month period ended September 30, 2000, from 54% for the nine-month period
ended September 30, 1999. Gross profit excluding related party as a percent of
contract revenue decreased to 50% for the nine-month period ended September 30,
2000, from 53% for the nine-month period ended September 30, 1999 due to lower
utilization of scientific staff. The lower utilization is a result of new hires
in scientific staff to meet the needs associated with planned revenue growth.
Since the scientific staff represents a fixed cost to the Company, utilization
varies with changes in contract service revenue volume. Related party gross
profit increased to 60% of related party contract revenue for the nine-month
period ended September 30, 2000, from 57% for the nine-month period ended
September 30, 1999. This increase is attributed to a greater number of projects
at higher charge-out rates.
Milestone and intellectual property revenue
In both the nine-month periods ended September 30, 2000 and 1999, we derived
$1.2 million of milestone and intellectual property revenue. The majority of
this revenue, $1.0 million, was related party for the nine-month period ended
September 30, 2000 while the entire $1.2 million was related party for the
nine- month period ended September 30, 1999. These revenues resulted from the
achievement of contract milestones with Advanced Life Sciences. The remaining
$222,000 for the nine-month period ended September 30, 2000 was earned as a
result of fulfilling third party project completion milestones in connection
with our strategic drug development program.
13
<PAGE>
Operating expenses
Selling, general and administrative expenses increased 69% to $7.3 million
for the nine-month period ended September 30, 2000, from $4.3 million for the
nine- month period ended September 30, 1999. As a percentage of total contract
revenues, selling, general and administrative expenses increased 8% to 52% for
the nine-month period ended September 30, 2000, from 44% for the nine-month
period ended September 30, 1999. The increase in selling, general and
administrative expenses was due primarily to an increase in marketing personnel
to support our expanding customer base, and an increase in facility costs
associated with facilities expansion and integration efforts relating to the
ThermoGen and Emerald BioStructures acquisitions.
Depreciation and amortization expenses increased to $2.6 million for the
nine- month period ended September 30, 2000, from $549,000 for the nine-month
period ended September 30, 1999. The increase was due to higher depreciation
expense associated with facilities expansion and the incurrence of $1.6 million
of amortization expense resulting from the ThermoGen and Emerald BioStructures
acquisitions.
Other expenses, net
Interest income increased to $148,000 in the nine-month period ended
September 30, 2000, from $91,000 in the nine-month period ended September 30,
1999, as cash balances rose from the sale of preferred stock, and the issuance
of term debt in June 1999.
Other expenses, net increased to $2.8 million for the nine-month period
ended September 30, 2000, from $263,000 for the nine-month period ended
September 30, 1999. This increase included a charge of $2.2 million which
represented mark-to- market costs associated with a redeemable stock warrant,
and it also included an increase in interest expense on additional borrowings
primarily for the purchase of land in Woodridge, Illinois and general corporate
purposes.
Income taxes
A $580,000 income tax benefit was recorded in the nine-month period ended
September 30, 2000. This benefit was recorded as a result of expected
utilization of the current year operating loss by carry-back to prior years in
which taxable income was generated.
Liquidity and Capital Resources
Prior to the initial public offering, we have funded our business through
cash flows from operations, proceeds from borrowings and the issuance of
preferred stock. During the nine-month period ended September 30, 2000 and
1999, we used $2.2 million and $.4 million, respectively, in cash flows from
operations and in addition we raised $12.0 million in 1999 through borrowings
and the issuance of preferred stock. On October 26, 2000, an initial public
offering was completed and the net proceeds, after deducting our expenses, were
approximately $45.5 million. A portion of the net proceeds from this offering
was used to repay in full and terminate the credit facility.
During the nine-month period ended September 30, 2000 and the year ended
December 31, 1999, total capital expenditures were $8.0 million and $4.2
million, respectively. Capital expenditures were incurred predominantly in
connection with our expansion of service offerings, including analytical and
separations chemistry, chemical synthesis and scale up and with our facilities
expansions in 2000. In April 1999, we began to develop a 14-acre site in
Woodridge, Illinois for the construction of a new 100,000 square foot
headquarters and discovery laboratories center. This facility is estimated to
cost $17.5 million for construction and an additional $5.0 million for
laboratory instrumentation, software, furniture and equipment upgrades. A total
of $9.6 million of the estimated total costs of our new facility had been
incurred through September 30, 2000. In May 2000, we received an 18-month
construction commitment for an additional $12.0 million to finance the project.
Upon completion of the project, we anticipate entering into a mortgage loan as
a more permanent form of financing for our facility. The new facility is
anticipated to be operational by the first quarter of 2001. The new offices and
laboratories have been developed with the capability of being expanded an
additional 100,000 square feet.
14
<PAGE>
We believe that the net proceeds from our initial public offering, together
with cash expected to be generated from operations and borrowings under the
mortgage loan, will be sufficient to fund our anticipated working capital needs
and capital expenditures, other than financing necessary to complete future
acquisitions, if any, for at least the next 24 months. Future acquisitions, if
any, could be funded with the net proceeds of this offering and/or the issuance
of debt or equity securities. There can be no assurance that attractive
acquisition opportunities will be available to us or will be available at
prices and upon such other terms that are attractive to us. We regularly
evaluate potential acquisitions of other businesses, products and product lines
and may hold discussions regarding such potential acquisitions. As a general
rule, we will publicly announce such acquisitions only after a definitive
purchase agreement has been signed. In addition, in order to meet our long-term
liquidity needs or consummate future acquisitions, we may incur additional
indebtedness or issue additional equity and debt securities, subject to market
and other conditions. There can be no assurance that such additional financing
will be available on terms acceptable to us or at all. Our failure to raise the
funds necessary to finance our future cash requirements or consummate future
acquisitions could adversely affect our ability to pursue our strategy and
could negatively affect our operations in future periods.
Special Note Regarding Forward-looking Statements
The discussion of our results of operations and financial condition should
be read in conjunction with the accompanying condensed consolidated financial
statements and the notes thereto included within this report. This Form 10-Q
contains "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Our actual results could differ materially from those
contained in the forward-looking statements and therefore, prospective
investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties. Actual
events or results may differ from those discussed in the forward-looking
statements as a result of various factors, including, without limitation, a
reduction in research and development spending in the pharmaceutical and
biotechnology industries, our ability to compete in multiple areas of the drug
development technology and services industry, the loss of a significant
customer, the termination of contracts on short notice, our ability to attract
and retain scientific personnel, the impact of government regulations on our
service offerings, our ability to produce proprietary technology, to protect
our intellectual property and to license technologies from others. We refer you
to the detailed discussion of these and other risk factors contained in our
registration statement on Form S-1, as declared effective on October 26, 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our activities
without increasing risk. Some of the securities that we invest in may have
market risk. This means that a change in prevailing interest rates may cause
the fair value of the principal amount of the investment to fluctuate. For
example, if we hold a security that was issued with a fixed interest rate at
the prevailing rate and the prevailing rate later rises, the fair value of the
principal amount of our investment will probably decline. To minimize this risk
in the future, we intend to maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including commercial paper,
government and non-government debt securities and money market funds. The
average duration of all our investments has generally been less than one year.
Due to the short-term nature of these investments, we believe we have no
material exposure to interest rate risk arising from our investments.
Therefore, no quantitative tabular disclosure is required.
15
<PAGE>
Part II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Our Registration Statement on Form S-1 (File No. 333-39548) relating to our
initial public offering was declared effective by the SEC on October 26, 2000.
A total of 7,360,000 shares of our common stock were registered on our behalf
and sold at an aggregate offering price of $51.5 million. Our managing
underwriters in connection with our initial public offering were UBS Warburg
LLC, Chase Securities Inc. and William Blair & Company, L.L.C. Up to the date
of the filing of this Form 10-Q, we have incurred approximately $6.0 million of
expenses in connection with the issuance and distribution of our common stock.
None of these expenses were paid to any of our officers, directors, general
partners or their associates, our affiliates or holders of 10% or more of our
securities.
The net offering proceeds after deducting our expenses were $45.5 million.
We have used the net proceeds as follows: (i) approximately $11.5 million for
the mandatory redemption of our outstanding preferred stock; (ii) approximately
$9.7 million for the repayment of our outstanding indebtedness under an
existing credit facility; and (iii) approximately $2.2 million for the
redemption of a warrant to purchase our common stock. Of such uses of proceeds,
approximately $11.5 million was paid to certain affiliates, directors or
officers in connection with the mandatory redemption of our outstanding
preferred stock. The remaining portion of our net offering proceeds has been
invested in short-term, interest-bearing, investment-grade securities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
27.1 Financial data schedule
</TABLE>
(b) Reports on Form 8-K
None
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
MEDICHEM LIFE SCIENCES, INC.
/s/ Richard Wieland
By: _________________________________
R. Richard Wieland
Executive Vice President and Chief
Financial Officer
/s/ Michael J. Cogan
By: _________________________________
Michael J. Cogan
Controller and Chief Accounting
Officer
Date: January 16, 2001
17
