<PAGE>
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 2000 OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-30992
3-DIMENSIONAL PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware
----------------------------
(State or other jurisdiction of
incorporation or organization)
23-2716487
----------------------------
(I.R.S. Employer Identification No.)
665 Stockton Drive
Exton, Pennsylvania
19341
----------------------------------------
(Address of principal executive offices)
610/458-8959
----------------------------------------
(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 X No _____
-----
As of November 3, 2000, 21,089,542 shares of common stock were outstanding.
--------------------------------------------------------------------------------
1
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Part I - Financial Information
---
Item 1 - Financial Information
3-DIMENSIONAL PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and Cash Equivalents 121,192,000 7,645,000
Prepaid Expenses and other current assets 2,352,000 337,000
------------- -----------
Total current assets,net 123,544,000 7,982,000
Property and equipment 4,766,000 4,314,000
Other assets 1,150,000 184,000
------------- -----------
129,460,000 12,480,000
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable and accrued expenses 1,832,000 2,737,000
Deferred Income 23,040,000 888,000
Current portion of long term debt 1,277,000 1,139,000
Current portion of settlement accrual 500,000 1,000,000
------------- -----------
Total current liabilities 26,649,000 5,764,000
Notes payable-dividends and accrued interest 685,000
Long -term debt, less current portion 1,678,000 2,330,000
Convertible notes payable and accrued interest 10,115,000
Long-term portion of settlement accrual 500,000
------------- -----------
28,327,000 19,394,000
------------- -----------
Commitment and contingency
Redeemable Convertible Series A preferred stock-$.001 par value;
25,564,715 shares authorized, 25,235,240 issued and outstanding at
December 31, 1999 (aggregate liquidating preference $35,004,474 at
December 31, 1999) 34,834,000
------------- -----------
Stockholders Equity:
Convertible preferred stock-$.001 par value: 6,000,000 shares authorized
in aggregate, 1,400,000 issued and outstanding at December 31, 1999
(Aggregate liquidating preference $3,250,000) 1,000
Common stock-$.001 par value; 45,000,000 shares authorized,
20,767,408 and 745,418 shares outstanding at September 30, 2000
and December 31, 1999 respectively 21,000 2,000
Additional paid-in capital 153,487,000 3,428,000
Notes receivable from officers (552,000) (70,000)
Deferred compensation (904,000)
Accumulated deficit (50,919,000) (45,109,000)
------------- -----------
Total Stockholders' Equity (Deficiency) 101,133,000 (41,748,000)
============= ===========
129,460,000 12,480,000
============= ===========
</TABLE>
2
<PAGE>
3-DIMENSIONAL PHARMACEUTICALS, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------------------
2000 1999 2000 1999
-------------- ----------- -------------- -----------
(Consolidated) (Consolidated)
<S> <C> <C> <C> <C>
Grant and research revenue............... 4,994,000 718,000 8,609,000 3,979,000
Costs and expenses:
Research and development............. 3,423,000 2,660,000 9,983,000 8,510,000
General and administrative........... 2,023,000 1,617,000 5,244,000 4,429,000
----------- ----------- ----------- -----------
Total costs and expenses................. 5,446,000 4,277,000 15,227,000 12,939,000
----------- ----------- ----------- -----------
Loss from operations..................... (452,000) (3,559,000) (6,618,000) (8,960,000)
Interest income.......................... 1,281,000 50,000 1,693,000 260,000
Interest expense......................... (100,000) (124,000) (565,000) (365,000)
----------- ----------- ----------- -----------
Income (loss) before income taxes........ 729,000 (3,633,000) (5,490,000) (9,065,000)
Provision for income taxes............... 320,000 320,000
----------- ----------- ----------- -----------
Income (loss)............................ 409,000 (3,633,000) (5,810,000) (9,065,000)
Declared and accrued cumulative
dividends on preferred stock.......... (62,000) (167,000) (396,000) (501,000)
----------- ----------- ----------- -----------
Income (loss) applicable to
common stock.......................... 347,000 (3,800,000) (6,206,000) (9,566,000)
=========== =========== =========== ===========
Basic net earnings (loss) per
common share-historical............... $ 0.03 $ (6.16) $ (1.33) $ (15.93)
Weighted average common shares
outstanding-historical................ 12,698,000 617,000 4,673,000 601,000
----------- ----------- ----------- -----------
Diluted net earnings (loss) per
common share-historical............... $ 0.02 $ (6.16) $ (1.33) $ (15.93)
Weighted average common shares and
equivalents outstanding-historical.... 21,066,000 617,000 4,673,000 601,000
----------- ----------- ----------- -----------
Basic net earnings (loss) per
common share-pro-forma................ $ 0.02 $ (0.36) $ (0.42) $ (0.89)
Weighted average common shares
outstanding-pro-forma................. 17,496,000 10,208,000 13,870,000 10,191,000
----------- ----------- ----------- -----------
Diluted net earnings (loss) per
common share-pro-forma................ $ 0.02 $ (0.36) $ (0.42) $ (0.89)
Weighted average common shares and
equivalents outstanding-pro-forma..... 21,066,000 10,208,000 13,870,000 10,191,000
----------- ----------- ----------- -----------
</TABLE>
3
<PAGE>
3-DIMENSIONAL PHARMACEUTICALS, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------
2000 1999
--------------- ---------------
(consolidated)
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................ (5,810,000) (9,065,000)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization................................... 1,275,000 1,189,000
Amortization of premium of short-term investments............... 21,000
Accretion of interest on discounted note payable................ 16,000
Compensation charge in connection with acceleration of
vesting of options and stock and other....................... 38,000
Valuation of options and warrants............................... 448,000
Interest paid with common stock................................. 49,000
Interest paid with preferred stock.............................. 239,000
Changes in:
Grants and contracts receivable............................ (448,000) 333,000
Other assets............................................... (1,638,000) (132,000)
Accounts payable and accrued expenses...................... (906,000) 856,000
Settlement accrual......................................... (1,000,000)
Deferred income............................................ 22,152,000 (432,000)
--------------- ---------------
Net cash provided by (used in) operating activities.... 14,415,000 (7,230,000)
--------------- ---------------
Cash flows from investing activities:
Sale and maturities of investment securities.................... 6,265,000
Capital expenditures............................................ (2,216,000) (164,000)
--------------- ---------------
Net cash provided by (used in) investing
activities........................................... (2,216,000) 6,101,000
--------------- ---------------
Cash flows from financing activities:
Proceeds from sale of stock and exercise of options and
warrants...................................................... 103,033,000 4,000
Dividends paid on Series A-1 Preferred Stock.................... (229,000)
Loan made to officer............................................ (519,000)
Reduction of long-term debt and notes payable................... (937,000) (928,000)
--------------- ---------------
Net cash provided by (used in) financing
activities........................................... 101,348,000 (924,000)
--------------- ---------------
Net increase (decrease) in cash and cash equivalents.................... 113,547,000 (2,053,000)
Cash and cash equivalents-beginning of period........................... 7,645,000 2,439,000
--------------- ---------------
Cash and cash equivalents-end of period................................. 121,192,000 386,000
=============== ===============
Supplemental disclosures of cash flow information:
Cash paid for interest.......................................... 261,000 342,000
Noncash investing and financing activities:
Equipment purchased under capital leases.................... 390,000
Dividend declared but not paid.............................. 501,000
Note receivable exchanged for common stock.................. 19,000 19,000
Notes payable (including interest due of $89,000)
exchanged for common stock................................ 1,069,000
Notes payable (including interest due of $353,000)
exchanged for redeemable preferred stock.................. 10,353,000
</TABLE>
4
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3-Dimensional Pharmaceuticals, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation:
The unaudited consolidated financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. In management's opinion, the accompanying consolidated financial
statements contain all adjustments, consisting of normally recurring
adjustments, necessary for a fair presentation of the Company's financial
position and results of operations. Interim financial results are not
necessarily indicative of results anticipated for the full year. These unaudited
consolidated financial statements should be read in conjunction with the
Company's 1999 audited financial statements and footnotes included in the
Company's Registration Statement on Form S-1, as amended (File No. 333-37606).
The preparation of financial statements in conformity with generally accepted
accounting principles requires that management make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of expenses incurred during the reporting period. Actual
results could differ from those estimates.
2. Revenue recognition
Revenue from corporate collaborations, is recognized over the period that the
Company performs research and development activities under the terms of the
agreements. Such revenue includes periodic payments for research and development
activities and related nonrefundable up-front technology access fees and/or
technology or software licensing fees. Revenue from nonrefundable up-front fees
for the licensing of technology, products or software under agreements which do
not require the Company to perform research or development activities or other
significant future performance obligations is recognized at the time the
agreement is executed or the software is delivered. Revenue resulting from the
achievement of milestone events stipulated in the agreements is recognized when
the milestone is achieved. Up-front fees and other amounts received in excess of
revenue recognized are recorded as deferred income.
In the year ended December 31, 1999, the Company changed its method of
recognizing revenue with respect to nonrefundable up-front fees received under
corporate collaboration research agreements to the method described above to
conform with the requirements of an accounting bulletin on revenue recognition
issued by the staff of the Securities and Exchange Commission in December 1999
and retroactively restated its prior years financial statements to reflect the
application of the new method. Prior to the change the Company recognized
revenue from such fees upon the execution of the agreement.
5
<PAGE>
3. Net Earnings (Loss) Per Common Share
The Company has presented basic and diluted net earnings (loss) per share
pursuant to the Statement of Financial Accounting Standards ("SFAS") No. 128
"Earnings per Share," and the Securities and Exchange Commission Staff
Accounting Bulletin No. 98. In accordance with SFAS 128, basic and diluted net
earnings (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 earnings (loss) per common share, as
presented in the statements of operations, gives effect to the conversion of the
redeemable convertible preferred stock, which automatically converted to common
stock upon the closing of the Company's initial public offering, from the
original date of issuance.
3-Dimensional Pharmaceuticals, Inc.
EPS Presentation
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income (Loss) 409,000 (3,633,000) (5,810,000) (9,065,000)
Declared and accrued cumulative dividends on
preferred stock (62,000) (167,000) (396,000) (501,000)
-------------------------------- -------------------------------
Income (loss) to common stockholders $ 347,000 ($ 3,800,000) ($ 6,206,000) ($ 9,566,000)
================================ ===============================
Basic
Weighted average shares of common stock outstanding 12,902,125 739,668 4,864,959 737,272
Less: weighted average shares subject to repurchase (204,417) (122,358) (192,118) (136,686)
-------------------------------- -------------------------------
Weighted average shares used in computing basic net
earnings (loss) per share 12,697,708 617,310 4,672,842 600,586
-------------------------------- -------------------------------
Basic net earnings (loss) per share $ 0.03 $ (6.16) $ (1.33) $ (15.93)
================================ ===============================
Diluted
Shares used in computing basic net earnings
(loss) per share 12,697,708 617,310 4,672,842 600,586
Add: Weighted Average of Dilutive Securities 8,368,707 -- -- --
Shares used in computing diluted net earnings
-------------------------------- -------------------------------
(loss) per share 21,066,415 617,310 4,672,842 600,586
Diluted net earnings (loss) per share $ 0.02 $ (6.16) $ (1.33) $ (15.93)
================================ ===============================
Pro forma:
Income (loss) to common stockholders $ 347,000 ($ 3,800,000) ($6,206,000) ($ 9,566,000)
Add:Declared and accrued cumulative dividends on
preferred stock 62,000 167,000 396,000 501,000
-------------------------------- -------------------------------
Income (loss) $ 409,000 ($ 3,633,000) ($5,810,000) ($ 9,065,000)
================================ ===============================
Shares used to compute basic net earnings (loss)
per share above 12,697,708 617,310 4,672,842 600,586
Pro forma adjustment to reflect the weighted-
average effect of assumed conversion of
convertible preferred stock (unaudited) 4,781,955 9,544,729 9,160,754 9,544,729
Add: Common shares Subject to Repurchase
with accelerated vesting Provision 16,169 45,982 36,081 45,982
Shares used in computing pro forma basic
-------------------------------- -------------------------------
net earnings (loss) per share (unaudited) 17,495,832 10,208,021 13,869,676 10,191,297
Pro forma basic net earnings (loss) per
-------------------------------- -------------------------------
share (unaudited) $ 0.02 $ (0.36) $ (0.42) $ (0.89)
================================ ===============================
Diluted Proforma:
Shares used in computing pro forma basic
net earnings (loss) per share (unaudited) 17,495,832 10,208,021 13,869,676 10,191,297
Add: Weighted Average of Dilutive Securities 3,570,583 -- -- --
Shares used in computing pro forma diluted
-------------------------------- -------------------------------
net earnings (loss) per share (unaudited) 21,066,415 10,208,021 13,869,676 10,191,297
Pro forma diluted net earnings (loss)
per share (unaudited) $ 0.02 $ (0.36) $ (0.42) $ (0.89)
================================ ===============================
</TABLE>
6
<PAGE>
In the three month period ending September 30, 1999 and the nine month periods
ending September 30, 2000 and September 30, 1999, the Company has excluded all
outstanding redeemable convertible preferred stock, outstanding stock options
and warrants, and shares subject to repurchase from the calculation of basic and
diluted loss per common share because all such securities are antidilutive for
those periods. The pro forma calculations, for those periods, exclude
outstanding stock options and warrants, and shares subject to repurchase as they
are antidilutive.
4. Income Taxes
The provision for income taxes for the quarter ended September 30, 2000 reflects
the expected federal alternative minimum tax.
5. Bristol-Myers Squibb Company
In July 2000, the Company entered into a collaboration with Bristol-Myers Squibb
Company, or BMS, under which the Company will use its DiscoverWorks technologies
to assist BMS in the discovery and development of new human drugs for specific
biological targets. In the initial three-year term of the research
collaboration, BMS will supply at least 30 biological targets and the Company
will create chemical libraries and screen such libraries against these targets.
Thereafter, the parties will agree upon which organization will conduct
subsequent lead optimization and development activities of active hits toward
creating pre-clinical drug candidates. Patentable subject matter resulting from
this collaboration will be assigned according to U.S. practice for identifying
inventorship. In addition to its collaboration in this research, BMS will be
primarily responsible for pre-clinical and clinical development, and for
marketing and sales of any resulting products.
The Company will receive upfront licensing and technology access fees amounting
to $23.5 million, and committed research funding of $14.4 million over the first
three years of the collaboration as well as payments for any purchases of
ThermoFlour instruments. In addition, the Company will receive milestone
payments through the clinical development stages, and royalty payments on sales
of any resulting products, with the amount at each level determined based on our
involvement in the related optimization and development activities. For each
compound, depending on whether all pre-clinical and clinical milestones are met,
we could receive milestone payments aggregating up to between $4.5 million and
$15 million, depending on our level of contribution to the development of the
compound.
The Company has also granted BMS non-exclusive licenses under DirectedDiversity
patent rights for the duration of the rights and non-exclusive perpetual
licenses under ThermoFluor and Protein Expression and Refolding Technology for
use by BMS in their research and development programs in exchange for licensing
fees. BMS also has the opportunity to purchase from us ThermoFluor instruments.
In addition, BMS has subscribed to the Company's planned Proteomica G-Protein
Coupled Receptor ("GPCR") structure database. BMS will pay user fees based on
the content of the database which are contingent upon the Company's successful
determination of one or more GPCR structures.
7
<PAGE>
BMS may terminate research activities with 90 days notice, without cause, but
must pay any remaining costs of the initial research term or one-half of the
remaining cost of any extended term. Following the end of the initial research
or any extended research term, either party may terminate the agreement on 30
days notice if no compound is being optimized or developed under the
collaborative agreement. Otherwise, the agreement will remain in effect for 10
years from the first commercial sale of a product identified from the research
program or until the expiration of patent rights relating to such product.
6. Stockholder's Equity
In July 2000, the Company effected a 1 for 2.8 reverse stock split of all
outstanding common and preferred stock and increased the number of authorized
shares of capital stock to 50,000,000. All references in the accompanying
financial statements to the number of shares and per share amounts have been
retroactively restated to reflect the reverse stock split.
On August 9, 2000 the Company completed its initial public offering ("IPO") of
5,750,000 shares of common stock at $15.00 per share, including 750,000 shares
of common stock issued pursuant to the underwriter's over-allotment option. The
combined gross proceeds to the Company from the offering and over-allotment
option was $86.25 million.
Following completion of the IPO, all of the outstanding shares of the Company's
Series A redeemable, convertible preferred stock and Series B, C and D
convertible preferred stock were converted into 13,186,602 shares of common
stock. In addition, 71,234 shares of common stock were issued at the close of
the IPO upon the automatic conversion of $979,000 of convertible promissory
notes, plus accrued interest, issued in lieu of cash dividends to the holders of
the Company's series A-1 preferred stock.
In addition, during September 2000, certain investors who held warrants to
purchase common stock, exercised those warrants through the net issuance
provisions contained in the warrant agreements. In connection therewith, the
Company issued 668,536 shares of common stock in exchange for 82,601 warrants
given as consideration in lieu of cash payment.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations as well as information contained elsewhere in this Report
contains forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
include statements about the following:
. The Company's intentions regarding collaborations
. Anticipated operating losses
. The Company's ability to out-license internally developed products
When used in this Report, we intend the words "may," "believe," "anticipate,"
"planned," "expect," "require," "intend," "assume" and similar words to identify
"forward-looking statements." Our forward-looking statements involve
uncertainties and other factors that may cause our actual results, performance
or achievements, to be far different from that suggested by our forward-looking
statements. You should not place undue reliance on our forward-looking
statements. We do not intend to update any of these factors or to publicly
announce the results of any revisions to any of these forward-looking
statements.
OVERVIEW OF 3-DIMENSIONAL PHARMACEUTICALS, INC.'S FINANCIAL PERFORMANCE
Overview
3-Dimensional Pharmaceuticals, Inc. is a drug discovery company that has
developed and integrated a set of proprietary technologies called DiscoverWorks
which accelerate and improve the drug discovery process and capitalize on the
opportunities for drug discovery presented by the thousands of new targets for
drugs being revealed from the sequencing of the human genome. The Company's
technologies also facilitate drug discovery for well-characterized disease
targets that have proven difficult. The Company believes that its technologies,
which apply to virtually any disease target, produce compounds suitable for
development into drugs in a more timely and cost- effective manner and with a
higher probability of success than that currently achieved using conventional
methods. The Company is using its technologies both to assist collaborators in
discovering drug candidates, and to discover and develop its own drug
candidates, which the Company currently intends to license at the pre-clinical
or early clinical stage.
To date, substantially all of the Company's revenue has been from corporate
collaborations, license agreements and government grants. Revenue from corporate
collaborations and licensing agreements consists of up-front fees, ongoing
research and development funding, potential milestone payments and royalties
upon the sale of designated products. Royalties from sales of products are not
expected for at least several years, if at all. The Company recognizes revenue
from corporate collaborations, including
9
<PAGE>
periodic payments for research and development activities and related
nonrefundable technology access fees and/or technology or software licensing
fees, over the period that the Company performs research and development
activities under the terms of these agreements.
Revenue from nonrefundable up-front fees for the licensing of technology,
products or software under agreements that do not require us to perform research
or development activities or other significant future performance obligations is
recognized at the time the agreement is executed or the software is delivered.
Revenue resulting from the achievement of milestone events stipulated in the
agreements is recognized when the milestone is achieved. Up- front fees and
other amounts received in excess of revenue recognized are recorded as deferred
income.
The Company has incurred substantial operating losses since its inception in
1993. As of September 30, 2000, the Company's accumulated deficit was $50.9
million. The Company has funded its operations primarily through private and
public placements of equity securities totaling $152 million and revenues of
$23.2 million. The Company's losses have resulted principally from costs
incurred in research and development activities related to its efforts to
develop its technologies and internal drug discovery programs and from the
associated administrative costs required to support these efforts. The Company
expects to incur additional operating losses over the next several years as it
continues to develop its technologies and fund internal product research and
development. The Company's ability to achieve profitability is dependent on the
progress and commercialization of drug candidates from existing internal
programs and collaborations and the Company's ability to initiate and develop
new internal programs and enter into additional collaborations with favorable
economic terms. Payments either under collaborative agreements or related to the
licensing of drug candidates the Company develops internally will be subject to
significant fluctuation in both timing and amount and therefore the results of
operations for any period may not be comparable to the results of operations
from any other period.
Results of Operations
Three Months Ended September 30, 2000 and 1999
Revenue. Revenue for the three months ended September 30, 2000 was $5.0 million
as compared to $.7 million for the three months ended September 30, 1999.
Revenues in the third quarter of 2000 included $4.7 million from corporate
collaborations, including revenue from new agreements with Bristol Myers Squibb
and continued funding from DuPont Pharmaceuticals Company, Boehringer Ingelheim
Pharmaceuticals, Inc., Berlex Pharmaceuticals ,Inc., and Aventis Crop Protection
and $0.3 million from government grants. Revenues in the third quarter of 1999
included $.7 million from corporate collaborations, including revenues from,
Merck KGaA, and Heska Corporation.
Research and Development Expenses. Research and development expenses increased
$0.7 million, to $3.4 million for the three months ended September 30, 2000 from
$2.7 million for the three months ended September 30, 1999. This increase was
connected to the expansion of research efforts in the Company's internal
programs, including pre-clinical testing of our internal compounds, the
commencement of collaborative discovery programs and investment in the Company's
core technologies, with related increases in expenses for personnel, equipment
and lab supplies for all of these activities.
10
<PAGE>
General and Administrative Expenses. General and administrative expenses
increased $0.4 million to $2.0 million for the three months ended September 30,
2000 from $1.6 million for the three months ended September 30, 2000. This
increase was connected to the expansion of management and administrative
personnel expenses related to the expansion of the Company's operations and
business development efforts.
Other Income (Expenses). Interest income was $1.3 million for the third quarter
of 2000 and $0.1 million in the third quarter of 1999. The increase of $1.2
million is attributable to the investment of the proceeds from the Company's
initial public offering of securities completed during this period. Interest
expense was $0.1 million for the third quarter of 2000 and 1999.
Provision for Income Taxes. We have significant net operating loss carryforwards
for federal and state income taxes. We also have federal research and
development tax credit carryforwards. Our utilization of the net operating loss
and tax credit carryforwards may be subject to annual limitations pursuant to
Section 382 of the Internal Revenue Code, and similar state provisions, as a
result of changes in our ownership structure. The annual limitations may result
in the expiration of net operating losses and credits prior to utilization.
We recorded a provision for income taxes of $320,000 for the quarter ended
September 30, 2000 based on the federal alternative minimum tax under which net
operating loss carryforwards are available to offset 90% of our current tax
liability. For federal income tax purposes upfront payments from collaborators
are taxable in the year received. During 1999, we incurred a net operating loss
for tax purposes and did not record a benefit because realization of the benefit
was uncertain and a valuation allowance was provided.
Nine Months Ended September 30, 2000 and 1999
Revenue. Revenue for the nine months ended September 30, 2000 was $8.6 million
as compared to $4.0 million for the nine months ended September 30, 1999.
Revenues in the first nine months of 2000 included $8.0 million from corporate
collaborations, including revenue from new agreements with Bristol Myers Squibb,
DuPont Pharmaceuticals Company, Boehringer Ingelheim Pharmaceuticals, Inc. and
Berlex Pharmaceuticals ,Inc., and continued funding from Aventis Crop Protection
and Heska Corporation and $0.6 million from government grants. Revenues in the
first nine months of 1999 included $3.9 million from corporate collaborations,
including revenues from Wyeth-Ayerst, Merck KGaA, and Heska Corporation and $0.1
million from government grants.
Research and Development Expenses. Research and development expenses increased
$1.5 million, to $10.0 million for the nine months ended September 30, 2000 from
$8.5 million for the nine months ended September 30, 1999. This increase was
connected to the expansion of research efforts in the Company's internal
programs, including clinical testing of our lead internal compound, the
commencement of collaborative discovery programs and investment in the Company's
core technologies, with related increases in expenses for personnel, equipment
and lab supplies for all of these activities.
11
<PAGE>
General and Administrative Expenses. General and administrative expenses
increased by $0.8 to $5.2 million for the nine months ended September 30, 2000
from $4.4 million for the nine months ended September 30, 1999. The increase was
primarily connected to increased management and administrative personnel
expenses related to the expansion of the Company's operations and business
development efforts.
Other Income (Expenses). Interest income increased by $1.4 million to $1.7
million for the first nine months of 2000 from $0.3 million in the first nine
months of 1999. The increase of $1.4 million is attributable to the investment
of the proceeds from the initial public offering and private placements of
securities completed during this period. Interest expense was $0.6 million for
the first nine months of 2000 and $0.4 million for the first nine months of
1999. The increase of $0.2 million was due to an increase in interest bearing
notes outstanding during the period. The notes were converted into Series A
redeemable, convertible preferred stock on March 31, 2000.
Liquidity and Capital Resources
At September 30, 2000, the Company held cash and cash equivalents $121.2 million
and had working capital of $96.9 million. The Company has funded its operations
to date primarily through public and private placements of equity and debt
securities with aggregate proceeds of $152.0 million, revenues from corporate
collaborations totaling $19.5 million, government grants totaling $3.7 million,
capital equipment and leasehold improvement financing totaling $7.8 million and
interest earned on the net proceeds of private placements.
To date, all of the Company's revenue has been from collaborations, license
agreements and government grants. The Company expects that substantially all of
its revenue for the foreseeable future will come from similar sources as well as
from interest income. Furthermore, the Company's ability to achieve
profitability will be dependent upon its ability to enter into additional
corporate collaborations. There can be no assurance that the Company will be
able to negotiate additional collaborative agreements in the future on
acceptable terms, if at all, or that such current or future collaborative
agreements will be successful and provide the expected benefits.
12
<PAGE>
PART II - OTHER INFORMATION
---
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 3, 2000, the Company consummated its initial public offering (the
"Offering") of its common stock, no par value (the "Common Stock") based on the
registration statement relating to this offering (File No. 333-37606), which was
declared effective on that date. Bear, Stearns & Co. Inc., Chase H & Q and U.S.
Bancorp Piper Jaffray were the managing underwriters of the Offering. The
Offering terminated on August 9, 2000 upon the sale of all shares registered.
The number of shares registered, the aggregate price of the offering amount
registered, the amount sold and the aggregate offering price of the amount sold
by the Company in the Offering were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
Shares Aggregate Price Amount Aggregate Price
Registered Registered Sold Sold
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Primary Offering 5,000,000 $75,000,000 5,000,000 $75,000,000
------------------------------------------------------------------------------------------
Overallotment Offering 750,000 $11,250,000 750,000 $11,250,000
------------------------------------------------------------------------------------------
</TABLE>
At the closing of the Offering on August 9, 2000, the Company incurred the
following expenses, none of which were direct or indirect payments to directors,
officers, general partners of the Company or their associates or to persons
owning 10% or more of any class of equity securities of the Company or to
affiliates of the Company:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
Underwriting Underwriter's Other Total
Discounts and Finders Expenses Expenses Expenses
Commissions Fees
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Primary Offering $5,250,000 $ 0 $ 0 $1,076,272 $6,326,272
-------------------------------------------------------------------------------------------
Overallotment Offering $ 787,500 $ 0 $ 0 $ 189,930 $ 977,430
-------------------------------------------------------------------------------------------
</TABLE>
The net offering proceeds to the Company, from the primary offering, after
deducting the foregoing discounts, commissions, fees and expenses were $
78,946,298. An estimate of how these proceeds were used by the Company during
the period August 9, 2000 through September 30, 2000 is as follows:
Construction of plant, building and facilities $ 0
Purchase and installation of machinery and equipment 0
Purchases of real estate 0
Acquisition of other businesses 0
Repayment of indebtedness 0
Temporary investments (money market securities) $78,946,298
13
<PAGE>
Item 6. Exhibits and reports on Form 8-k.
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-k
There were no reports on Form 8-k filed by the Company during the
quarter ended September 30, 2000.
14
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 3, 2000 /s/ Scott M., Horvitz
----- ---------------- ---------------------
Scott M. Horvitz
Vice President, Finance and Administration
(Principal Financial and Accounting
Officer and Duly Authorized Signatory)
15
