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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-K/A
(Amendment No. 1)
______________________
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-28150
NEUROCRINE BIOSCIENCES, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0525145
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
10555 Science Center Drive, San Diego, CA 92121
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (858) 658-7600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001
par value
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 15, 2000 totaled approximately $527.6 million based
on the closing stock price as reported by the Nasdaq National Market. As of
March 15, 2000, there were 21,830,471 shares of the Registrant's Common Stock,
$.001 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III of Form 10-K is incorporated by
reference from the Registrant's Proxy Statement for the Annual Meeting of
Stockholders held on May 24, 2000 (the "Proxy Statement"), which was filed with
the Securities and Exchange Commission on April 27, 2000.
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PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations section contains forward-looking statements which
involve risks and uncertainties, pertaining generally to the expected
continuation of our collaborative agreements, the receipt of research payments
thereunder, the future achievement of various milestones in product development
and the receipt of payments related thereto, the potential receipt of royalty
payments, preclinical testing and clinical trials of potential products, the
period of time that our existing capital resources will meet our funding
requirements, and our financial results and operations. Actual results could
differ materially from those anticipated in such forward-looking statements as a
result of various factors, including those set forth below.
Overview
We incorporated in California in 1992 and we reincorporated in Delaware in
1996. Since we were founded, we have been engaged in the discovery and
development of novel pharmaceutical products for diseases and disorders of the
central nervous and endocrine systems. To date, we have not generated any
revenues from the sale of products, and we do not expect to generate any product
revenues in the foreseeable future. We have funded our operations primarily
through private and public offerings of our common stock and payments under
research and development agreements. We are developing a number of products with
corporate collaborators and will rely on existing and future collaborators to
meet funding requirements. We expect to generate future net losses in
anticipation of significant increases in operating expenses as products are
advanced through the various stages of clinical development. As of December 31,
1999, we have incurred a cumulative deficit of $41.7 million and we expect to
incur operating losses in the future, which may be greater than losses in prior
years.
Results of Operations
Our revenues for the year ended December 31, 1999 were $16.8 million
compared with $16.0 million in 1998, and $26.1 million in 1997. Although similar
in amount, revenues for 1999 and 1998 had a different composition resulting from
several significant events. During 1999, we entered into a collaborative
agreement with Wyeth-Ayerst and agreed to a two-year extension of our 1995
collaboration with Janssen Pharmaceutica. Revenues received in 1999 under the
new agreements consisted of $5.4 million of sponsored research and development
funding and $3.0 million in milestone achievements.
The increase in 1999 revenues generated by the new agreements was offset by
a decline in revenues received under the Eli Lilly, Novartis and Neuroscience
Pharma (NPI), Inc. collaborations that were concluded during the year. Revenues
in 1998 for sponsored research and development funding and milestone
achievements under these agreements were $12.2 million and $2.3 million,
respectively.
Revenues recorded during 1997 included the initiation of the Eli Lilly
collaboration and the final year of sponsored research funding under the 1995
Janssen agreement. Revenues in 1997 for sponsored research and development
funding and milestone achievements under these and the Novartis agreements were
$20.0 million and $5.3 million, respectively.
Research and development expenses increased to $29.2 million during 1999
compared with $21.8 million in 1998 and $18.8 million in 1997. Increased
expenses reflect advancement of our drug candidates through progressive clinical
development phases. We expect to incur significant increases in future periods
as later phases of development typically involve an increase in the scope of
studies and number of patients treated.
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General and administrative expenses increased to $7.5 million during 1999
compared with $6.6 million in 1998 and $5.7 million in 1997. Increased expenses
resulted from additional professional services, including patent and legal
services, to support our expanded clinical development efforts. We anticipate
similar increases in general and administrative expenses in the future as these
efforts continue.
During 1998, we wrote-off acquired in-process research and development
costs of $4.9 million. This amount included the acquisition of Northwest
NeuroLogic and the in-licensing of drug candidates for our insomnia and
malignant glioma programs. Both of the in-licensed programs are currently under
clinical development.
Interest income decreased to $3.1 million during 1999 compared with $4.2
million for 1998 and $4.1 million in 1997. The decrease in 1999 compared with
1998 and 1997 primarily resulted from lower investment balances. Management
anticipates an increase in interest income during future periods resulting from
cash reserves generated by the sale of our common stock in December 1999 and
increased revenues from anticipated collaborations.
In December 1999, we sold our investment in Neuroscience Pharma (NPI), Inc.
and recorded a gain of $526,000. Our proportionate share of NPI operating losses
during 1999, 1998 and 1997 were $764,000, $3.4 million and $1.1 million,
respectively. In addition, we recorded a write-down in the investment value of
$646,000 during 1999 and $3.8 million during 1998 relating to the decline in
cash redemption value of the NPI preferred shares.
Net loss for 1999 was $16.8 million, or $0.88 per share, compared to net
loss of $20.0 million, or $1.10 per share, for 1998 and net income of $5.1
million, or $0.30 per share, for 1997. Management expects to incur similar
operating losses in the next two to three years as our clinical development
efforts continue to grow.
To date, our revenues have come principally from funded research and
achievements of milestones under corporate collaborations. The nature and amount
of these revenues from period to period may lead to substantial fluctuations in
the results of year-to-year revenues and earnings. Accordingly, results and
earnings of one period are not predictive of future periods.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, our cash, cash equivalents, and short-term
investments totaled $91.1 million compared with $62.7 million at December 31,
1998. The increase in cash balances at December 31, 1999 resulted from the
private placement of our common stock, which resulted in net cash proceeds of
$39.3 million.
Net cash used by operating activities during fiscal year 1999 was $10.3
million compared with $10.7 million in fiscal year 1998 and net cash provided of
$11.0 million in fiscal year 1997. The decrease in cash used in operations
during 1999 compared with 1998 resulted primarily from increased sponsored
research and milestone revenues received under our collaborations during 1999.
The increase in cash used during 1998 compared with 1997 resulted primarily from
higher sponsored research and milestone revenues received under our
collaborations during 1997, which included a $5.0 million lump sum payment from
Eli Lilly, in addition to lower operating expenses.
Net cash used by investing activities during fiscal year 1999 was $21.2
million compared with net cash provided of $4.7 million in fiscal year 1998 and
net cash used of $7.2 million in fiscal year 1997. The fluctuations in cash used
resulted primarily from the timing differences in the investment purchases,
sales, maturities and the fluctuations in our portfolio mix between cash
equivalents and short-term investment holdings. We expect similar fluctuations
to continue in future periods. Capital equipment purchases are expected to be
$2.4 million for the fiscal year 2000, of which $2.0 million will be financed
through leasing arrangements.
Net cash provided by financing activities during fiscal year 1999 was $41.0
million compared with $1.9 million and $659,000 during fiscal years 1998 and
1997, respectively. Cash provided during 1999 resulted from net proceeds
received from the private sale of our common stock and exercise of employee
stock options. Cash provided during 1998 resulted from capital lease financing
of equipment purchases. Cash provided during 1997 resulted from the issuance of
our common stock upon the exercises of stock options and warrants and proceeds
received from a note payable used to finance the purchase of land.
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In September 1999, we signed an amendment to our 1995 agreement with
Janssen Pharmaceutica, N.V. The amendment provides for a new sponsored research
period designed to identify new corticotropin-releasing factor receptor
antagonists, which will be subject to the terms of the original agreement signed
in 1995. The term of the amendment is from April 1999 through February 2001.
Under the agreement, we will receive $5.0 million in sponsored research funding,
up to $3.5 million in milestone achievements, $500,000 for research already
conducted under this technology and reimbursement of all outside and third-party
costs associated with the project. As of December 31, 1999, we have received
$1.9 million in sponsored research and $500,000 payment for prior research.
In March 1999, we entered into an agreement with Wyeth-Ayerst Laboratories,
the pharmaceutical division of American Home Products, on the research,
development and commercialization of compounds, which modulate excitatory amino
acid transporters for the treatment of neurodegenerative and psychiatric
diseases.
The Wyeth-Ayerst agreement includes sharing proprietary technologies,
funding for research, payments for milestones reached, plus royalties on sales
from products resulting from the collaboration. Under the terms of the
agreement, we expect to receive three to five years of funding for research and
development as well as worldwide royalties on commercial sales of products that
result from the collaboration. Wyeth-Ayerst will also provide us with access to
chemical libraries for screening within the collaborative field. As of December
31, 1999, we have received $3.0 million in sponsored research payments and $3.0
million for the achievement of four milestones.
During 1998, we expensed acquired in-process research and development of
$4.9 million. These charges consisted of $4.2 million for the acquisition of
Northwest NeuroLogic, through which we received licenses to the melanocortin
receptor and excitatory amino acid transporters programs, and $710,000 for
licenses to an insomnia and brain cancer compounds. We performed scientific due
diligence related to the acquired projects and because they were based on narrow
scientific hypothesis, we concluded that none of these programs had alternative
future uses.
The nature and efforts required to develop the acquired in-process research
and development into commercially viable products include research to identify a
clinical candidate, preclinical development, clinical testing, FDA approval and
commercialization. This process may cost in excess of $100 million and can take
as long as 10 years to complete. It is also important to note that if a clinical
candidate is identified, the further development of that candidate can be halted
or abandoned at any time due to a number of factors. These factors include, but
are not limited to, funding constraints, safety or a change in market demand.
Because of our limited financial resources, our strategy to develop some of
our programs is to enter into collaborative agreements with major pharmaceutical
companies. Through these collaborations, we could partially recover our research
costs through contract research and milestone revenues. The collaborators would
then be financially responsible for all clinical development and
commercialization costs.
In May 1998, when we acquired the in-process research and development
programs from Northwest NeuroLogic, we estimated the costs to identify a
clinical candidate and provide minimal research support during the clinical
development stages for the melanocortin receptor program to be $15.4 million
over an 8-year period. Costs to identify a clinical candidate and provide
minimal research support during the clinical development stages of the
excitatory amino acid transporters program were estimated at $22.4 million.
Estimated revenues from the collaborative arrangements were anticipated to
reduce our net costs. The clinical development and commercialization costs were
to be completely funded by the collaborator.
During fiscal year 2000, we anticipate that our gross costs for continued
research on these programs will approximate $5 million. Our research efforts may
not result in clinical candidates for either compound. We intend to collaborate
on the melanocortin receptor technology. We would expect the collaborator to
then be responsible for the clinical development, commercialization and funding.
Our excitatory amino acid transporters program is currently under a
collaborative agreement with Wyeth-Ayerst. Consequently, we cannot estimate the
time or resources they will commit to the development of this program.
Our insomnia and brain cancer compounds are both in the early stages of
clinical testing. During 2000, we expect to spend approximately $20 million on
additional clinical testing of the brain cancer and insomnia compounds. We
expect the clinical testing of both compounds to continue for at least the next
two years, but our efforts may not result
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in commercially viable products. If our efforts were completely successful and
we did not collaborate on these compounds, we estimate that each compound could
cost an additional $50-$150 million and take up to five years to reach
commercial viability.
For each of our programs, we periodically assess the scientific progress
and merits of the programs to determine if continued research and development is
economically viable. Certain of our programs have been terminated due to the
lack of scientific progress and lack of prospects for ultimate
commercialization. Because of the uncertainties associated with research and
development of these programs, we may not be successful in achieving
commercialization. As such, the ultimate timeline and costs to commercialize a
product cannot be accurately estimated.
We believe that our existing capital resources, together with interest
income and future payments due under our strategic alliances, will be sufficient
to satisfy our current and projected funding requirements for at least the next
12 months. However, we cannot assure you that these capital resources and
payments will be sufficient to conduct our research and development programs as
planned. The amount and timing of expenditures will vary depending upon a number
of factors, including progress of our research and development programs.
We will require additional funding to continue our research and product
development programs, to conduct preclinical studies and clinical trials, for
operating expenses, to pursue regulatory approvals for our product candidates,
for the costs involved in filing and prosecuting patent applications and
enforcing or defending patent claims, if any, the cost of product in-licensing
and any possible acquisitions, and we may require additional funding to
establish manufacturing and marketing capabilities in the future. We may seek to
access the public or private equity markets whenever conditions are favorable.
We may also seek additional funding through strategic alliances and other
financing mechanisms, potentially including off-balance sheet financing. We
cannot assure you that adequate funding will be available on terms acceptable to
us, if at all. If adequate funds are not available, we may be required to
curtail significantly one or more of our research or development programs or
obtain funds through arrangements with collaborators or others. This may require
us to relinquish rights to certain of our technologies or product candidates.
We expect to incur operating losses over the next several years as our
research, development, preclinical studies and clinical trial activities
increase. To the extent that we are unable to obtain third-party funding for
such expenses, we expect that increased expenses will result in increased losses
from operations. We cannot assure you that we will successfully develop our
products under development or that our products, if successfully developed, will
generate revenues sufficient to enable us to earn a profit.
INTEREST RATE RISK
We are exposed to interest rate risk on our short-term investments and on
our long-term debt. The primary objective of our investment activities is to
preserve principal while at the same time maximizing yields without
significantly increasing risk. To achieve this objective, we invest in highly
liquid and high quality government and other debt securities. To minimize our
exposure due to adverse shifts in interest rates, we invest in short-term
securities with maturities of less than 44 months. If a 10% change in interest
rates were to have occurred on December 31, 1999, this change would not have had
a material effect on the fair value of our investment portfolio as of that date.
Due to the short holding period of our investments, we have concluded that we do
not have a material financial market risk exposure.
Interest risk exposure on long-term debt relates to our note payable, which
bears a floating interest rate of prime plus one quarter percent (8.75% at
December 31, 1999 and 8.00% at December 31, 1998). At December 31, 1999 and
1998, the note balance was $461,000 and $610,000, respectively. This note is
payable in equal monthly installments through January 2003. Based on the balance
of our long-term debt, we have concluded that we do not have a material
financial market risk exposure.
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IMPACT OF YEAR 2000
Beginning in 1998, we conducted a program to address the impact of the Year
2000 on the processing of date sensitive information by our computer systems and
software ("IT Systems"), embedded systems in our non-computer equipment ("Non-IT
Systems") and relationships with certain third parties. Assessment, testing, and
remediation of our critical systems were completed in mid-October 1999. Based on
survey responses and Year 2000 website statements, we also assessed Year 2000
readiness of third parties with which we have significant relationships.
Contingency plans were formulated for each of our critical systems and
third-party relationships, which were deficient in compliance criteria.
The total costs, both out-of-pocket and internal, of our Year 2000 program
were estimated at $175,000 and were funded with available cash. There are no
further costs anticipated. Other internal systems projects were not
significantly deferred as a result of the Year 2000 readiness program, because
much of the Year 2000 assessment and remediation efforts were integrated into
our routine maintenance and upgrade programs. To date, there have been no
material adverse effects caused by the January 1, 2000 date change on our IT and
Non-IT Systems, third-party relationships, nor our results of operations.
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
Our business is subject to significant risks, including but not limited to,
the risks inherent in our research and development activities, including the
successful continuation of our strategic collaborations, the successful
completion of clinical trials, the lengthy, expensive and uncertain process of
seeking regulatory approvals, uncertainties associated both with the potential
infringement of patents and other intellectual property rights of third parties,
and with obtaining and enforcing our own patents and patent rights,
uncertainties regarding government reforms and of product pricing and
reimbursement levels, technological change and competition, manufacturing
uncertainties and dependence on third parties. Even if our product candidates
appear promising at an early stage of development, they may not reach the market
for numerous reasons. Such reasons include the possibilities that the product
will be ineffective or unsafe during clinical trials, will fail to receive
necessary regulatory approvals, will be difficult to manufacture on a large
scale, will be uneconomical to market or will be precluded from
commercialization by proprietary rights of third parties.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements." SAB 101 provides guidance in
applying generally accepted accounting principles to revenue recognition in
financial statements, including the recognition of nonrefundable up-front fees
received in conjunction with a research and development arrangement.
We are required to adopt this pronouncement effective in the fourth quarter
of 2000. As required by the adoption, we reviewed all up-front payments, license
fees and milestones received in the current and prior years. Up-front payments
have been received for program cost reimbursements incurred during a negotiation
period. License fees are received in exchange for a grant to use our proprietary
technologies on an as-is basis, for the term of the collaborative agreement.
Milestones are received for specific scientific achievements determined at the
beginning of the collaboration. These achievements are remote and unpredictable
at the onset of the collaboration and are based on the success of scientific
efforts.
Based on that review, we have determined that there were no up-front
payments or license fees received during 1999 or in prior years, which will be
subject to the adoption of SAB 101. We are continuing to review the impact of
the adoption on milestones revenues. Currently, we believe that $3.0 million in
milestones payments received from Wyeth-Ayerst during 1999 may be subject to the
accounting provisions of SAB 101. All other fees received relate to agreements
under which the scientific milestones have been achieved and the research
portion of the collaboration has been completed, or the agreements have been
terminated entirely.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and Qualitative Disclosures about Market Risk is contained in
Item 7, Management Discussion and Analysis--Interest Rate Risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the list of the Company's Financial Statements filed with this Form
10-K under Item 14 below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report
1. List of Financial Statements. The following financial statements
of Neurocrine Biosciences, Inc. and
Report of Ernst & Young LLP, Independent Auditors, are included
in this report:
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheet as of December 31, 1999 and 1998
Consolidated Statement of Operations for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statement of Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997
Consolidated Statement of Cash Flows for the years ended
December 31, 1999, 1998 and 1997
Notes to the Consolidated Financial Statements
2. List of all Financial Statement schedules. All schedules are
omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements or
notes thereto.
3. List of Exhibits required by Item 601 of Regulation S-K. See
part (c) below.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
quarter ended December 31, 1999.
(c ) Exhibits. The following exhibits are filed as part of, or
incorporated by reference into, this report:
Exhibit
Number Description
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2.1 Agreement and Plan of Reorganization dated May 1, 1998, between
Northwest NeuroLogic, Inc., NBI Acquisition Corporation and the
Registrant (7)
2.2 Form of Warrant pursuant to the Agreement and Plan of
Reorganization dated May 1, 1998 (7)
3.1 Restated Certificate of Incorporation (1)
3.2 Bylaws (1)
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Exhibit
Number Description
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3.3 Certificate of Amendment of Bylaws (1)
4.1 Form of Common Stock Certificate (1)
4.2 Form of warrant issued to existing warrant holders (1)
4.3** Information and Registration Rights Agreement dated September
15, 1992, as amended
4.4 Form of Series A warrant issued in connection with the execution
by the Registrant of the Unit Purchase Agreement (see below) (1)
4.5** New Registration Rights Agreement dated March 29, 1996 among the
Registrant and the investors signatory thereto
4.6 Letter of Intent between Northwest NeuroLogic, Inc. and the
Registrant dated February 27, 1998 (6)
4.7* Registration Rights Agreement dated May 28, 1998, between
certain investors and the Registrant (7)
4.8 Amended and Restated Rights Agreement by and between the
Registrant and American Stock Transfer & Trust Company, as
Rights Agent, dated as of July 19, 1999 (9)
4.9 Stock Purchase Agreement dated December 20 through 23, 1999,
between Neurocrine Biosciences, Inc. and each of the Purchasers
named therein (11)
10.1 Purchase and Sale Agreement and Escrow Instructions between MS
Vickers II, LLC and the Registrant dated February 13, 1997 (3)
10.2 1992 Incentive Stock Plan, as amended (10)
10.3 1996 Employee Stock Purchase Plan (1)
10.4 1996 Director Stock Option Plan and form of stock option
agreement (1)
10.5 Form of Director and Officer Indemnification Agreement (1)
10.6 Employment Agreement dated March 1, 1997, between the Registrant
and Gary A. Lyons, as amended (4)
10.7 Employment Agreement dated March 1, 1997, between the Registrant
and Errol B. De Souza, as amended (4)
10.8 Employment Agreement dated March 1, 1997, between the Registrant
and Paul W. Hawran (4)
10.9 Employment Agreement dated March 1, 1997, between the Registrant
and Stephen Marcus, MD (4)
10.10 Consulting Agreement dated September 25, 1992, between the
Registrant and Wylie A. Vale, Ph.D. (1)
10.11 Consulting Agreement effective January 1, 1992, between the
Registrant and Lawrence J. Steinman, MD (1)
10.12 Lease Agreement dated June 1, 1993, between the Registrant and
Hartford Accident and Indemnity Company, as amended (1)
10.13 Exclusive License Agreement dated as of July 1, 1993, by and
between the Beckman Research Institute of the City of Hope and
the Registrant covering the treatment of nervous system
degeneration and Alzheimer's disease (1)
10.14 Exclusive License Agreement dated as of July 1, 1993, by and
between the Beckman Research Institute of the City of Hope and
the Registrant covering the use of Pregnenolone for the
enhancement of memory (1)
10.15 License Agreement dated May 20, 1992, by and between The Salk
Institute for Biological Studies and the Registrant (1)
10.16 License Agreement dated July 17, 1992, by and between The Salk
Institute for Biological Studies and the Registrant (1)
10.17 License Agreement dated November 16, 1993, by and between The
Salk Institute for Biological Studies and the Registrant (1)
10.18 License Agreement dated October 19, 1992, by and between the
Board of Trustees of the Leland Stanford Junior University and
the Registrant (1)
10.19 Agreement dated January 1, 1995, by and between the Registrant
and Janssen Pharmaceutica, N.V. (1)
10.20 Letter Agreement dated January 19, 1996, by and between the
Registrant and Ciba-Geigy Limited (1)
10.21* Unit Purchase Agreement dated March 29, 1996, by and between
Neuroscience Pharma, Inc. the Registrant and the investors
signatory thereto (1)
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Exhibit
Number Description
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10.22* Exchange Agreement dated March 29, 1996, by and between
Neurocrine Biosciences (Canada), Inc., the Registrant and the
investors signatory thereto (1)
10.23* Research and Development Agreement dated March 29, 1996, by and
between Neurocrine Biosciences (Canada), Inc. and Nueorscience
Pharma, Inc. (1)
10.24* Intellectual Property and License Grants Agreement dated March
29, 1996, by and between the Registrant and Neurocrine
Biosciences (Canada), Inc. (1)
10.25* Development and Commercialization Agreement dated December 20,
1996, by and between Ciba-Geigy Ltd. and the Registrant (2)
10.26* Letter and Purchase Order dated June 7, 1996, by and between
Ciba-Geigy and the Registrant (2)
10.27 Third Lease Amendment dated June 6, 1996, by and between Talcott
Realty I Limited Partnership and the Registrant (2)
10.28* Research and License Agreement dated October 15, 1996, between
the Registrant and Eli Lilly and Company (2)
10.29* Lease between Science Park Center LLC and the Registrant dated
July 31, 1997 (5)
10.30* Option Agreement between Science Park Center LLC (Optionor) and
the Registrant dated July 31, 1997 (Optionee) (5)
10.31* Construction Loan Agreement Science Park Center LLC and the
Registrant dated July 31, 1997 (5)
10.32 Secured Promissory Note Science Park Center LLC and the
Registrant dated July 31, 1997 (5)
10.33* Operating Agreement for Science Park Center LLC between Nexus
Properties, Inc. and the Registrant dated July 31, 1997 (5)
10.34 Form of incentive stock option agreement and nonstatutory stock
option agreement for use in connection with 1992 Incentive Stock
Plan (1)
10.35* Patent License Agreement dated May 7, 1998, between the US
Public Health Service and the Registrant (7)
10.36* Patent License Agreement dated April 28, 1998, between and among
Ira Pastan, David Fitzgerald and the Registrant (7)
10.37* Sub-License and Development Agreement dated June 30, 1998, by
and between DOV Pharmaceutical, Inc. and the Registrant (7)
10.38* Warrant Agreement dated June 30, 1998, between DOV
Pharmaceutical, Inc. and the Registrant (7)
10.39* Warrant Agreement dated June 30, 1998, between Jeff Margolis and
the Registrant (7)
10.40* Warrant Agreement dated June 30, 1998, between Stephen Ross and
the Registrant (7)
10.41* Collaboration and License Agreement dated January 1, 1999, by
and between American Home Products Corporation acting through
its Wyeth-Ayerst Laboratories Division and the Registrant (8)
10.42* Employment Agreement dated January 1, 1999, between the
Registrant and Margaret Valeur-Jensen (8)
10.43* Employment Agreement dated February 9, 1998, between the
Registrant and Bruce Campbell (8)
10.44 Amended 1992 Incentive Stock Plan, as amended May 27, 1997, May
27, 1998 and May 21, 1999 (8)
10.45* Agreement by and among Dupont Pharmaceuticals Company, Janssen
Pharmaceutica, N.V. and Neurocrine Biosciences, Inc. dated
September 28, 1999 (10)
10.46* Amendment Number One to the Agreement between Neurocrine
Biosciences, Inc. and Janssen Pharmaceutica, N.V. dated
September 24, 1999 (10)
21+ Subsidiaries of the Company
23** Consent of Ernst & Young LLP, Independent Auditors
24+ Power of Attorney
27+ Financial Data Schedule
--------------------------------------------------------------------------------
(1) Incorporated by reference to the Company's Registration
Statement on Form S-1 (Registration No. 333-03172)
(2) Incorporated by reference to the Company's Report on Form 10-K
for the fiscal year ended December 31, 1996
(3) Incorporated by reference to the Company's amended Quarterly
Report on Form 10-Q filed on August 15, 1997
(4) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q filed on August 14, 1997
Page 9
<PAGE>
Exhibit
Number Description
--------------------------------------------------------------------------------
(5) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q filed on November 14, 1997
(6) Incorporated by reference to the Company's Report on Form 8-K
filed on March 13, 1998
(7) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q filed on November 16, 1998
(8) Incorporated by reference to the Company's Report on Form 10-K
for the fiscal year ended December 31, 1998
(9) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q filed on August 11, 1999
(10) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q filed on November 12, 1999
(11) Incorporated by reference to the Company's Report on Form S-3
filed on January 20, 2000
* Confidential treatment has been granted with respect to certain
portions of the exhibit
** Filed herewith
+ Previously filed
(d) Financial Statement Schedules. See Item 14 (a)(2) above.
Page 10
<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.
NEUROCRINE BIOSCIENCES, INC.
A Delaware Corporation
By: /s/ Gary A. Lyons
------------------
Gary A. Lyons
President and Chief Executive Officer
Date: November 30, 2000
Page 11
<PAGE>
NEUROCRINE BIOSCIENCES, INC.
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors F-2
Consolidated Balance Sheet F-3
Consolidated Statement of Operations F-4
Consolidated Statement of Stockholders' Equity F-5
Consolidated Statement of Cash Flows F-6
Notes to the Consolidated Financial Statements F-7
</TABLE>
Page F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Neurocrine Biosciences, Inc.
We have audited the accompanying consolidated balance sheet of Neurocrine
Biosciences, Inc. as of December 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Neurocrine
Biosciences, Inc. at December 31, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
/s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
San Diego, California
January 27, 2000
Page F-2
<PAGE>
NEUROCRINE BIOSCIENCES, INC.
Consolidated Balance Sheet
(in thousands)
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1999 1998
----------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 21,265 $ 11,708
Short-term investments, available-for-sale 69,833 50,962
Receivables under collaborative agreements 1,458 863
Receivables from related parties - 544
Other current assets 2,257 1,556
---------------- --------------
Total current assets 94,813 65,633
Property and equipment, net 11,181 10,899
Licensed technology and patent applications costs, net 615 967
Other assets 2,613 3,030
---------------- --------------
Total assets $ 109,222 $ 80,529
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,447 $ 2,481
Accrued liabilities 5,069 2,077
Deferred revenues 155 169
Current portion of long-term debt 149 149
Current portion of capital lease obligations 825 693
---------------- --------------
Total current liabilities 8,645 5,569
Long-term debt, net of current portion 312 461
Capital lease obligations, net of current portion 1,827 1,786
Deferred rent 1,005 257
Other liabilities 1,079 498
---------------- --------------
Total liabilities 12,868 8,571
Commitments and contingencies (See Note 6) - -
Stockholders' equity:
Preferred Stock, $0.001 par value; 5,000,000 shares
authorized; no shares issued and outstanding - -
Common Stock, $0.001 par value; 100,000,000 shares
authorized; issued and outstanding shares were
21,608,011 in 1999 and 18,930,865 in 1998 22 19
Additional paid in capital 138,798 97,064
Deferred compensation (411) (187)
Stockholder notes (119) (119)
Accumulated other comprehensive (loss) income (264) 31
Accumulated deficit (41,672) (24,850)
---------------- --------------
Total stockholders' equity 96,354 71,958
---------------- --------------
Total liabilities and stockholders' equity $ 109,222 $ 80,529
================ ==============
</TABLE>
See accompanying notes.
Page F-3
<PAGE>
NEUROCRINE BIOSCIENCES, INC.
Consolidated Statement of Operations
(in thousands)
<TABLE>
<CAPTION>
Year-ended December 31,
--------------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Sponsored research and development $ 12,171 $ 8,751 $ 14,985
Sponsored research and development from related party 491 3,610 -
Milestones and license fees 3,000 2,500 10,250
Grant income and other revenues 1,129 1,176 909
----------- ----------- -----------
Total revenues 16,791 16,037 26,144
Operating expenses:
Research and development 29,169 21,803 18,758
General and administrative 7,476 6,594 5,664
Write-off of acquired in-process research and
development and licenses - 4,910 -
----------- ----------- -----------
Total operating expenses 36,645 33,307 24,422
Income (loss) from operations (19,854) (17,270) 1,722
Other income and expenses:
Interest income 3,082 4,151 4,084
Interest expense (231) (151) (153)
Equity in NPI losses and other adjustments, net (885) (7,188) (1,130)
Other income 1,066 504 818
----------- ----------- -----------
Income (loss) before taxes (16,822) (19,954) 5,341
Income taxes - 1 214
----------- ----------- -----------
Net income (loss) $ (16,822) $ (19,955) $ 5,127
=========== =========== ===========
Earnings (loss) per common share:
Basic $ (0.88) $ (1.10) $ 0.30
Diluted $ (0.88) $ (1.10) $ 0.28
Shares used in the calculation of earnings (loss)
per common share:
Basic 19,072 18,141 16,930
Diluted 19,072 18,141 18,184
</TABLE>
See accompanying notes.
Page F-4
<PAGE>
NEUROCRINE BIOSCIENCES, INC.
Consolidated Statement of Stockholders' Equity
(in thousands)
<TABLE>
<CAPTION>
Notes
Additional Receivable
Common Stock Paid In Unearned from
---------------------
Shares Amount Capital Compensation Stockholders
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 16,777 $ 17 $ 83,234 $ (376) $ (128)
Net income - - - - -
Unrealized loss on short-term investments - - - - -
Comprehensive income - - - - -
Issuance of common stock for warrants 182 - 59 - -
Issuance of common stock for option exercises 106 - 453 - -
Issuance of common stock pursuant to the
Employee Stock Purchase Plan 22 - 175 - -
Issuance of common stock in exchange for
NPI Preferred Stock 600 1 4,473 - -
Payments received on stockholder notes - - - - 8
Deferred compensation and related amortization, net - - 192 (63) -
---------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 17,687 18 88,586 (439) (120)
Net loss - - - - -
Unrealized gain on short-term investments - - - - -
Comprehensive loss - - - - -
Issuance of common stock for warrants 60 - 142 - -
Issuance of common stock for option exercises 81 - 286 - -
Issuance of common stock pursuant to the
Employee Stock Purchase Plan 30 - 205 - -
Issuance of common stock in exchange for
NPI Preferred Stock 679 1 3,854 - -
Issuance of common stock for NNL Acquisition 392 - 4,032 - -
Issuance of common stock for milestone achievement 2 - 17 - -
Payments received on stockholder notes - - - - 1
Amortization of deferred compensation, net - - (58) 252 -
---------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 18,931 19 97,064 (187) (119)
Net loss - - - - -
Unrealized gain on short-term investments - - - - -
Comprehensive loss - - - - -
Issuance of common stock for option exercises 307 - 1,507 - -
Issuance of common stock pursuant to the Employee
Stock Purchase Plan 42 - 213 - -
Issuance of common stock, net of offering costs 2,328 3 39,293 -
Amortization of deferred compensation, net - - 721 (224) -
---------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 21,608 $ 22 $ 138,798 $ (411) $ (119)
===============================================================
<CAPTION>
Accumulated
Other Total
Comprehensive Accumulated Stockholders'
Income (Loss) Deficit Equity
-------------------------------------------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 $ 42 $ (10,022) $ 72,767
Net income - 5,127 5,127
Unrealized loss on short-term investments (40) - (40)
----------
Comprehensive income - - 5,087
Issuance of common stock for warrants - - 59
Issuance of common stock for option exercises - - 453
Issuance of common stock pursuant to the
Employee Stock Purchase Plan - - 175
Issuance of common stock in exchange for
NPI Preferred Stock - - 4,474
Payments received on stockholder notes - - 8
Deferred compensation and related amortization, net - - 129
-------------------------------------------
BALANCE AT DECEMBER 31, 1997 2 (4,895) 83,152
Net loss - (19,955) (19,955)
Unrealized gain on short-term investments 29 - 29
----------
Comprehensive loss - - (19,926)
Issuance of common stock for warrants - - 142
Issuance of common stock for option exercises - - 286
Issuance of common stock pursuant to the
Employee Stock Purchase Plan - - 205
Issuance of common stock in exchange for
NPI Preferred Stock - - 3,855
Issuance of common stock for NNL Acquisition - - 4,032
Issuance of common stock for milestone achievement - - 17
Payments received on stockholder notes - - 1
Amortization of deferred compensation, net - - 94
-------------------------------------------
BALANCE AT DECEMBER 31, 1998 31 (24,850) 71,958
Net loss - (16,822) (16,822)
Unrealized gain on short-term investments (295) - (295)
----------
Comprehensive loss - - (17,117)
Issuance of common stock for option exercises - - 1,507
Issuance of common stock pursuant to the Employee
Stock Purchase Plan - - 213
Issuance of common stock, net of offering costs 39,296
Amortization of deferred compensation, net - - 497
-------------------------------------------
BALANCE AT DECEMBER 31, 1999 $ (264) $ (41,672) $ 96,354
===========================================
</TABLE>
Page F-5
<PAGE>
See accompanying notes.
Page F-6
<PAGE>
NEUROCRINE BIOSCIENCES, INC.
Consolidated Statement of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
----------------------------------------------------
1999 1998 1997
-------------- ------------- ----------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net (loss) income $ (16,822) $ (19,955) $ 5,127
Adjustments to reconcile net income (loss) to net cash
Provided by (used in) operating activities:
Acquisition of Northwest NeuroLogic for Common Stock - 4,200 -
Equity in NPI losses and other adjustments, net 885 7,188 1,130
Depreciation and amortization 2,066 1,720 1,322
Loss on abandonment of assets 133 460 76
Gain on sale of equipment - (15) -
Deferred revenues (14) (1,750) 1,000
Deferred rent 748 (402) 384
Compensation expenses recognized for stock options 497 194 129
Change in operating assets and liabilities,
net of acquired business:
Accounts receivable and other current assets (752) (2,898) 885
Other non-current assets (357) 291 (1,274)
Accounts payable and accrued liabilities 3,360 271 2,213
-------------- ------------- ----------------
Net cash flows (used in) provided by operating activities (10,256) (10,696) 10,992
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of short-term investments (87,728) (41,618) (113,080)
Sales/maturities of short-term investments 68,562 50,006 112,315
Purchases of property and equipment, net (2,061) (3,683) (6,440)
-------------- ------------- ----------------
Net cash flows (used in) provided by investing activities (21,227) 4,705 (7,205)
CASH FLOW FROM FINANCING ACTIVITIES
Issuance of Common Stock 41,016 433 687
Proceeds received from long-term obligations 981 2,500 747
Principal payments on long-term obligations (957) (1,006) (783)
Payments received on notes receivable from stockholders - 1 8
-------------- ------------- ----------------
Net cash flows provided by financing activities 41,040 1,928 659
-------------- ------------- ----------------
Net increase (decrease) in cash and cash equivalents 9,557 (4,063) 4,446
Cash and cash equivalents at beginning of the period 11,708 15,771 11,325
-------------- ------------- ----------------
Cash and cash equivalents at end of the period $ 21,265 $ 11,708 $ 15,771
============== ============= ================
SUPPLEMENTAL DISCLOSURES
Supplemental disclosures of cash flow information:
Interest paid $ 231 $ 150 $ 153
Taxes paid
- 1 250
Schedule of noncash investing and financing activities:
Conversion of note receivable to investment in NPI $ - $ 1,401 -
Conversion of NPI Preferred Stock to investment in NPI - 3,855 4,474
</TABLE>
See accompanying notes.
Page F-7
<PAGE>
NEUROCRINE BIOSCIENCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activities. Neurocrine Biosciences, Inc. (the "Company") was
incorporated in California on January 17, 1992 and was reincorporated in
Delaware in March 1996. The Company is a neuroscience-based company focused on
the discovery and development of novel therapeutics for neuropsychiatric,
neuroinflammatory and neurodegenerative diseases and disorders. The Company's
neuroscience, endocrine and immunology disciplines provide a unique biological
understanding of the molecular interaction between central nervous, immune and
endocrine systems for the development of therapeutic interventions for anxiety,
depression, insomnia, stroke, malignant brain tumors, multiple sclerosis,
obesity and diabetes.
Principles of Consolidation. The consolidated financial statements include
the accounts of Neurocrine Biosciences, Inc. (the "Company") and its wholly
owned subsidiary, Northwest NeuroLogic, Inc. ("NNL"). Significant intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
the accompanying notes. Actual results could differ from those estimates.
Cash Equivalents. The Company considers all highly liquid investments with a
maturity of three months or less when purchased, to be cash equivalents.
Short-Term Investments Available-for-Sale. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Debt
and Equity Securities," short-term investments are classified as available-for-
sale. Available-for-sale securities are carried at fair value, with the
unrealized gains and losses reported in comprehensive income. The amortized cost
of debt securities in this category is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization is included in investment
income. Realized gains and losses and declines in value judged to be other-than-
temporary, if any, on available-for-sale securities are included in investment
income. The cost of securities sold is based on the specific identification
method. Interest and dividends on securities classified as available-for-sale
are included in interest income.
The Company invests its excess cash primarily in investment grade debt
instruments, marketable debt securities of U.S. government agencies, and high-
grade commercial paper. Management has established guidelines relative to
diversification and maturities that maintain safety and liquidity.
Property and Equipment. Property and equipment are carried at cost.
Depreciation and amortization are provided over the estimated useful lives of
the assets, ranging from three to ten years, using the straight-line method.
Licensed Technology and Patent Application Costs. Licensed technology
consists of worldwide licenses to patents related to the Company's platform
technology which are capitalized at cost and amortized over periods of 7 to 11
years. These costs are regularly reviewed to determine that they include costs
for patent applications the Company is pursuing. Costs related to applications
that are not being actively pursued are evaluated under Accounting Principles
Board Statement 17 "Intangible Assets" and are adjusted to an appropriate
amortization period which generally results in immediate write-off. Assets
written-off during 1999 had a net book value of $133,000. Accumulated
amortization at December 31, 1999 and 1998 was $685,000 and $679,000,
respectively.
Impairment of long-lived assets. In accordance with SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of", if indicators of impairment exist, the Company assesses the recoverability
of the affected long-lived assets by determining whether the carrying value of
such assets can be recovered through undiscounted future operating cash flows.
If impairment is indicated, the Company measures the amount of such impairment
by comparing the carrying value of the asset to the present value of the
expected future cash flows associated with the use of the asset. While the
Company's current and historical operating and cash flow
Page F-8
<PAGE>
NEUROCRINE BIOSCIENCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
losses are indicators of impairment, the Company believes the future cash flows
to be received from the long-lived assets will exceed the assets carrying value,
and accordingly the Company has not recognized any impairment losses through
December 31, 1999.
Industry Segment and Geographic Information. The Company operates in a single
industry segment - the discovery and development of therapeutics for the
treatment of diseases and disorders of the central, nervous and immune systems.
The Company has no foreign operations.
Research and Development Revenue and Expenses. Revenues under collaborative
research agreements and grants are recognized as research costs are incurred
over the period specified in the related agreement or as the services are
performed. These agreements are on a best-efforts basis and do not require
scientific achievement as a performance obligation and provide for payment to be
made when costs are incurred or the services are performed. All fees are
nonrefundable to the collaborators. Up-front, nonrefundable payments for license
fees are recognized as revenues upon receipt. These licenses grant the use of
the Company's proprietary technology on an as-is basis for the term of the
collaborative agreement. They do not require the Company to expend additional
efforts or provide financial support. Advance payments for sponsored research
revenues received in excess of amounts earned are classified as deferred revenue
and recognized as income in the period earned. Milestone payments are recognized
as revenue upon achievement of pre-defined scientific events. Revenues from
government grants are recognized based on a percentage-of-completion basis as
the related costs are incurred. The Company recognizes revenue only on payments
that are nonrefundable and when the work is performed. Research and development
costs are expensed as incurred. Such costs include proprietary research and
development activities and expenses associated with collaborative research
agreements. Research and development expenses relating to collaborative
agreements and grants were approximately $7.2 million, $12.0 million and $9.4
million during 1999, 1998 and 1997, respectively.
Stock-Based Compensation. As permitted by SFAS 123, "Accounting for Stock-
Based Compensation", the Company has elected to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and
related Interpretations in accounting for stock-based employee compensation.
Deferred compensation is recorded for employee options only in the event that
the fair market value of the stock on the date of the option grant exceeds the
exercise price of the options. The deferred compensation is amortized over the
vesting period of the options.
Deferred charges for options granted to non-employees has been determined in
accordance with SFAS 123 and EITF 96-18 as the fair value of the consideration
received or the fair value of the equity instruments issued, whichever is more
reliably measured. Deferred charges for options granted to non-employees are
periodically remeasured as the underlying options vest and are included in
deferred compensation in the financial statements.
Earnings Per Share. Basic and diluted earnings per share are calculated in
accordance with SFAS 128, "Earnings per Share". All earnings per share amounts
for all periods have been presented, and where appropriate, were restated to
conform to the requirements of SFAS 128.
Comprehensive Income. Comprehensive income is calculated in accordance with
SFAS 130, "Comprehensive Income". The Statement requires the disclosure of all
components of comprehensive income, including net income and changes in equity
during a period from transactions and other events and circumstances generated
from non-owner sources. The Company's other comprehensive income consisted of
gains and losses on short-term investments and is reported in the consolidated
statement of stockholders' equity.
Reclassifications. Certain reclassifications have been made to prior year
amounts to conform to the presentation for the year ended December 31, 1999.
Impact of Recently Issued Accounting Standards. In December 1999, the SEC
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements." SAB 101 provides guidance in applying generally
Page F-9
<PAGE>
NEUROCRINE BIOSCIENCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
accepted accounting principles to revenue recognition in financial statements,
including the recognition of nonrefundable up-front fees received in conjunction
with a research and development arrangement.
We are required to adopt this pronouncement effective in the fourth quarter
of 2000. As required by the adoption, we reviewed all up-front payments, license
fees and milestones received in the current and prior years. Up-front payments
have been received for program cost reimbursements incurred during a negotiation
period. License fees are received in exchange for a grant to use our proprietary
technologies on an as-is basis, for the term of the collaborative agreement.
Milestones are received for specific scientific achievements determined at the
beginning of the collaboration. These achievements are remote and unpredictable
at the onset of the collaboration and are based on the success of scientific
efforts.
Based on that review, we have determined that there were no up-front
payments or license fees received during 1999 or in prior years, which will be
subject to the adoption of SAB 101. We are continuing to review the impact of
the adoption on milestones revenues. Currently, we believe that $3.0 million in
milestones payments received from Wyeth-Ayerst during 1999 may be subject to the
accounting provisions of SAB 101. All other fees received relate to agreements
under which the scientific milestones have been achieved and the research
portion of the collaboration has been completed, or the agreements have been
terminated entirely.
In June 1998, the Financial Accounting Standards Board issued SFAS
133,"Accounting for Derivative Instruments and Hedging Activities". The Company
expects to adopt the new Statement effective January 1, 2001. This statement
requires the recognition of all derivative instruments as either assets or
liabilities in the statement of financial position and the measurement of those
instruments at fair value. The Company does not expect the adoption of this
statement to have a material impact on its results of operations or financial
position.
Note 2. Short-Term Investments
The following is a summary of short-term investments classified as
available-for-sale securities (in thousands):
<TABLE>
<CAPTION>
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1999
US Government securities $ 1,997 $ - $ (24) $ 1,973
Corporate debt securities 68,100 7 (247) 67,860
-------- ------ --------- --------
Total securities $ 70,097 $ 7 $ (271) $ 69,833
======== ====== ========= ========
December 31, 1998
US Government securities $ 6,000 $ 17 $ - $ 6,017
Certificates of deposit 260 - - 260
Commercial paper 5,420 - - 5,420
Corporate debt securities 39,141 61 (87) 39,115
Other 110 40 - 150
-------- ------ --------- --------
Total securities $ 50,931 $ 118 $ (87) $ 50,962
======== ====== ========= ========
</TABLE>
Gross realized gains and losses were not material for any of the reported
periods. The amortized cost and estimated fair value of debt securities by
contractual maturity at December 31, 1999, are shown below (in thousands).
Page F-10
<PAGE>
NEUROCRINE BIOSCIENCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
Amortized Estimated
Cost Fair Value
---------- ----------
Due in one year or less $ 2,004 $ 2,000
Due after one year through four years 68,093 67,833
---------- ----------
$ 70,097 $ 69,833
========== ==========
Page F-11
<PAGE>
NEUROCRINE BIOSCIENCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
Note 3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 and 1998, consist of the
following (in thousands):
1999 1998
---- ----
Land $ 5,299 $ 5,299
Furniture and fixtures 1,982 1,856
Equipment 9,046 7,356
Leasehold improvements 875 562
-------- --------
17,202 15,073
Less accumulated depreciation and amortization (6,021) (4,174)
-------- --------
Net property and equipment $ 11,181 $ 10,899
======== ========
Furniture and equipment under capital leases were $6.7 million and $5.8
million at December 31, 1999 and 1998, respectively. Accumulated depreciation of
furniture and equipment under capital leases totaled $4.0 million and $3.1
million at December 31, 1999 and 1998, respectively. In 1999, the Company
entered into $981,000 of additional capital leases. Similar transactions in 1998
totaled $2.5 million.
Note 4. ACCRUED LIABILITIES
Accrued liabilities at December 31, 1999 and 1998 consist of the following
(in thousands):
1999 1998
---- ----
Accrued employee benefits $ 1,331 $ 1,120
Accrued professional fees 270 438
Accrued offering expenses 1,222 -
Accrued development costs 1,828 333
Taxes payable 27 15
Other accrued liabilities 391 171
-------- --------
$ 5,069 $ 2,077
======== ========
Note 5. LONG-TERM DEBT
During 1997, the Company partially financed the purchase of land under a 5
year note payable for approximately $747,000, which bears interest at a floating
rate of prime plus one quarter percent (8.75% and 8.00% at December 31, 1999 and
1998, respectively). The note is repayable in equal monthly installments
beginning February 1998.
At December 31, 1999, the balance of the note was $ 461,000. The repayment
schedule for the note is $149,000 for each year 2000 through 2002 and $13,000 in
the year 2003.
Note 6. COMMITMENTS AND CONTINGENCIES
Capital Lease Obligations. The Company has financed certain equipment under
capital lease obligations, which expire on various dates through the year 2004
and bear interest at rates between 7.6% and 10.1%. The lease commitments are
repayable in monthly installments.
Operating Leases. In May 1997, the Company purchased two adjacent parcels
of land in San Diego for $5.0 million. In August 1997, the Company sold one
parcel to Science Park Center LLC, a California limited liability
Page F-12
<PAGE>
NEUROCRINE BIOSCIENCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
company (the "LLC"), of which the Company owns a nominal minority interest, in
exchange for a note receivable in the amount of $3.5 million plus interest of
8.25%. However, for accounting purposes, this transaction does not qualify as a
sale under SFAS No. 98 and therefore, the entire amount of the note receivable
is included in land. The amount included in land at December 31, 1999 and 1998
was $3.8 million.
During 1998, the LLC constructed an expanded laboratory and office complex
which was leased by the Company under a 15 year operating lease, commencing
September 1998. The Company has the option to purchase the facility at any time
during the term of the lease at a predetermined price. The lease contains a 4%
per year escalation in base rent fees, effective with each anniversary. In
November 1998, the Company subleased a portion of this facility to an unrelated
third party through August 2000. The Company will hold the second parcel of land
until such time as additional facilities are required.
In November 1998, the lease obligation relating to the Company's former
operating facility was amended to reduce the amount of square footage leased and
to shorten the lease term to conclude in June 2000. The Company currently
subleases this space to an unrelated third party and is obligated to continue
this arrangement through June 2000.
Repayment schedules for the capital lease obligations and operating lease
commitments at December 31, 1999 are as follows (in thousands):
Capital Operating
Fiscal Year: Leases Leases
------------ ----------- -----------
2000 $ 996 $ 2,731
2001 1,163 2,525
2002 573 2,626
2003 173 2,731
2004 66 2,841
Thereafter - 29,880
-------- ---------
Total minimum payments $ 2,971 $ 43,334
=========
Less: amounts representing interest (319)
--------
Future minimum payments 2,652
Less: current portion (825)
--------
Future payments on capital lease obligations $ 1,827
========
Rent expense was $2.7 million, $2.4 million and $2.1million for the years
ended December 31, 1999, 1998 and 1997, respectively. Sublease income was $1.2
million, $837,000 and $917,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
Future minimum sublease income to be received under non-cancelable
subleases at December 31, 1999 will be $657,000 for the year ending December 31,
2000.
Licensing and Research Agreements. The Company has entered into licensing
agreements with various universities and research organizations, which are
cancelable at the option of the Company with 30 days written notice. Under the
terms of these agreements, the Company has received licenses to technology, or
technology claimed, in certain patents or patent applications. The Company is
required to pay royalties on future sales of products employing the technology
or falling under claims of a patent, and certain agreements require minimum
royalty payments. Certain agreements also require the Company to make payments
upon the achievement of specified milestones. Due to the uncertainty of the
pharmaceutical development process, the Company continually reassesses the value
of the license agreements and cancels them as research efforts are discontinued
on these programs.
Page F-13
<PAGE>
NEUROCRINE BIOSCIENCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
Note 7. Stockholders' Equity
Common Stock Issuances. From inception through 1996, the Company has issued
Common Stock in various private and public offerings, as well as to corporate
collaborators, at prices between $5.00 and $10.50 per share resulting in
aggregate net proceeds of approximately $72.1 million. In December 1999, the
Company sold 2.3 million shares of Common Stock in a private placement at $18.00
per share. The offering resulted in net proceeds of $39.3 million.
Options. The Company has authorized 5.6 million shares of its Common Stock
for issuance upon exercise of options or stock purchase rights granted under the
1992 Incentive Stock Option Plan, 1996 Director Option Plan and the 1997 NNL
Stock Option Plan (collectively "the Plan"). These plans provide for the grant
of stock options and stock purchase rights to officers, directors, and employees
of, and consultants and advisors to, the Company. Options under these plans have
terms of up to 10 years from the date of grant and may be designated as
incentive stock options or nonstatutory stock options under the Plan.
A summary of the Company's stock option activity, and related information
for the years ended December 31 follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Options Average Options Average Options Average
(in thousands) Exercise Price (in thousands) Exercise Price (in thousands) Exercise Price
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1, 2,793 $6.02 2,653 $5.84 1,739 $4.48
Granted 1,142 $6.03 677 $6.26 1,072 $7.86
Exercised (412) $4.79 (81) $3.64 (100) $4.10
Canceled (365) $6.52 (456) $5.76 (58) $5.88
----------------------------------------------------------------------------------------------
Outstanding at December 31, 3,158 $5.91 2,793 $6.02 2,653 $5.85
==============================================================================================
</TABLE>
A summary of options outstanding as of December 31, 1999 follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------------------------------------------------------------------
Weighted
Average
Outstanding Remaining Weighted Exercisable Weighted
Range of as of Contractual Average As of Average
Exercise Prices 12/31/99 Life Exercise Price 12/31/99 Exercise Price
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.02 to $2.50 478 4.3 $2.29 425 $2.42
$4.03 to $4.25 459 5.6 $4.24 406 $4.25
$4.66 to $5.25 501 8.7 $4.99 119 $5.01
$5.27 to $6.50 410 8.8 $5.79 97 $5.97
$6.56 to $7.37 509 7.7 $7.16 271 $7.25
$7.50 to $8.25 361 7.2 $7.95 219 $8.00
$8.31 to $20.50 440 7.4 $9.66 251 $9.04
---------------------------------------------------------------------------------------------------
3,158 7.1 $5.91 1,788 $5.54
</TABLE>
The weighted average fair values of the options granted during 1999, 1998
and 1997 were $3.75, $5.59 and $5.01, respectively.
Page F-14
<PAGE>
NEUROCRINE BIOSCIENCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
Pro forma information regarding net income (loss) is required by SFAS No.
123, and has been determined as if the Company had accounted for its employee
stock options under the fair value method of that Statement. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model using the following weighted-average assumptions for 1999, 1998
and 1997, respectively: risk-free interest rates of 6.4%, 5.5% and 5.8%; a
dividend yield of 0.0% (for all years), volatility factors of the expected
market price of the Company's common stock of .74, .88 and .43; and a weighted
average expected life of the option of 5 years (for all years presented).
For purposes of pro forma disclosures, the estimated fair value of the
options granted is amortized to expense over the options' vesting period. The
pro forma effect on net losses for 1999 and 1998 and net income in 1997, is not
likely to be representative of the effects on reported income or loss in future
years because these amounts reflect less than full vesting for options granted
during these periods. The Company's pro forma information for the years ended
December 31, 1999, 1998 and 1997 follows (in thousands, except for per share
data):
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------
<S> <C> <C> <C>
Net income (loss) as reported $(16,822) $(19,955) $5,127
Earnings (loss) per share (diluted) $ (0.88) $ (1.10) $ 0.28
Pro forma net income (loss) $(18,303) $(20,758) $4,364
Pro forma earnings (loss) per share (diluted) $ (0.96) $ (1.14) $ 0.24
</TABLE>
Employee Stock Purchase Plan. The Company has reserved 125,000 shares of
Common Stock for issuance under the 1996 Employee Stock Purchase Plan (the
"Purchase Plan"). The Purchase Plan permits eligible employees to purchase
Common Stock through payroll deductions at a purchase price equal to 85% of the
lesser of the fair market value per share of Common Stock on the start date of
an offering period or on the date on which the shares are purchased. Through
December 31, 1999, 93,000 shares had been issued pursuant to the Purchase Plan.
Warrants. The Company has outstanding warrants to purchase 384,000 shares
of Common Stock at an exercise price of $10.50 per share. These warrants
generally expire in 2007. At December 31, 1999, all outstanding warrants were
exercisable.
The following shares of Common Stock are reserved for future issuance at
December 31, 1999 (in thousands):
Stock option plans 3,653
Employee stock purchase plan 32
Warrants 384
-----
Total 4,069
=====
Of the shares available for future issuance under the Plan, 3.2 million are
outstanding grants and 495,000 remain available for future grant.
NOTE 8. ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT AND LICENSES
Northwest NeuroLogic, Inc.: In May 1998, the Company acquired the assets
and liabilities of Northwest NeuroLogic, Inc. ("NNL"), in exchange for the
Company's Common Stock and stock options valued at $4.2 million. Since the
acquisition, the operations of NNL have been included in the Company's
consolidated statements of operations. The acquisition was accounted for as a
purchase and, accordingly, the purchase price was allocated to the assets
acquired and the liabilities assumed based on the estimated fair market values.
Substantially all the purchase
Page F-15
<PAGE>
NEUROCRINE BIOSCIENCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
price was allocated to the in-process research and development. The value
allocated to the technology was then expensed because it had not reached
technological feasibility and had no future alternative uses. The Company
performed scientific due diligence related to the acquired projects and because
they were based on narrow scientific hypothesis, the Company concluded that
neither program had alternative future uses.
The nature and efforts required to develop the acquired in-process research
and development into commercially viable products include research to identify a
clinical candidate, preclinical development, clinical testing, FDA approval and
commercialization. This process may cost in excess of $100 million and can take
as long as 10 years to complete. It is also important to note that if a clinical
candidate is identified, the further development of that candidate can be halted
or abandoned at any time due to a number of factors. These factors include, but
are not limited to, funding constraints, safety or a change in market demand.
Because of limited financial resources, the Company's strategy to develop
some of its programs is to enter into collaborative agreements with major
pharmaceutical companies. Through these collaborations, the Company could
partially recover its research costs through contract research and milestone
revenues. The collaborators would then be financially responsible for all
clinical development and commercialization costs.
In May 1998, when the Company acquired the in-process research and
development programs from NNL, it estimated the costs to identify a clinical
candidate and provide minimal research support during the clinical development
stages for the melanocortin receptor program to be $15.4 million over an 8-year
period. Costs to identify a clinical candidate and provide minimal research
support during the clinical development stages of the excitatory amino acid
transporters program were estimated at $22.4 million. Estimated revenues from
the collaborative arrangements were anticipated to reduce the Company's net
costs. The clinical development and commercialization costs were to be
completely funded by the collaborator.
During fiscal year 2000, the Company anticipates that its gross costs for
continued research on these programs will approximate $5 million. The Company
cannot be certain that its research efforts will result in clinical candidates
for either compound. The Company intends to collaborate on the melanocortin
receptor technology. The Company would expect the collaborator to then be
responsible for the clinical development, commercialization and funding. The
excitatory amino acid transporters program is currently under a collaborative
agreement with Wyeth-Ayerst. Consequently, the Company cannot estimate the time
or resources Wyeth-Ayerst will commit to the development of this program.
The following are pro forma unaudited results of operations for the year
ended December 31, 1998 (in thousands, except per share data) had the purchase
of NNL been consummated as of January 1, 1998. This pro forma information is not
necessarily indicative of the actual results that would have been achieved nor
is it necessarily indicative of future results.
Revenues $ 16,325
Net loss (20,013)
Loss per share basic and diluted $ (1.09)
Other: During 1998, the Company purchased licenses for technologies
relating to insomnia and brain cancer in the amount of $710,000. These projects
were in the early stages of development, have not reached technological
feasibility and have no known alternative uses. Consequently, the costs of these
licenses were expensed.
The insomnia and brain cancer compounds are both in the early stages of
clinical testing. During 2000, the Company expects to spend approximately $20
million on additional clinical testing of the brain cancer and insomnia
compounds. The Company expects the clinical testing of both compounds to
continue for at least the next two years, but its efforts may not result in
commercially viable products. If the Company's efforts were completely
successful and it did not collaborate on these compounds, it is estimated that
each compound could cost an additional $50 - $150 million and take up to five
years to reach commercial viability.
Page F-16
<PAGE>
NEUROCRINE BIOSCIENCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
NOTE 9. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS
Taisho. In December 1999, Neurocrine signed an exclusive agreement with
Taisho Pharmaceutical Co. LTD ("Taisho") providing Taisho an option to obtain
European and Asian commercialization rights for Neurocrine's altered peptide
ligand (APL) for diabetes (NBI-6024). Neurocrine would retain all rights in the
rest of the world, including North America. The resulting collaboration could be
valued at up to $45 million, if a product is commercialized, consisting of:
licensing and option fees, payments for certain development and regulatory
milestones, and reimbursement of 50% of the worldwide development expenses. In
addition, Neurocrine would receive royalties on product sales in Europe and
Japan.
Wyeth-Ayerst. In March 1999, the Company entered into an agreement with
Wyeth-Ayerst Laboratories, the pharmaceutical division of American Home Products
Corporation, on the research, development and commercialization of compounds
which modulate excitatory amino acid transporters (EAATs) for the treatment of
neurodegenerative and psychiatric diseases. EAATs are part of the family of
neurotransmitter transporters and play a key role in regulating the actions of
neurotransmitters and brain function.
The agreement, valued at up to $81 million if a product is commercialized,
includes: sharing proprietary technologies, funding for research, payments for
milestones reached, plus royalties on sales from products resulting from the
collaboration. Under the terms of the agreement, Neurocrine expects to receive
three to five years of funding for research and development as well as worldwide
royalties on commercial sales of products that result from the collaboration.
Wyeth-Ayerst will also provide Neurocrine with access to chemical libraries for
screening within the collaborative field. As of December 31, 1999, the Company
has received $3.0 million in sponsored research payments and $3.0 million for
the achievement of four milestones.
Eli Lilly. In October 1996, the Company entered into an agreement with Eli
Lilly and Company under which the Company expects to receive $22.0 million in
research payments of which $17.7 million have been received as of December 31,
1999. The Company is also entitled to milestone payments for certain development
and regulatory accomplishments. The Company will have the option to receive
co-promotion rights and share profits from commercial sales of select products,
which result from the collaboration in the U.S. or receive royalties on U.S.
product sales. The Company will receive royalties on product sales for the rest
of the world.
The collaborative research portion of the agreement was completed as
scheduled in 1999. The Company will continue to receive milestone payments and
royalties upon the successful continuation of the development portion of the
agreement, if any.
Janssen. In January 1995, the Company entered into a research and
development agreement (the "Janssen Agreement") with Janssen, under which
Janssen paid the Company $2.0 million in up-front license fees and $9.7 million
in sponsored research payments during the three-year term of the collaborative
research portion of the agreement. The research portion of the agreement was
completed in 1997.
Under the Janssen Agreement, the Company is entitled to receive up to $10.0
million in milestone payments for the indications of anxiety, depression and
substance abuse, and up to $9.0 million in additional milestone payments for
other indications. Milestone payments of $3.5 million had been received as of
December 31, 1998. There were no additional milestone payments received during
1999. The Company has granted Janssen an exclusive worldwide license to
manufacture and market products developed under the Janssen Agreement. The
Company is entitled to receive royalties on worldwide product sales and has
certain rights to co-promote such products in North America. Janssen is
responsible for funding all clinical development and marketing activities,
including reimbursement to Neurocrine for its promotional efforts, if any.
Page F-17
<PAGE>
NEUROCRINE BIOSCIENCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
The collaborative research portion of the agreement was completed as
scheduled in 1997 with the selection of a clinical candidate and the
commencement of clinical trials in Europe. The Company will continue to receive
milestone payments and royalties upon the successful continuation of the
development portion of the agreement. Janssen has the right to terminate the
Agreement upon six months notice. However, in the event of termination, other
than termination by Janssen for cause or as a result of the acquisition of
Neurocrine, all product and technology rights become the exclusive property of
Neurocrine.
In September 1999, the Company signed an amendment to its 1995 agreement
with Janssen Pharmaceutica, N.V. ("Janssen"). The amendment provides for a new
sponsored research period designed to identify new corticotropin-releasing
factor ("CRF") receptor antagonists which will be subject to the terms of the
original agreement signed in 1995. The term of the amendment is from April 1999
through February 2001. Under the agreement, the Company will receive $5.0
million in sponsored research funding, up to $3.5 million in milestone
achievements, $500,000 for research already conducted under this certain
technology and reimbursement of all outside and third party costs associated
with the project. As of December 31, 1999, the Company has received $1.9 million
in sponsored research and the $500,000 payment for prior research.
Novartis. In January 1996, the Company entered into an agreement with
Novartis under which Novartis paid the Company $5.0 million in up-front license
fees and was obligated to provide Neurocrine with $7.0 million in research and
development funding during the first two years of the agreement and up to $15.5
million in further research and development funding thereafter. As of December
31, 1999, the Company has received $18.8 million in sponsored research and
development payments and $9.1 million of milestone payments.
On July 7, 1999, Novartis exercised its right to terminate the Development
and Commercialization Agreement, effective January 7, 2000. As a result,
Neurocrine will reacquire the worldwide rights to its multiple sclerosis
compound, MSP771.
NOTE 10. RELATED PARTY TRANSACTIONS
Neuroscience Pharma, Inc. In March 1996, the Company along with a group of
Canadian institutional investors (the "Canadian Investors") established
Neuroscience Pharma Inc. ("NPI"). The Company's contribution was to license
certain technology and Canadian marketing rights to NPI. The Canadian Investors
contributed approximately $9.5 million in cash in exchange for the Preferred
Stock of NPI, which was convertible into the Company's Common Stock at the
option of the Canadian Investors, and warrants exercisable for 383,875 shares of
the Company's Common Stock at an exercise price of $10.50 per share. The
Canadian Investors are also eligible to receive additional warrants upon the
attainment of certain additional funding.
During 1997 and 1998, the Investors converted their Preferred Shares to the
Company's Common Stock. As a result, the Company recorded an investment in NPI
equal to the market value of Common Stock issued in exchange for the Preferred
Shares and has recognized its proportionate share of the NPI net losses in
accordance with the equity method of accounting. Equity in NPI losses totaled
$764,000, $3.4 million and $1.1 million in 1999, 1998 and 1997, respectively.
The Preferred Shares were redeemable for cash at the Company's option. The
redemption feature of the Preferred Shares limits their value to the balance of
cash and cash equivalents maintained by NPI. Consequently, the Company reduced
the value of its NPI investment by $646,000 during 1999 and $3.8 million during
1998. The balance of the Company's investment in NPI was $0 and $1.4 million at
December 31, 1999 and 1998, respectively.
During 1996, the Company entered into a sponsored research agreement with
NPI. The terms of the agreement called for NPI to fund additional research
efforts on technologies licensed to NPI by the Company. Associated with the
costs of research on those certain programs, the Company recognized revenues of
$491,000 and $3.6 million during 1999 and 1998 respectively.
Page F-18
<PAGE>
NEUROCRINE BIOSCIENCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
During December 1999, the Company sold its investment in NPI in exchange
for cash, receivables and potential royalties on worldwide sales resulting from
certain of NPI's future products. The Company recorded a gain of $526,000 on the
sale of this investment. The gain was calculated using the total consideration
of cash and receivables, less the carrying value of the NPI investment. No value
was assigned to potential royalties on future product sales due to the
uncertainty of this event. This transaction, as well as those discussed above,
is included in "Equity in NPI losses and other adjustments, net" reported on the
Consolidated Statement of Operations.
NOTE 11. EARNINGS PER SHARE
The following data show the amounts used in computing earnings per share
and the effect on income and the weighted-average number of shares of dilutive
potential common stock (in thousands except for earning per share data):
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1999 1998 1997
------------------------------------------------
<S> <C> <C> <C>
Numerator:
Net income (loss) $ (16,822) $ (19,955) $ 5,127
Effect of dilutive securities - - -
---------- ---------- --------
Numerator for earnings (loss) per share $ (16,822) $ (19,955) $ 5,127
========== ========== ========
Denominator:
Denominator for basic earnings (loss) per share 19,072 18,141 16,930
Effect of dilutive securities:
Employee stock options ** ** 909
Convertible preferred stock ** ** 204
Warrants ** ** 141
---------- ---------- --------
Dilutive potential of common shares ** ** 1,254
---------- ---------- --------
Denominator for diluted earnings (loss) per share 19,072 18,141 18,184
=========== ========== ========
Basic earnings (loss) per share $ (0.88) $ (1.10) $ 0.30
=========== ========== ========
Diluted earnings (loss) per share $ (0.88) $ (1.10) $ 0.28
=========== ========== ========
</TABLE>
**Antidilutive
NOTE 12. INCOME TAXES
At December 31, 1999, the Company had federal and California income tax net
operating loss carryforwards of approximately $20.3 million and $5.4 million,
respectively. The federal and California tax loss carryforwards will begin to
expire in 2010 and 2003, respectively, unless previously utilized. The Company
also has federal and California research tax credit carryforwards of
approximately $3.5 million and $1.3 million, respectively, which will begin to
expire in 2007 and 2012, respectively, unless previously utilized. The Company
has federal Alternative Minimum Tax credit carryforwards of approximately
$257,000, which will carryforward indefinitely.
Pursuant to Internal Revenue Code Sections 382 and 383, annual use of the
Company's net operating loss and credit carryforwards may be limited because of
cumulative changes in ownership of more than 50% which occurred during 1992 and
1993. However, the Company does not believe such changes will have a material
impact upon the utilization of these carryforwards.
Significant components of the Company's deferred tax assets as of December
31, 1999 and 1998 are shown below. A valuation allowance of $13.5 million and
$6.5 million at December 31, 1999 and 1998, respectively, have
Page F-19
<PAGE>
NEUROCRINE BIOSCIENCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
been recognized to offset the net deferred tax assets as realization of such
assets is uncertain. Amounts are shown in thousands as of December 31, of the
respective
years:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 7,400 $ 3,744
Tax credit carryforwards 4,649 2,069
Capitalized research and development 935 453
Other, net 520 204
-------- --------
Total deferred tax assets 13,504 6,470
Valuation allowance (13,504) (6,470)
-------- --------
Net deferred tax assets $ - $ -
======== ========
</TABLE>
The provision for income taxes on earnings subject to income taxes differs
from the statutory federal rate at December 31, 1999, 1998 and 1997, due to the
following:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------
<S> <C> <C> <C>
Federal income taxes at 34% $ (5,719) $ (6,785) $ 1,816
State income tax, net of federal benefit - 1 87
Increase in tax credits (1,981) - -
Tax effect on non-deductible expenses 932 4,213 21
Increase in valuation allowance 7,034 2,572 (1,837)
Alternative Minimum Tax - - 127
Other (266) - -
--------------------------------------------
$ - $ 1 $ 214
--------------------------------------------
</TABLE>
Page F-20
