-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HXCTFfT/GAA3e9Ldk62VaXS96sHD/a05GVfKxjtm9SqLo8k0CBk+dG2684HJfmHP 6aT534UsyMFtB6yCIOoQow== 0000884939-00-000003.txt : 20000327 0000884939-00-000003.hdr.sgml : 20000327 ACCESSION NUMBER: 0000884939-00-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000324 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYNAPTIC PHARMACEUTICAL CORP CENTRAL INDEX KEY: 0000884939 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 222859704 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-27324 FILM NUMBER: 578276 BUSINESS ADDRESS: STREET 1: 215 COLLEGE RD CITY: PARAMUS STATE: NJ ZIP: 07652 BUSINESS PHONE: 2012611331 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K Mark One: [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) 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 (NO FEE REQUIRED) Commission File Number 0-27324 SYNAPTIC PHARMACEUTICAL CORPORATION (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 215 College Road Paramus, NJ (Address of principal executive offices) 22-2859704 (I.R.S. Employer Identification No.) 07652 (Zip Code) (201) 261-1331 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share Rights to Purchase Series A Junior Convertible Preferred Stock, par value $.01 per share (Title of Class) 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, as amended (the "Exchange Act"), 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 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. [ ] The approximate aggregate market value of the voting and non voting common equity held by non-affiliates of the registrant was approximately $76,278,000 as of February 15, 2000, based upon the closing price of the Common Stock as reported on The Nasdaq Stock Market on such date. For purposes of this calculation, shares of Common Stock held by directors, officers and stockholders whose ownership in the registrant is known by the registrant to exceed five percent have been excluded. This number is provided only for purposes of this report and does not represent an admission by either the registrant or any such person as to the status of such person. As of February 15, 2000, there were 10,767,311 shares of the registrant's Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Synaptic Pharmaceutical Corporation Proxy Statement, to be filed not later than 120 days after December 31, 1999, in connection with the registrant's 2000 Annual Meeting of Stockholders, referred to herein as the "Proxy Statement," are incorporated by reference into Part III of this Report on Form 10-K. SYNAPTIC PHARMACEUTICAL CORPORATION INDEX TO REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1999 Part I Page ---- Item 1. Business..................................................... 1 Item 2. Properties................................................... 25 Item 3. Legal Proceedings............................................ 25 Item 4. Submission of Matters to a Vote of Securityholders........... 25 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................................ 26 Item 6. Selected Financial Data...................................... 27 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. 27 Item 7A. Quantitative and Qualitative Disclosures About Market Risk... 36 Item 8. Financial Statements......................................... 37 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................... 58 Part III Item 10. Directors and Executive Officers of the Registrant........... 58 Item 11. Executive Compensation....................................... 58 Item 12. Security Ownership of Certain Beneficial Owners and Management............................................. 58 Item 13. Certain Relationships and Related Transactions............... 58 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................................ 59 (i) Part I Item 1. Business Overview Synaptic Pharmaceutical Corporation ("Synaptic" or the "Company") is a biotechnology company engaged in the development of a broad platform of enabling technology which it calls "human receptor-targeted drug design technology." The Company is utilizing this technology in its genomics program to discover and clone the genes that code for human receptors. The Company and its licensees are also utilizing this technology in functional genomics programs to discover the function of these receptors in the body and thus specific physiological disorders with which they may be associated. The Company and its licensees are in turn utilizing the cloned receptor genes to design compounds that can potentially be developed as drugs for treating these disorders. Synaptic's human receptor-targeted drug design technology is the result of an integrated approach to four life science fields: molecular biology; cell biology; pharmacology; and chemistry, including medicinal, combinatorial and computer-assisted chemistry. This technology allows chemists to focus their drug discovery efforts on a specific human receptor target. The Company believes that its technology provides four distinct advantages over the traditional approach to drug discovery in which compounds are screened against animal tissues containing many different types of receptors. First, by having an isolated receptor as a target, chemists are better able to design compounds that interact with only the target of interest and not with other receptors that may be responsible for side effects. Second, the Company believes that using human receptors as drug design targets will substantially reduce the number of problems that often arise during the drug development process as a result of differences in a compound's activity in humans compared to its activity in animal models. Third, Synaptic believes that its technology may be more cost-effective than traditional drug discovery because the Company and its licensees can eliminate or redesign compounds that react poorly with human receptor targets prior to initiating the costly activities related to preclinical testing and clinical trials. Fourth, once a compound designed with this technology is tested in clinical trials, the specific receptor targeted by such compound may be validated as a useful intervention point of therapy. Synaptic focuses its receptor and drug discovery efforts on members of a receptor superfamily known as "G protein-coupled receptors" or "GPCRs." The Company selected this receptor superfamily for two principal reasons. First, many GPCRs have been shown to be effective drug targets, as evidenced by the commercial availability of drugs for a wide variety of therapeutic applications that work by means of their interactions with GPCRs. Second, the GPCR superfamily is extremely large and diverse and, based on several estimates, exceeds 1,000 receptors, with its members being involved in the mediation of a broad array of physiological functions. Accordingly, the Company believes that there are substantial opportunities to use many receptors within the GPCR superfamily as targets for novel drugs. The Company began its genomics program in 1988 shortly following its inception and has since that time discovered the genes that code for many G protein-coupled receptors. Gene discovery is, however, just the first step in the long process of drug discovery. In order for receptors to have value as drug targets in the drug discovery process, it is imperative that their functions in the body be determined. The multi-step process of determining the function of a receptor can be described as "target validation," which occurs only when compounds directed toward the receptor of interest have been shown to have therapeutic efficacy in a population of individuals who suffer from the disorder in question. The data required to prove therapeutic 1 efficacy of such compounds are available only after the completion of Phase II clinical trials. "Functional genomics" is the term which comprises the technologies that are involved in target validation. An essential step in the process of validating a receptor as a drug target is determining the "family" within the GPCR superfamily of which the receptor is a member. This determination is made by discovering the specific endogenous ligand with which the receptor preferentially interacts. Genes that code for receptors whose endogenous ligand has not yet been discovered are called "orphan receptors." Without knowing the family, or endogenous ligand, for a receptor, it is difficult to generate pharmacological information which might suggest a function for that receptor in the body and, as a consequence, to speculate on the role of an orphan receptor in specific physiological disorders. The Company anticipated several years ago that, as worldwide interest in sequencing the entire human genome increased, more and more discoveries from its and others' genomics programs would be orphan receptors. Accordingly, the Company began to develop technologies that would facilitate the discovery of the endogenous ligands for orphan receptors. These efforts have culminated in the successful development of an assay, which the Company calls its "Universal Functional Assay" (UFA). By means of the Universal Functional Assay, the Company has discovered the endogenous ligands for several orphan receptors. Synaptic has varying levels of expertise in the many steps of the validation process, with its highest expertise in the earlier steps of the validation process. In order to gain access to expertise required to effect steps where it has no expertise, or its expertise is limited, the Company seeks to leverage its resources by entering into collaborative and licensing arrangements with pharmaceutical companies. In these arrangements, the Company's human receptor-targeted drug design technology is used through the preclinical stage of the drug discovery process and the Company's licensees assume responsibility for conducting clinical trials with compounds that successfully complete the preclinical stage. Through December 31, 1999, the Company's gene discoveries resulting from its genomics and functional programs had led to collaborations between the Company and a number of pharmaceutical companies. In four of these collaborations, the Company and its collaborative partners Eli Lilly and Company ("Lilly"), Merck & Co., Inc. ("Merck"), Novartis Pharma AG ("Novartis"), and Grunenthal GmbH ("Grunenthal"), confirmed the role of at least five receptor targets in specific physiological disorders in studies, known as "proof of concept" studies, in animal model systems. Further, the Company's collaboration with Lilly yielded a compound that showed substantial efficacy in patients in three Phase II clinical trials and thus validated the specific receptor targeted by the compound as a target of drugs for the treatment of migraine headache. The Company's collaboration with Merck yielded a compound that showed substantial efficacy in a Phase II clinical trial and thus validated the specific receptor targeted by that compound as a target of drugs for the treatment of benign prostatic hyperplasia ("BPH"). These compounds were subsequently withdrawn from clinical trials in 1999 due to drug development concerns unrelated to Synaptic's technology. In January 2000, the Company entered into a collaborative arrangement with Kissei Pharmaceutical Co., Ltd. ("Kissei"). Unlike earlier arrangements in which the Company's collaborative partners licensed from the Company previously cloned receptor genes whose endogenous ligands had at the time already been discovered by Synaptic, Kissei is providing funding to the Company for research in which the Company will utilize its genomics technologies on behalf of Kissei to discover and clone novel receptor genes and to discover their endogenous ligands. Certain discussions in this Report refer to various phases of preclinical testing and clinical trials. For a description of such phases, see "Government Regulation" below. 2 Business Objectives Synaptic's business objectives are to develop, together with collaborative partners, a broad array of drugs based upon the Company's human receptor-targeted drug design technology, and to license certain of its technology to third parties which will use the technology in their drug development efforts. In order to achieve its objectives the Company employs five principal strategies. To Discover and Clone G Protein-Coupled Receptor Genes The first strategy of the Company is to aggressively discover and clone G protein-coupled receptor genes and to aggressively seek patent protection for such discoveries. The Company's original approach to gene discovery was a targeted genomics approach, which involves the use of the Company's molecular biology expertise to discover and clone receptor genes within families of GPCRs identified by the Company as being of particular interest based upon their potential role in certain physiological disorders. During the past several years, the Company has successfully developed an array of proprietary technologies related to a nontargeted approach to the discovery of GPCRs. These technologies involve molecular biology, cell biology and bioinformatics algorithms. The receptor discoveries resulting from the nontargeted approach are generally orphan receptors. As of February 18, 2000, Synaptic had successfully cloned many receptor genes and had received 50 patents relating to 16 of these receptor genes and related drug discovery systems. In addition, at that date additional patent applications relating to the Company's receptor gene discoveries had been filed in the United States and in other countries. To Develop a Broad Array of Functional Genomics Technologies The Company's second strategy is to attempt to validate individual GPCRs as drug targets. The Company has discovered, and will continue to attempt to discover, technologies that will facilitate an understanding of the various functions of specific GPCRs in the body. One such technology is an assay, which the Company calls its "Universal Functional Assay," that facilitates the discovery of the endogenous ligands for GPCRs, a critical step in the process of target validation. The Universal Functional Assay allows for the screening of the Company's proprietary endogenous ligand library against orphan receptors of interest. The successful application of the UFA is, however, dependent on the presence of the endogenous ligand for the receptor of interest in the Company's ligand collection. In an attempt to maximize the chances that the endogenous ligand for a particular receptor will be discovered, the Company has developed proprietary algorithms which it employs in deciding how best to enhance and expand its ligand collection. To Discover and Design Potential Drugs with Human Receptor-Targeted Drug Design Technology The Company's third strategy is to discover and design, or to have collaborative partners and other licensees discover and design, potential drugs through the use of the Company's human receptor-targeted drug design technology. The Company and its licensees are using this technology to design, synthesize and optimize compounds for further development. The Company's two approaches to designing and synthesizing compounds include medicinal chemistry and combinatorial chemistry, each of which is supported by the Company's expertise in computer-assisted molecular modeling. With both approaches, the Company's chemists and pharmacologists use their knowledge of the structures of ligands and targeted receptors to design and synthesize initial chemical structures that are then optimized. 3 To Leverage Resources and Generate Royalty-Based Revenues The Company's fourth strategy is to leverage resources and generate royalty-based revenues through collaborations and licensing arrangements with pharmaceutical companies. As part of this strategy, the Company focuses most of its scientific resources on the discovery of receptor genes and their endogenous ligands, the use of such genes as potential drug targets and the early design phases of the drug discovery process, while relying predominately on collaborative partners and other licensees for preclinical testing, clinical trials and commercialization. With respect to its nontargeted genomics expertise, the Company seeks to establish collaborations in which it utilizes this expertise on behalf of its collaborative partners to discover and clone novel receptor genes present in specific tissues selected by its partners and, together with those partners, attempts to link its receptor discoveries to specific physiological functions. In these arrangements, the Company's collaborative partners would be responsible for all late preclinical and clinical development activities, as well as commercialization of any drug resulting from any such arrangement. The Company may also, as part of this strategy, seek to license certain of its receptor discoveries to pharmaceutical companies, which would then be solely responsible for any research necessary to evaluate the licensed discoveries as potential drug targets and for any drug discovery and development efforts focused on these discoveries. The Company's collaborative and licensing arrangements generally provide for the payment to the Company of milestone payments upon the occurrence of certain events and royalties tied to net sales of any drugs resulting from the use of the Company's technology. The collaborative arrangements may also provide for financial support for the Company's research. By pursuing the objective of leveraging resources and generating royalty-based revenues, Synaptic benefits from the expertise and resources of its partners and other licensees, while simultaneously maintaining relatively low capital requirements. See "Joint Research Programs" and "Other Licensees' Programs" below." To Retain Ownership of Certain Products The Company's fifth strategy is to retain ownership rights to certain products developed through the use of its technology. The Company is seeking to implement this strategy in a variety of manners, including the exploration of and entry into collaborations with pharmaceutical companies in which the Company increases its participation in and funding of drug development activities conducted as part of such collaborations. Through such arrangements, the Company believes that it may be able to gain access to additional chemistry, in vivo pharmacology and preclinical and clinical expertise, as well as to retain a greater portion of the downstream financial benefits associated with the commercialization of any products resulting from such arrangements. In January 1998, the Company entered into a collaboration with Grunenthal in which the Company participates in and may fund a portion of the drug development activities conducted as part of the collaboration. See "Grunenthal Collaboration" under "Joint Research Programs" below. 4 Background The Role of Receptors in Controlling Cellular Function The human body coordinates its activities through communication among its great variety of cells and tissues. One of the principal means of communication occurs through chemical signaling, when one cell releases a chemical messenger, called a "ligand," which ultimately binds to and activates a protein molecule, called a "receptor," on the surface of another cell. The activation of the receptor on the surface of the receiving cell triggers a cascade of events in which the message received by the receptor is, in turn, transmitted to the interior of the cell, thereby causing some aspect of the behavior of the receiving cell to change. The nature of this change depends upon a number of factors, including the specific ligand and receptor involved in the communication. Many different kinds of receptors involved in cellular communication exist in the human body. Receptors are first classified into categories, called "superfamilies," based upon similarities in their biochemical and structural properties. There are four principal superfamilies of receptors: the G protein-coupled receptor superfamily, the receptor protein-tyrosine kinase superfamily, the ligand-gated ion channel superfamily and the intracellular receptor superfamily. The receptors included within each superfamily are then subcategorized into groups, called "families," based upon the specific ligands with which they interact. Examples of receptor families within the GPCR superfamily are the serotonin, adrenergic, neuropeptide Y ("NPY") and galanin families of receptors. Each member of each family is called a "receptor subtype." If the ligand with which a receptor interacts is not known, the receptor is called an "orphan receptor." Historically, it was believed that each family of receptors had only one or two members. Scientists have discovered, however, that many families of receptors have more than two receptor subtypes. The number of receptor subtypes within each family of receptors varies, with some families, such as the serotonin family, comprising at least 14 known receptor subtypes, and other families, such as the alpha adrenergic family, comprising at least six known receptor subtypes. In general, each receptor subtype is distributed differently throughout the body and often controls physiological functions that are different from those controlled by other receptor subtypes within the same family. By interacting with all of its receptor subtypes that are located throughout the body, a single ligand thus plays a role in numerous physiological functions. Receptor-Based Drug Therapy--The Traditional Approach Many illnesses arise because of abnormalities in intercellular communication, and the concept of receptor-based drug therapy was developed to address this problem. The goal of receptor-based drug therapy is to develop drugs that will interact with the receptor believed to be associated with the targeted abnormality, thereby inhibiting or enhancing the cascade of events that is mediated by the receptor. A number of receptor-based drugs have been developed and are currently being marketed. In general, however, these drugs do not differentiate among receptor subtypes and, while they may indeed interact with the targeted receptor subtypes, thereby having some therapeutic effect, they may also interact with other receptor subtypes within the same family as the targeted receptor subtypes. These other receptor subtypes may be associated with other physiological functions, and interactions of these drugs with them often result in undesirable side effects. In addition, many of these drugs have limited therapeutic utility because they must be used in suboptimal doses in order to minimize these side effects. 5 The reason that many of these currently available drugs do not differentiate among receptor subtypes stems from the fact that they were discovered through traditional drug discovery methods. The traditional approach to drug discovery involves the screening of compounds against animal tissues containing multiple receptor subtypes to determine their relevant biological activity. This approach is limited in its ability to yield optimally effective drugs because of inherent limitations in the use of animal tissues to test drugs intended for humans. First, by using animal tissues containing multiple receptor subtypes, it is usually difficult and often impossible both to measure with precision the effect of a compound on the receptor subtype that is the target of a drug discovery effort and to determine whether the compound is binding to other receptor subtypes in the tissue that are not the intended drug target. Second, due to differences in the receptor systems of various species of animals as compared to humans, there are often significant differences between a drug's activity in animals and the same drug's activity in humans. In fact, there are several examples of drug development candidate failures in human clinical trials that were due to differences in the properties of such candidates in humans as compared to their properties in the animal tissues that were initially used for drug discovery. As a consequence, compounds initially tested against animal tissues often do not have the desired effects when they are ultimately administered to humans in clinical trials. Synaptic's Human Receptor-Targeted Drug Design Technology Advantages Over Traditional Approach Since its inception, Synaptic's goal has been to develop a technology that will facilitate the design and development of drugs that are safer and more efficacious than existing drugs. Toward that end, the Company has developed, and continues to refine and expand, its human receptor-targeted drug design technology. The Company believes that this technology can overcome the limitations of the traditional approach to drug discovery. This technology makes it possible not only to clone receptors previously believed or known to exist, but also to discover and clone receptors which had previously been undetectable in animal tissues because they were present in concentrations too low to detect using traditional pharmacological techniques. In addition, the Company believes that the expansion of its technology platform to facilitate the discovery of the endogenous ligands for orphan receptors and to determine their functions will enable it to extend its reach into the drug discovery process. The Company believes that a number of its newly discovered receptors will provide opportunities for the design of novel drugs. In addition, the Company believes that its ability to access and to use individual cloned human receptors in its and its licensees' drug design efforts will yield safer and more effective drugs than those currently available. Synaptic further believes that its technology may make the drug development process more predictive and cost-effective than the traditional approach because the Company and its licensees can eliminate or redesign nonsubtype-selective compounds and compounds that react poorly with human targets at an early stage of the process rather than at the costly later stages of preclinical testing and clinical trials. Finally, drugs developed through the use of the Company's human receptor-targeted drug design technology will be small molecule drugs which offer possibilities of avoiding specialized delivery approaches and which may be delivered orally. The Company also believes that its success in the discovery of receptors will enable it to further refine the understanding of many disease processes. There is increasing evidence to suggest that some disorders may actually involve the malfunctioning of any one of a variety of receptors included within different receptor families. For example, in the case of obesity, there are pharmacological data indicating that NPY, galanin and serotonin receptors are involved in controlling food intake. As a result, more than one drug could be developed to treat obesity, but such drugs would work through different biological mechanisms by exerting their therapeutic effects by interacting with receptor subtypes belonging to different families. The Company believes 6 that its human receptor-targeted drug design technology may make it possible to discover two or more separate drugs that could benefit distinct patient populations whose symptoms (for example, obesity), while identical, stem from different physiological disorders and therefore require different treatments. Industry-Shift from Traditional Approach Towards Use of Cloned Receptors Over the past decade, most of the major pharmaceutical companies have developed a keen interest in using cloned receptors in at least some of their drug discovery efforts. This interest coincides with, and may in part be responsible for, the worldwide race to sequence the entire human genome. While worldwide genomics efforts have resulted in the development of new technologies which greatly accelerate the pace at which new receptors are discovered, most of these discoveries are orphan receptors. Without information regarding the endogenous ligands of these receptors, it is difficult to hypothesize about their role in specific physiological functions. As a result, these newly discovered receptors are, and will continue to be, of limited value as targets for the design and development of drugs until their biological roles are determined. As the new millennium commences, a principal focus of the biotechnology and pharmaceutical industries is upon utilizing the vast body of data being generated with respect to cloned receptors to better understand these receptors, their physiological functions and their potential as targets for the design and development of drugs that are safer and more efficacious than existing drugs. Synaptic believes that its human receptor-targeted drug design technology will play an important role in both the discovery of new receptors and the elucidation of the functions of newly discovered receptors and their potential as drug targets. Overview -- The Three Principal Steps The Company's human receptor-targeted drug design technology has three principal steps: (i) Genomics. Genomics is the discovery and cloning of the genes that code for receptors. In this step, the Company's molecular biologists employ genetic engineering techniques, molecular biology technologies, automated gene sequencing and bioinformatics to discover and clone receptor genes. Many of the component technologies in this step are proprietary to the Company. (ii) Functional Genomics. Functional genomics is the term which comprises the technologies involved in the process of target validation. For example, certain functional genomics technologies facilitate the discovery of the endogenous ligands for receptors and, thus, the biological roles of such receptors in the body, while others involve assays that facilitate both the search for compounds that are selective for the receptors of interest and the use of selective compounds in various animal models of behavior and physiology in an attempt to provoke a response in an animal model system that might indicate the role of such receptors in the body. Observation of a response in an animal model constitutes a confirmation, or "proof of concept,"of a role of the receptors targeted by the selective compounds and provides an opportunity to develop hypotheses concerning the possible therapeutic utility of drugs that act at the receptors of interest. There is no guarantee, however, that effects seen in animals will also occur in humans. The downstream steps in the process of target validation include preclinical testing and Phase I and Phase II clinical trials. These steps are currently performed by Synaptic's collaborative partners or licensees. (iii) Chemistry: Compound Design and Optimization. Chemistry, as it relates to Synaptic's human receptor-targeted drug design technology, involves two principal activities: the design and synthesis of compounds which are selective for the receptor of interest and which can thus be used in proof of concept studies; and, following proof of concept, the optimization of selective compounds to arrive at a compound 7 which has the desired pharmacological profile and which can thus proceed through preclinical testing and clinical trials. Drug Discovery Paradigm Set forth below is a diagram of the Drug Discovery Paradigm, which illustrates various steps in the drug discovery process and the role that Synaptic's human receptor-targeted drug design technology plays in this process. DRUG DISCOVERY PARADIGM -- 2000 =============================== /--------------Synaptic Expertise------------/------"Big Pharma"-------------/ /---Genomics---/--------------------Functional Genomics----------------------/ Gene Discovery Functional Screening Preclinical and Cloning Assays Assays Pharmacology +-----+------+------+------+------+--------+-------+------+------+----------+ + + + + + + + Proof + + + Validated+ + + + + + + + of + + + Targets + + + + + + + +Concept+ + + + +-----+------+------+------+------+--------+-------+------+------+----------+ Endogenous Compound Phase I Ligand Design and Phase II Identif- Optimization Efficacy Trials ication Research and Drug Discovery Programs: Focus on G Protein-Coupled Receptor Superfamily The superfamily of receptors to which the Company has chosen to apply its human receptor-targeted drug design technology is the G protein-coupled receptor superfamily, so called because the cascade of events that ensues within the receiving cell following the occurrence of the ligand-receptor interaction is mediated by a class of proteins called "GTP-binding regulatory proteins," or "G proteins," found within the cell. The Company chose to focus on the GPCR superfamily because it believes that this superfamily provides the optimum opportunity for the exploitation of its human receptor-targeted drug design technology. First, it is known that G protein-coupled receptors play a major role in intercellular communication and that drugs that block ("antagonists") or enhance ("agonists") their activity have therapeutic utility. Examples of such drugs include: Zantac(R), a histamine receptor antagonist for the treatment of ulcers; Claritin(R), a histamine receptor antagonist for the treatment of allergy; Propulsid(R), a serotonin receptor agonist for the treatment of gastric motility disorder; Imitrex(R), a serotonin receptor agonist for the treatment of migraine headache; and Hytrin(R), an adrenergic receptor antagonist for the treatment of hypertension and urinary retention resulting from benign prostatic hyperplasia ("BPH"). Second, there is a large body of knowledge about some of the basic structural elements of drugs that interact with these receptors that has accumulated over the years from which the Company and its collaborative partners and licensees can draw in beginning their drug discovery programs. Third, the GPCR superfamily is extremely large and, based on several estimates, exceeds 1,000 receptor subtypes belonging to more than 45 known families and an unknown number of additional families the endogenous ligands of which either have not yet been identified or have been identified but have not been publicly disclosed. 8 The Company's human receptor-targeted drug design technology is being utilized or has been utilized in a number of different research and drug discovery programs. Some of these programs are currently being conducted by the Company independently. Others may have been conducted by the Company independently or in collaboration with pharmaceutical companies but are currently inactive and available for licensing by the Company. Finally, some of the programs are being conducted by the Company in joint research programs with its collaborative partners or by the Company's licensees. Total operating expenses incurred by the Company for each of the fiscal years 1999, 1998 and 1997 were $19,652,000, $19,576,000 and $17,853,000, respectively, of which approximately $1,759,000, $7,182,000 and $9,785,000, respectively, was funded by the Company's collaborative partners during such years. In 1998, the Company increased its internal research and development spending in part as a result of the expiration of its collaboration with Novartis and the termination of the associated research funding provided by Novartis. The Company again increased internal research and development spending during 1999, in part as a result of the July 31, 1999 expiration of its collaboration with Lilly and the termination of the associated research funding provided by Lilly and the February 28, 1999 expiration of its collaboration with Merck and the termination of the associated research funding provided by Merck. Certain of the programs in which the Company's human receptor-targeted drug design technology is being or has been utilized are summarized in the following table: 9 Summary of Certain Research and Drug Discovery Programs Types [and Number] of Issued U.S. and Programs(1) Subject Matter Primary Indications Foreign Patents - -------------------------------------------------------------------------------- Company Programs - ---------------- Genomics Research Gene Discovery All Potent'l GPCR-based -- and Cloning Functional Genomics Research Target Validation All Potent'l GPCR-based -- Undisclosed -- Urology -- Undisclosed -- Obesity -- Galanin Galanin Obesity, Diabetes, Receptor [1] Alzheimer's Disease, Depression and Pain Neuropeptide Y NPY Depression and Pain Receptor [10] Alpha 1a Antagonist Alpha 1a BPH Funct'l Use [9] Receptor [3] Chemistry [3] Joint Research Programs - ----------------------- Grunenthal Undisclosed Pain -- Kissei Gene Discovery Undisclosed -- and Cloning/Target Validation Programs of Licensees - --------------------- Lilly Serotonin Acute Migraine, Funct'l Use [1] Depression Receptor [31] and Obesity Novartis NPY Obesity Receptor [10] Glaxo Alpha 1a,1b or 1d (2) Receptor [4] - -------------------------------------------------------------------------------- (1) The Company's technology is being utilized by certain of the Company and its licensees in drug discovery programs in addition to those programs referenced in the above table. The subjects of such programs are confidential to the Company. (2) Glaxo has a nonexclusive license to use Synaptic's alpha 1 receptors for certain purposes, but is not required to provide Synaptic with any information regarding such use unless it files an NDA for a royalty-bearing compound under its agreement with Synaptic. Glaxo has not notified Synaptic of any such NDA filing. 10 Company Programs Genomics and Functional Genomics Research The Company began its genomics program in 1988 shortly following its inception and has since that time discovered the genes that code for many G protein-coupled receptors. The Company continues to place considerable emphasis on receptor gene discovery and, accordingly, continues to devote substantial resources to its genomics program. Gene discovery is, however, just the first step in the long process of drug discovery. In order for receptors to have value as drug targets in the drug discovery process, it is imperative that their functions in the body be determined. As a result, the Company is committing significant resources to the development and utilization of technologies designed both to facilitate the discovery of the endogenous ligands for its orphan receptor discoveries and to further the overall process of validating receptors for which the endogenous ligands have been discovered as targets of drugs for specific physiological disorders. Galanin Program One focus of the Company in its functional genomics program has been the galanin family of receptors. The neurotransmitter galanin is widely distributed in the gastrointestinal tract and the brain. There are a number of possible therapeutic applications for drugs that modulate galanin receptors, including the treatment of obesity, diabetes, Alzheimer's Disease, depression and pain. Most of the research done to date with galanin has focused on its role in the control of food intake. Injection of galanin into the brain has been shown to produce an increase in food intake in satiated rats. As a result, galanin receptor antagonists might result in a reduction of food intake and may thus be useful in the treatment of obesity. The immediate objective of this program is to achieve proof of concept of the biological function of one or more galanin receptors in animal model systems. To date, the discovery and cloning of the genes for three of these subtypes have been reported. The Company believes that it is responsible for the discovery of two of the three reported genes that code for galanin receptor subtypes. As of February 18, 2000, the Company had been issued one patent relating to the GALR2 receptor subtype. As of that date, additional patent applications relating to the Company's galanin discoveries had been filed in the United States and in other countries. In July 1997, the Company entered into a collaboration with Warner-Lambert to identify and develop galanin receptor subtype-selective compounds for a variety of therapeutic applications. As part of this program, the Company and Warner-Lambert identified galanin receptor subtype-selective compounds. Under the terms of its agreement with Warner-Lambert, Synaptic granted Warner-Lambert an exclusive worldwide license under certain of its patent rights to develop and commercialize galanin agonists and antagonists. In May 1999, this license automatically terminated upon the termination of the agreement. Synaptic is now seeking to license this program to a third party. There can be no assurance that Synaptic will be successful in licensing this program to a third party or that any licensee would be successful in developing galanin receptor subtype-selective compounds. NPY Program Neuropeptide Y is a neurotransmitter that is widely distributed in the nervous system and gastrointestinal tract. Evidence from both pharmacological studies and molecular cloning demonstrates the existence of multiple NPY subtypes. NPY exerts a multitude of actions in the body which indicate potential roles for the control of appetite, pain, affective disorders, circadian function, vasoconstriction, and 11 gastrointestinal motility. In addition, the administration of NPY has been shown to greatly enhance food ingestion in several species, and selective antagonists of the Y5 receptor subtype suppress appetite and lead to loss of body weight in rodents. In addition to its role in feeding, the Y5 receptor appears to mediate circadian function, play a role in the control of body temperature, and may suppress seizure disorders. NPY has also been shown to reduce plasma extravazation in a neurogenic model of migraine headache, as well as to constrict blood vessels in a "cranial window" model for that same condition, both through the Y2 receptor subtype. To date, the discovery and cloning of the genes for four NPY receptor subtypes have been reported. The Company believes that it is responsible for the discovery of three of these subtypes, the Y2, Y4 and Y5 receptor subtypes. As of February 18, 2000, the Company had been issued ten patents relating to these receptors. As of that date, additional patent applications had been filed in the United States and in other countries. The Company's NPY technology and related intellectual property, insofar as they relate to obesity and cardiovascular disease, are subject to licenses granted by the Company to Novartis. See "Novartis Programs" under "Other Licensees' Programs" below. Alpha 1a Antagonist Program Alpha adrenergic receptors are activated by the neurotransmitter norepinephrine (noradrenaline). The alpha adrenergic receptors serve a critical control function in regulating involuntary physiological functions, such as blood pressure, heart rate and smooth muscle tone, and thus may serve as important tools in the management of many disorders. Until 1982, only two alpha adrenergic receptors (alpha-1 and alpha-2) were believed to exist. Since then, scientists have discovered that the alpha adrenergic receptor family contains at least six subtypes (alpha- 1a, 1b and 1d and alpha-2a, 2b and 2c). The Company believes it is responsible for the discovery of the genes that code for the human alpha-1a, -1b, -1d and -2b receptors. As of February 18, 2000, the Company had received six patents relating to these genes and related drug discovery systems. As of that date, additional patent applications relating to certain of these genes had been filed both in the United States and in other countries. There are a number of adrenergic drugs on the market today which are effective in the treatment of a variety of disorders. However, most of these drugs were discovered in the 1970's prior to the discovery of the six alpha adrenergic subtypes and are not selective for any one of these receptor subtypes. The Company believes that many of the side effects associated with these drugs may be traced to a lack of selectivity for the appropriate receptor subtypes. The Company's first drug discovery program involving the alpha 1 adrenergic receptors focused on the condition known as benign prostatic hyperplasia ("BPH"). BPH is a pathology of the prostate, a walnut-sized gland in men that surrounds the urethra as it exits the bladder. As men age, cells in the prostate proliferate, causing growth in the prostatic tissue which in turn results in pressure on the urethra. Common symptoms of BPH include urinary retention, hesitancy or difficulty initiating the stream of urine, urinary frequency, a sense of urgency and a sensation of incomplete emptying of the bladder. The incomplete emptying of the bladder caused by BPH can also lead to urinary tract infections and bladder damage. In severe cases, the flow of urine can become completely blocked and lead to kidney failure. 12 Through the use of its alpha adrenergic drug discovery systems and by means of in vivo studies in animals, Synaptic discovered that different alpha 1 adrenergic receptor subtypes are involved in the control of prostate musculature and blood pressure: the alpha-1a receptor subtype is responsible for contraction of prostate musculature and other alpha-1 receptor subtypes are involved in the regulation of blood pressure. This discovery confirmed the Company's hypothesis that many of the side effects caused by nonselective alpha-1 adrenergic antagonists that were available for the treatment of BPH stemmed from their lack of selectivity for the receptor subtype involved in relaxation of prostate musculature. The Company, in collaboration with Merck, used the Company's drug discovery systems to design compounds that block the activity of the alpha-1a receptor subtype, but that have minimal affinity for alpha-1b and alpha-1d receptor subtypes. In studies involving the administration of alpha-1a selective antagonists to animals, "proof of concept"--that the alpha-1a receptor subtype is an appropriate target of drugs for the treatment of symptoms associated with BPH--was demonstrated. Further, one of the compounds resulting from the collaboration was found in a Phase IIa clinical trial to be efficacious in the treatment of BPH without cardiovascular side effects seen with currently available nonselective alpha-1 adrenergic antagonists, thereby validating the alpha-1a receptor subtype as a target of drugs for the treatment of BPH. Due to drug development concerns unrelated to Synaptic's technology, Merck withdrew this compound from clinical trials in 1999 and subsequently terminated its efforts to develop an alpha-1a antagonist for BPH. As of February 18, 2000, the Company had been issued 15 patents relating to its BPH program, nine of which are functional use patents that cover the use of alpha-1a antagonists having defined degrees of selectivity for the alpha-1a receptor subtype relative to one or both of the other alpha-1 receptor subtypes for the treatment of BPH (the "BPH use patents"), three of which relate to the human alpha-1a adrenergic receptor subtype and three of which cover selective alpha-1a antagonists. As of that date, additional patent applications had been filed in the United States and in other countries. Under the terms of its agreement with Merck, Synaptic had granted Merck a nonexclusive worldwide license under certain of its patent rights, including the Company's alpha adrenergic receptor patents and patent applications, to develop and commercialize alpha-1a antagonists. In addition, Synaptic had granted Merck an exclusive worldwide license to use Synaptic's alpha-1a selective compounds and know-how, as well as an exclusive worldwide license under certain of the Company's patent rights, including the BPH use patents and related patent applications, for the same purpose. In March 2000, these licenses automatically terminated upon the termination of the Merck agreement. Merck continues to have a non-exclusive license to use certain Synaptic know-how. However, Synaptic is now free to license its technology and patent rights relating to the BPH program to third parties and is currently seeking licensees for such patent rights. There can be no assurance that Synaptic will be successful in licensing this technology and related patent rights to third parties or that any licensee would be successful in developing an alpha-1a antagonist for the treatment of BPH. Joint Research Programs A key element of the Company's business strategy has been to leverage resources and to attempt to generate royalty-based revenues through collaborative and licensing arrangements with pharmaceutical companies. The Company is currently collaborating with two pharmaceutical companies pursuant to: (i) the Cooperation Agreement dated as of January 12, 1998, as amended (the "Grunenthal Agreement"), with Grunenthal GmbH ("Grunenthal") and (ii) the Collaborative Research and License Agreement dated as of January 24, 2000 (the "Kissei Agreement"), with Kissei. Concurrently with the establishment of these 13 collaborative arrangements, the Company granted certain rights with respect to its technology and patent rights to Grunenthal and Kissei. Set forth below is a brief summary of these collaborative arrangements. Grunenthal Collaboration In January 1998, the Company and Grunenthal entered into the Grunenthal Agreement pursuant to which they agreed to collaborate in the identification and development of drugs for the alleviation of pain. The basis of the collaboration has been the complementary technologies of the two companies. Synaptic has cloned the genes for many receptors whose biological functions are not known. Grunenthal has a broad expertise in various animal models of pain. The work of the collaboration involves the coupling of the Company's human receptor-targeted drug design technology with Grunenthal's expertise in pain-related technology in an attempt first to identify receptors that could be targets of drugs that alleviate pain and then to design and develop drugs targeted to such receptors. Under the terms of the Grunenthal Agreement, Synaptic agreed to make available to Grunenthal for evaluation all receptors (to the extent not already licensed exclusively to a third party) cloned by Synaptic for which there is evidence of a role in the mediation of pain or whose function has not yet been elucidated but which were first cloned by Synaptic from tissues known to be so implicated. Synaptic further agreed not to pursue such receptors, independently or with any third party, as targets of potential drugs for the alleviation of pain during the evaluation period applicable to the receptors or during the period over which activities involving any such receptor are being jointly conducted with Grunenthal. The terms of the Grunenthal Agreement provide that the companies are responsible for their own expenses incurred during the research stage of any project undertaken as part of the collaboration but will each be responsible for 50% of all development costs incurred as part of the project with respect to any resulting drug candidates up to the commencement of Phase III clinical trials. Synaptic will retain manufacturing and marketing rights in the United States, Canada and Mexico with respect to any drug candidates resulting from the collaboration, while Grunenthal will retain manufacturing and marketing rights in Europe, Central America (other than Mexico) and South America with respect to any such candidates. The two companies will share these rights in all other countries. With respect to each country in its own territories and in the shared territories in which it desires to market a drug candidate, each of Synaptic and Grunenthal will be responsible for conducting Phase III clinical trials, if required, for obtaining any necessary regulatory approval, and for all associated costs. Kissei Collaboration In January 2000, the Company and Kissei entered into the Kissei Agreement pursuant to which they agreed to collaborate in an effort in which Synaptic will conduct both a genomics and functional genomics program on behalf of Kissei in an attempt to clone genes that code for G protein-coupled receptors from tissues selected by Kissei and to identify the ligands for such receptors, and Kissei will attempt to discover and develop compounds that act at such receptors. The term of the collaboration is three years. Under the terms of the Kissei Agreement, Kissei will provide the Company with funding to support Synaptic's research. Kissei will have the opportunity to select up to a certain number of receptors that are discovered by Synaptic during the course of the collaboration and to receive an exclusive worldwide license to use the selected receptors to develop, manufacture and market drugs that act through such receptors. Kissei's license will convert to a nonexclusive license in all countries except Japan following its achievement of certain 14 milestones. In consideration for this license, Kissei will be required to pay the Company license fees, milestone payments and royalty payments on each drug that reaches the marketplace. Kissei has the right to terminate the Kissei Agreement effective in January 2001, 2002 or 2003 upon at least three months' prior written notice. In the event of any such termination, Kissei will not be required to provide the Company with any research funding that has not come due prior to such termination. Other Licensees' Programs In addition to the licenses granted in connection with the Company's ongoing collaborative arrangements, licenses to certain of the Company's technology and patent rights have been granted to three other pharmaceutical companies pursuant to: (A) the Research, Option and License Agreement dated as of January 25, 1991, as amended (the "Lilly Agreement"), with Lilly; (B) the Research and License Agreement dated as of August 4, 1994, as amended (the "First Novartis Agreement") and the Research and License Agreement dated as of May 31, 1996 (the "Second Novartis Agreement," and together with the First Novartis Agreement, the "Novartis Agreements"), with Novartis; and (C) the Option and License Agreement dated as of March 2, 1998 (the "Glaxo Agreement"), with Glaxo Group Limited ("Glaxo"). The Lilly and Novartis licenses were granted concurrently with the establishment by Synaptic of collaborative arrangements with such companies. While the Novartis collaboration and the Lilly collaboration ended in August 1998 and July 1999, respectively, the associated licenses continue for the respective periods provided in the Novartis Agreements and the Lilly Agreement. Lilly Programs Serotonin is one of the major neurotransmitters of the body. It affects mood, sleep rhythms, sexual functions, appetite, temperature control, gastro-intestinal movement and the cardiovascular, pulmonary and genito-urinary systems. Drugs that inhibit or enhance the actions of serotonin have proven to be effective in the treatment of an array of disorders, such as migraine headache, depression and anxiety. However, many of the serotonergic drugs currently available were designed without the use of cloned serotonin receptor subtype genes and some of these drugs have unacceptable side effect profiles. It is generally believed that the poor side effect profiles stem from the interaction of these drugs with multiple serotonin receptor subtypes. The serotonin family is extremely large, comprising at least 14 receptor subtypes. While each of these receptor subtypes may be implicated in a physiological function distinct from the other subtypes, all of the receptor subtypes respond to the neurotransmitter serotonin--and may be responding to nonsubtype-selective drugs. As a consequence, a nonsubtype-selective drug intended to exert its effects on one physiological function may in fact have the unintended consequence of exerting its effects on other physiological functions, thereby causing the undesirable side effects. Of the 14 serotonin receptor subtype genes that have been discovered and cloned, the Company believes that it is responsible for the discovery of seven. The Company has been issued 32 patents relating to these receptors and related drug discovery systems. Additional patent applications relating to these genes have been filed in the United States and in other countries. In 1991, the Company and Lilly began a collaboration to exploit Synaptic's serotonin receptor technology. The basis of the collaboration was Synaptic's discovery of several serotonin receptors and its creation of serotonin receptor drug discovery systems, and Lilly's expertise in serotonin pharmacology, chemistry and drug development. 15 During the course of the collaboration, one of the serotonin receptors, the serotonin 1F receptor, was validated as a target for the treatment of migraine headaches. The use of the serotonin 1F receptor as a target allows for the design of compounds that are efficacious in the treatment of migraine and that, in addition, do not carry the cardiovascular side effects associated with currently available serotonin-based drugs for the treatment of migraine headache. In addition to migraine headache, there is a wide variety of additional applications for serotonin-based drugs, including potential therapies for the treatment of obesity and novel receptor-based therapies for the treatment of depression. Although many years of research have been committed to the serotonin receptor system by dozens of research teams around the world, the understanding of the biological role of most of the serotonin receptors is still in a very early stage. Considerable work must be done in order to validate many of the serotonin receptors as drug targets. Lilly recently informed the Company that it is conducting drug discovery programs focused on a number of serotonin receptor subtypes and therapeutic applications, including migraine headache, obesity and depression, and that receptor subtype-selective compounds have been identified for a number of Lilly's serotonin programs. Under the terms of the Lilly Agreement, Lilly received an exclusive worldwide license to use all but two of the Company's existing serotonin drug discovery systems for the development and commercialization of drugs that affect serotonergic transmission. The Company retained the unlimited right to use two of its existing serotonin drug discovery systems and a limited right to use all of its other serotonin drug discovery systems for cross-reactivity screening of compounds in nonserotonin drug discovery programs. Lilly was also granted certain exclusive rights under several of the Company's patents and patent applications. The terms of the Lilly Agreement provide that Lilly is responsible for all development, manufacturing, marketing and sales of drugs resulting from the use of Synaptic's technology. The Company will be entitled to receive from Lilly payments upon the achievement of certain drug development milestones and royalties on sales of all drugs developed through the use of the Company's technology. Such royalties will be payable in respect of sales in any country over the period commencing with the date of the first commercial sale of a drug and ending with the expiration of related patent rights in that country. Lilly's milestone and royalty payment obligations under the Lilly Agreement continue, notwithstanding the expiration of the term of the collaboration. Novartis Programs From August 1994 to August 1998, the Company and Novartis engaged in a collaboration directed primarily to the identification and development of NPY drugs for the treatment of obesity and eating disorders. As part of its collaboration with the Company, Novartis received an exclusive worldwide license to use the Company's NPY receptor subtype drug discovery systems for the limited purpose of developing and commercializing Y5 antagonists, as well as any other NPY drugs, for the treatment of obesity and eating disorders, as well as cardiovascular disorders. Novartis also received rights under several of the Company's patents and patent applications. The license and rights remain exclusive until August 2001, following which time they become nonexclusive. Animal studies have shown that NPY is the most potent stimulator of food intake identified to date. As little as one billionth of a gram of NPY injected directly into the hypothalamus, a key brain area that 16 controls appetite, causes well-fed, satiated rats to overeat. Repeated administration of NPY causes continual overeating and obesity. A Y5 receptor was initially isolated by the Company's scientists from rat hypothalamus. In laboratory tests, the activity of NPY and related peptides on the Y5 receptor correlates with the ability of these peptides to stimulate feeding in animals. As part of its collaboration with the Company, Novartis then showed in proof of concept studies that several peptides that activated the Y5 receptor preferentially over other known NPY receptors increased food intake in rats. Additional proof of concept studies by Synaptic and Novartis showed that small molecules that selectively block the Y5 receptor significantly reduce food intake in rats and reduce body weight after chronic administration. Based upon these studies, Synaptic believes that the Y5 receptor is a "feeding" receptor, and that compounds that are selective for this receptor subtype may lead to new approaches to the treatment of obesity. The Company's collaboration with Novartis focused on discovering and developing a potent and selective Y5 antagonist for the treatment of obesity. Novartis recently informed the Company that it was continuing its efforts to identify a Y5 antagonist as a development candidate for this obesity program. In consideration for the licenses granted to it pursuant to the Novartis Agreements, from August 1994 to August 1998, Novartis provided the Company with funding to support a specified number of the Company's scientists dedicated to work on the collaboration. Novartis will be required to make payments to the Company upon the achievement by Novartis of certain drug development milestones and, subject to certain limitations, to pay the Company royalties on the sale of drugs developed through the use of the Company's technology. Glaxo Agreement In March 1998, the Company and Glaxo entered into the Glaxo Agreement pursuant to which the Company granted Glaxo a nonexclusive license under the Company's alpha 1 adrenergic receptor patents to develop and sell alpha-1a selective compounds for therapeutic applications other than the treatment of BPH. Synaptic will be entitled to receive royalties on sales of all alpha-1a selective drugs sold by Glaxo so long as Synaptic has an issued patent relating to an alpha 1 adrenergic receptor subtype in at least one major market country at that time. Terminated Agreements The Company had also granted licenses to certain of its technology and patent rights to two other pharmaceutical companies pursuant to (i) the Collaborative Research and License Agreement dated as of July 28, 1997 (the "Warner-Lambert Agreement"), with Warner-Lambert; and (ii) the Research Collaboration and License Agreement dated as of November 30, 1993, as amended (the "Merck Agreement"), with Merck. The Warner-Lambert license terminated in May 1999 upon the termination of the collaboration and the Merck licenses terminated in March 2000 upon the termination of the Merck Agreement. Other Agreements The Company's practice is to meet with pharmaceutical and biotechnology companies on an on-going basis to discuss the possibility of collaborating with them on projects of mutual interest and/or out-licensing its technology to them on a noncollaborative basis. At present, the Company is in the early stages of discussing 17 with other companies the possibility of a number of such arrangements. There can be no assurance that the Company will be successful in consummating any such arrangement. Patents, Proprietary Technology and Trade Secrets The Company's success depends, in part, on its ability to establish, protect and enforce its proprietary rights relating to its technology. The Company's policy is to seek, when appropriate, protection for its gene discoveries, compound discoveries and other proprietary technology by filing patent applications in the United States and other countries. The Company has filed numerous patent applications both in the United States and in other countries covering its inventions. As of February 18, 2000, the Company had been issued a total of 50 patents relating to the genes that code for various G protein-coupled receptors. These patents expire at various times from 2009 to 2016. In addition, as of that date additional patent applications relating to the Company's receptor gene discoveries had been filed in the United States and in other countries. In April 1995, the Company was issued its first functional use patent in the United States. This patent covers the use of selective alpha-1a antagonists for the treatment of BPH. As of February 18, 2000, the Company had been issued a total of nine patents relating to the same subject matter in the United States and in other countries. These patents expire at various times from 2012 to 2016. Additional related or corresponding patent applications of the Company are on file in the United States and in other countries. In August 1999, the Company received a functional use patent in the United States covering the use of selective serotonin 1D agonists for the treatment of migraine headache. Additional patent applications relating to the same subject matter have been filed in other countries. The Company has also filed patent applications in the United States and in other countries covering its neurotransmitter transporter discoveries. Whereas receptors are protein molecules which bind to and are activated by certain ligands, transporters are protein molecules which serve to terminate the action of certain ligands by carrying them back into the cells from which they are released. As of February 18, 2000, the Company had been issued eight patents relating to six of these transporter discoveries in the United States and in another country. Additional related or corresponding applications have been filed by the Company in the United States and in another country. The Company is no longer actively working on its transporter program. However, the Company is seeking to license its transporter technology to one or more other companies. Additional patent applications covering the Company's compound discoveries and other inventions have been filed in the United States and in other countries and the Company expects to file additional patent applications in the future. The Company has granted certain rights under several of its patents and patent applications to Lilly, Novartis, Grunenthal, Glaxo and Kissei. Patent law as it relates to inventions in the biotechnology field is still evolving, and involves complex legal and factual questions for which legal principles are not firmly established. Accordingly, there can be no assurance that patents will be granted with respect to any of the Company's patent applications currently pending in the United States or in other countries, or with respect to applications filed by the Company in the 18 future. The failure by the Company to receive patents pursuant to the applications referred to herein and any future applications could have a material adverse effect on the Company. There is no clear policy involving the breadth of claims allowed in patents or the degree of protection afforded thereunder. Accordingly, no firm predictions can be made regarding the breadth or enforceability of claims allowed in the patents that have been issued to the Company or in patents that may be issued to the Company in the future, and there can be no assurance that claims in the Company's patents, either as initially allowed by the United States Patent and Trademark Office or any of its non-United States counterparts or as subsequently interpreted by courts inside or outside the United States, will be sufficiently broad to protect the Company's proprietary rights. Also, there can be no assurance that the Company's patents or patent applications will not be challenged by way of interference proceedings or opposed by third parties or that the Company will not be required to participate in interference proceedings or oppose the patents or patent applications of third parties in order to protect its rights. Interference and opposition proceedings can be expensive to prosecute and defend. In 1998, one of the Company's patent applications on file outside the United States was the subject of an opposition filed by a pharmaceutical company. During the year, a determination favorable to the Company was made in which most of the claims in the Company's patent application were found to be patentable. In November 1998, the Company sought to file an amendment to the patent application pursuant to which certain of the claims that were found not to be patentable would be modified. This amendment was approved by the patent office in such country in February 1999 and the patent, with the modified claims, issued in August 1999. In addition, as of February 18, 2000, one of the Company's patent applications on file in the United States was the subject of an interference proceeding involving an issued patent of a third party, and the Company was seeking to provoke an interference by the United States Patent and Trademark Office between another of its patent applications and an issued patent of a third party. There can be no assurance that the outcome of the interference proceeding or the anticipated interference proceeding will be favorable to the Company. In the event that the outcome of the interference proceedings were unfavorable to the Company, the Company might not be able to practice the subject matter of the relevant patent applications in the United States. Accordingly, an unfavorable outcome in any such proceeding would have an adverse effect on the Company. Even if the ultimate outcome of the interference proceedings is favorable to the Company, the Company's participation in them could result in substantial cost to the Company. Further, no assurance can be given that patents issued to the Company will not be infringed, invalidated or circumvented by others, or that the rights granted thereunder will be commercially valuable or will provide competitive advantages to the Company and its present or future collaborative partners or licensees. Moreover, because patent applications in the United States are maintained in secrecy until patents issue, because patent applications in certain other countries generally are not published until more than eighteen months after they are filed and because publication of technological developments in the scientific or patent literature often lags behind the date of such developments, the Company cannot be certain that it was the first to invent the subject matter covered by its patents or patent applications or that it was the first to file patent applications for such inventions. The field of gene discovery has become intensely competitive. A number of pharmaceutical companies, biotechnology companies, universities and research institutions have significantly expanded their gene discovery efforts in recent years. Many of these groups are employing recent technological advances in gene sequencing technology to rapidly identify partial sequences of expressed genes ("expressed sequence tags" or "ESTs") and complete sequences of genes whose functions have not been characterized. Some of these groups, including Washington University (with funding provided by Merck), are currently identifying ESTs 19 through partial sequencing and depositing these sequences into public databases, while others are filing patent applications covering their discoveries. The public availability of EST and other sequence information prior to the time the Company applies for patent protection on corresponding gene discoveries could adversely affect the Company's ability to obtain patent protection with respect to such discoveries. While the Company routinely conducts searches of publicly available databases to determine whether other parties have previously cloned ESTs or full-length genes discovered by the Company, it is not always possible to determine whether the third party or the Company was the first inventor. Patent applications covering ESTs and full-length genes filed by third parties may be competitive with the Company's applications or conflict in certain respects with claims made under the Company's applications. There can be no assurance that, in the event of any conflict, the Company will be in a priority position with respect to inventorship on any of these applications. To the extent any patents issue to other parties on such partial or full-length genes, the risk increases that the Company will not be able to obtain patents covering certain of its discoveries, that the Company's existing or future patents and patent applications may become the subject of interference or opposition proceedings, that the Company may not be able to use such discoveries and/or that the potential products and processes of the Company or its licensees may give rise to claims of patent infringement. The commercial success of the Company depends in part on the Company's ability to operate without infringing patents and proprietary rights of third parties. The Company is aware of a large number of patents and patent applications of third parties that contain claims to genes that code for G protein-coupled receptors, ESTs of novel GPCRs and/or compounds that interact with GPCRs. Patents issued to others may preclude the Company from using or licensing certain of its receptor discoveries or may preclude the Company or its collaborative partners and other licensees from commercializing drugs developed with the use of the Company's technology. The Company has acquired a license to use certain technologies covered by a patent owned by Columbia University. The Columbia University license is a worldwide nonexclusive license to manufacture, use, sell and sublicense drugs derived from the use of certain recombinant DNA technology. In consideration for such license, the Company has agreed to pay royalties on sales of drugs developed through the use of such license. The term of the license extends until the expiration of the last to expire of the patent rights covered by the license. The Company may be required to obtain additional licenses to patents or other proprietary rights of other parties in order to pursue its own technologies. No assurance can be given that any such additional licenses would be made available on terms acceptable to the Company, if at all. The failure to obtain such licenses could result in delays in the Company's or its collaborative partners' or licensees' activities, including the development, manufacture or sale of drugs requiring such licenses, or preclude such development, manufacture or sale. In some cases, litigation or other proceedings may be necessary to assert infringement claims against others, to defend against claims of infringement, to enforce patents issued to the Company, to protect trade secrets, know-how or other intellectual property rights owned by the Company, or to determine the scope and validity of the proprietary rights of third parties. Such litigation could result in substantial costs to and diversion of resources by the Company and could have a material adverse effect on the Company. There can be no assurance that any of the Company's patents would ultimately be held valid or that efforts to defend any of its patents, trade secrets, know-how or other intellectual property rights would be successful. An adverse outcome in any such litigation or proceeding could subject the Company to significant liabilities, require the Company to cease using the subject technology or require the Company to license the subject technology from the third party, all of which could have a material adverse effect on the Company's business. In addition to patent protection, the Company relies upon trade secrets, proprietary know-how and continuing technological advances to develop and maintain its competitive position. To maintain the confidentiality of its trade secrets and proprietary information, the Company requires its employees, consultants 20 and collaborative partners to execute confidentiality agreements upon the commencement of their relationships with the Company. In the case of employees, the agreements also provide that all inventions resulting from work performed by them while in the employ of the Company will be the exclusive property of the Company. There can be no assurance, however, that these agreements will not be breached, that the Company would have adequate remedies in the event of any such breach or that the Company's trade secrets or proprietary information will not otherwise become known or developed independently by others. Competition The Company operates in a field in which new developments occur and are expected to continue to occur at a rapid pace. Competition from biotechnology and pharmaceutical companies, joint ventures, academic and other research institutions, including government-financed entities, and others is intense and is expected to increase. Although the Company believes that the elements of its human receptor-targeted drug design technology and the manner in which the Company has integrated these elements are proprietary to the Company, one or more of such elements are currently employed by many other pharmaceutical and biotechnology companies in their drug discovery efforts. Moreover, there are other companies with drug discovery programs at least some of the objectives of which are the same as or similar to those of the Company. The Company is aware of many pharmaceutical and biotechnology companies that are engaged in efforts to develop compounds that interact with G protein-coupled receptor subtypes, including receptor subtypes with which the Company is working. In addition, there are a number of companies and academic and other research institutions engaged in gene sequencing, gene discovery, gene expression analysis and other genomic service businesses. There is a finite number of genes in the human genome, and many competitors are seeking to identify, sequence and determine the biological function of a large number of genes in the shortest time possible in order to obtain a proprietary position with respect to the largest number of novel genes discovered. In addition, the Company is aware that other companies and research institutions have developed genomic databases and are marketing, or have announced their intention to market, their data to competitors of the Company. The Company expects that additional competitors will attempt to establish gene sequence, gene expression or other genomic databases in the future. In addition, competitors may discover and establish patent positions with respect to the same gene sequences discovered by the Company. Further, certain entities engaged in gene sequencing have made and are continuing to make the results of their sequencing efforts publicly available. These patent positions or the public availability of gene sequences comprising substantial portions of the human genome could decrease the potential value of the Company's discoveries and adversely affect the Company's ability to realize royalties or other revenue from commercialization of this genetic information and products based upon this genetic information. Many of the Company's competitors are large biotechnology companies and multinational pharmaceutical companies who may employ in such activities greater financial and other resources, including larger research and development staffs and more extensive marketing and manufacturing organizations, than the Company or its present and future collaborative partners or other licensees. The genomics industry is characterized by extensive research efforts and rapid technological progress. To remain competitive in its genomics efforts, the Company will be required to continue to expand its databases and to enhance the functionality of its bioinformatics and database software. New developments are expected to continue and discoveries by others may render the Company's services and potential products noncompetitive. 21 The Company also expects to encounter significant competition with respect to the drugs that it and its collaborative partners and other licensees plan to develop. Companies that complete clinical trials, obtain required regulatory approvals and commence commercial sales of their drugs before their competitors may achieve a significant competitive advantage. In order to compete successfully, the Company's goal is to obtain patent protection for certain of its gene discoveries and drug discovery systems and to make these systems available to pharmaceutical companies through collaborative and licensing arrangements for use in discovering drugs for major markets which have historically been difficult to address using the traditional approach to drug discovery. There can be no assurance, however, that the Company will obtain patents covering its technology that protect it against competitors. Moreover, there can be no assurance that the Company's competitors will not succeed in developing technologies that circumvent the Company's technology or that such competitors will not succeed in developing technologies and drugs that are more effective than those developed by the Company and its collaborative partners and other licensees or that would render technology or drugs of the Company and its collaborators and other licensees less competitive or obsolete. In addition, there can be no assurance that competitors of the Company will not obtain regulatory approvals of their drugs more rapidly than the Company and its collaborative partners and other licensees, thereby rendering the Company's and its collaborative partners' and other licensees' drugs noncompetitive or obsolete. Moreover, there can be no assurance that the Company's competitors will not obtain patent protection or other intellectual property rights that would limit the Company's or its collaborative partners' and other licensees' ability to use the Company's technology or commercialize its or their drugs. Government Regulation The development, manufacturing and marketing of drugs developed through the use of the Company's technology are subject to regulation by numerous Federal, state and local governmental authorities in the United States, the principal one of which is the FDA, and by similar agencies in other countries (each of such Federal, state, local and other authorities and agencies, a "Regulatory Agency"). Regulatory Agencies impose mandatory procedures and standards for the conduct of certain preclinical testing and clinical trials and the production and marketing of drugs for human therapeutic use. Product development and approval of a new drug are likely to take many years and involve the expenditure of substantial resources. The steps required by the FDA before new drugs may be marketed in the United States include: (i) preclinical studies; (ii) the submission to the FDA of a request for authorization to conduct clinical trials on an investigational new drug (an "IND"); (iii) adequate and well-controlled clinical trials to establish the safety and efficacy of the drug for its intended use; (iv) submission to the FDA of a new drug application (an "NDA"); and (v) review and approval of the NDA by the FDA. In the United States, preclinical testing includes both in vitro and in vivo laboratory evaluation and characterization of the safety and efficacy of a drug and its formulation. Laboratories involved in preclinical testing must comply with FDA regulations regarding Good Laboratory Practices. Preclinical testing results are submitted to the FDA as part of the IND and are reviewed by the FDA prior to the commencement of human clinical trials. Unless the FDA objects to an IND, the IND will become effective 30 days following its receipt by the FDA. There can be no assurance that submission of an IND will result in the commencement of human clinical trials. Clinical trials, which involve the administration of the investigational drug to healthy volunteers or to patients under the supervision of a qualified principal investigator, are typically conducted in three sequential phases, although the phases may overlap with one another. Clinical trials must be conducted in 22 accordance with Good Clinical Practices under protocols that detail the objectives of the study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND. Further, each clinical study must be conducted under the auspices of an independent Institutional Review Board (the "IRB") at the institution where the study will be conducted. The IRB will consider, among other things, ethical factors, the safety of human subjects and the possible liability of the institution. Compounds must be formulated according to the FDA's Good Manufacturing Practices ("GMP"). Phase I clinical trials represent the initial administration of the investigational drug to a small group of healthy human subjects or, more rarely, to a group of selected patients with the targeted disease or disorder. The goal of Phase I clinical trials is typically to test for safety (adverse effects), dose tolerance, absorption, bio-distribution, metabolism, excretion and clinical pharmacology and, if possible, to gain early evidence regarding efficacy. Phase II clinical trials involve a small sample of the actual intended patient population and may seek to assess the efficacy of the drug for specific targeted indications, to determine dose tolerance and the optimal dose range and/or to gather additional information relating to safety and potential adverse effects. Once an investigational drug is found to have some efficacy and an acceptable safety profile in the targeted patient population, Phase III clinical trials are initiated to establish further clinical safety and efficacy of the investigational drug in a broader sample of the general patient population at geographically dispersed study sites in order to determine the overall risk-benefit ratio of the drug and to provide an adequate basis for all package labeling. The results of the research and product development, manufacturing, preclinical testing, clinical trials and related information are submitted to the FDA in the form of an NDA for approval of the marketing and shipment of the drug. Timetables for the various phases of clinical trials and NDA approval cannot be predicted with any certainty. The Company, its collaborative partners or other licensees or the FDA may suspend clinical trials at any time if it is believed that individuals participating in such trials are being exposed to unacceptable health risks. Even assuming that clinical trials are completed and that an NDA is submitted to the FDA, there can be no assurance that the NDA will be reviewed by the FDA in a timely manner or that once reviewed, the NDA will be approved. The approval process is affected by a number of factors, including the severity of the targeted indications, the availability of alternative treatments and the risks and benefits demonstrated in clinical trials. The FDA may deny an NDA if applicable regulatory criteria are not satisfied, or may require additional testing or information with respect to the investigational drug. Data obtained from preclinical and clinical activities are susceptible to varying interpretations which could also delay, limit or prevent Regulatory Agency approval. Even if initial FDA approval is obtained, further studies, including post-market studies, may be required in order to provide additional data on safety and will be required in order to gain approval for the use of a product as a treatment for clinical indications other than those for which the product was initially tested. The FDA will also require post-market reporting and may require surveillance programs to monitor the side effects of the drug. Results of post-marketing programs may limit or expand the further marketing of the drug. Further, if there are any modifications to the drug, including changes in indication, manufacturing process or labeling, an NDA supplement may be required to be submitted to the FDA. Finally, delays or rejections may be encountered based upon changes in Regulatory Agency policy during the period of drug development and/or the period of review of any application for Regulatory Agency approval for a compound. Moreover, because most of the Company's collaborative partners and other licensees are generally responsible for preclinical testing, clinical trials, regulatory approvals, manufacturing and commercialization of drugs, the ability to obtain and the timing of regulatory approvals are not within the control of the Company. There can be no assurance 23 that the regulatory framework described above will not change or that additional regulations will not arise that may affect approval of a potential drug. Each manufacturing establishment for new drugs is required to receive some form of approval by the FDA. Among the conditions for such approval is the requirement that the prospective manufacturer's quality control and manufacturing procedures conform to GMP, which must be followed at all times. In complying with standards set forth in these regulations, manufacturers must continue to expend time, monies and effort in the area of production and quality control to ensure full technical compliance. Manufacturing establishments, both foreign and domestic, are also subject to inspections by or under the authority of the FDA and may be subject to inspections by foreign and other Federal, state or local agencies. Prior to the commencement of marketing a product in other countries, approval by the Regulatory Agencies in such countries is required, regardless of whether FDA approval has been obtained for such product. The requirements governing the conduct of clinical trials and product approvals vary widely from country to country, and the time required for approval may be longer or shorter than the time required for FDA approval. Although there are some procedures for unified filings for certain European countries, in general, each country has its own procedures and requirements. Delays in obtaining Regulatory Agency approvals could adversely affect the marketing of any drugs developed by the Company or its collaborative partners or other licensees, impose costly procedures upon the Company's or its collaborative partners' or other licensees' activities, diminish any competitive advantages that the Company or its collaborative partners or other licensees may attain and adversely affect the Company's ability to receive revenues or royalties. There can be no assurance that, even after such time and expenditures, Regulatory Agency approvals will be obtained for any compounds developed by, in collaboration with or pursuant to licenses from the Company. Moreover, even if Regulatory Agency approval for a compound is granted, such approval may entail limitations on the indicated uses for which it may be marketed. Further, approved drugs and their manufacturers are subject to continual review, and discovery of previously unknown problems with a drug or its manufacturer may result in restrictions on such drug or manufacturer, including withdrawal of the drug from the market. Regulatory Agency approval of prices is required in many countries and may be required for the marketing of any drug developed by the Company or its collaborative partners or other licensees. As with many biotechnology and pharmaceutical companies, the Company's activities involve the use of radioactive compounds and hazardous materials. The Company is subject to local, state and Federal laws and regulations relating to occupational safety, laboratory practices, the use, handling and disposition of radioactive materials, environmental protection and hazardous substance control. Although the Company believes that its safety procedures for handling and disposing of radioactive compounds and other hazardous materials used in its research and development activities comply with the standards prescribed by Federal, state and local regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of any such accident, the Company could be held liable for any damages that result and any such liability could exceed the resources of the Company. Employees As of February 18, 2000, the Company had 94 full-time employees, 29 of whom hold Ph.D. or M.D. degrees. Of the Company's full-time employees, 76 were engaged directly in scientific research and 18 were engaged in general and administrative functions. The Company's scientific staff members have diversified 24 experience and expertise in molecular and cell biology, biochemistry, molecular pharmacology, medicinal, structural, combinatorial and computer-assisted chemistry and information systems. All employees have entered into agreements with the Company pursuant to which they are prohibited from disclosing to third parties the Company's proprietary information and assign to the Company all rights to inventions made by them during their employment with the Company. The Company's employees are not covered by a collective bargaining agreement, and the Company believes that its relationship with its employees is good. Item 2. Properties The Company leases laboratory and office space in a facility at 215 College Road in Paramus, New Jersey. The total square footage currently leased by the Company is 83,843. The lease will expire on December 31, 2015. The Company is currently converting a portion of its space into additional research laboratories and may renovate other portions of its space in 2000 for additional laboratories and offices. The Company believes that the space it currently leases is adequate to accommodate the anticipated administrative and research needs of the Company for the foreseeable future. Item 3. Legal Proceedings Other than as described in Item 1 above under the caption "Patents, Proprietary Technology and Trade Secrets," the Company is not a party to any legal proceedings. Item 4. Submission of Matters to a Vote of Securityholders None. 25 Part II Item 5. Market For Registrant's Common Equity and Related Stockholder Matters The Common Stock of the Company trades on The Nasdaq Stock Market under the symbol SNAP. As of February 18, 2000, there were approximately 2,150 holders of record of the Company's Common Stock. No dividends have been paid on the Common Stock to date, and the Company does not currently intend to declare or pay dividends for the foreseeable future. The following tables set forth the high and low last trade prices for the Common Stock as reported by The Nasdaq Stock Market for the periods indicated below. 1999 Fiscal Year High Low ---- ---- 1st Quarter 1999 19 1/4 6 1/16 2nd Quarter 1999 7 1/2 4 1/2 3rd Quarter 1999 9 4 1/2 4th Quarter 1999 7 1/4 4 1998 Fiscal Year High Low ---- ---- 1st Quarter 1998 14 10 7/16 2nd Quarter 1998 15 1/8 11 1/8 3rd Quarter 1998 15 1/8 9 3/4 4th Quarter 1998 16 1/8 12 5/8 26 Item 6. Selected Financial Data The following table presents selected information relating to the financial condition and results of operations of the Company for the past five years. The following data should be read in conjunction with the Company's financial statements. (In thousands, except per share information) 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------- Total revenues $ 1,855 $ 9,352 $ 10,307 $ 9,481 $ 7,977 Total expenses $ 19,652 $ 19,576 $ 17,853 $ 14,319 $ 12,078 Other income, net $ 2,676 $ 3,731 $ 2,200 $ 2,205 $ 734 Net loss $(15,121) $ (6,493) $ (5,346) $ (2,633) $ (3,367) Basic and diluted net loss per share $ (1.41) $ (0.61) $ (0.66) $ (0.35) $ (4.76) Total assets $ 48,750 $ 64,696 $ 69,402 $ 40,355 $ 40,913 Long term debt -- -- -- -- $ 107 Accumulated deficit $(50,930) $(35,809) $(29,316) $ (23,970) $(21,337) Stockholders' equity $ 47,106 $ 62,676 $ 67,704 $ 39,040 $ 38,668 - ------------------------------------------------------------------------------- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Synaptic Pharmaceutical Corporation ("Synaptic" or the "Company") is a biotechnology company engaged in the development of a broad platform of enabling technology which it calls "human receptor-targeted drug design technology." The Company is utilizing this technology in its genomics program to discover and clone the genes that code for human receptors. The Company and its licensees are also utilizing this technology in functional genomics programs to discover the function of these receptors in the body and thus specific physiological disorders with which they may be associated. The Company and its licensees are in turn utilizing the cloned receptor genes to design compounds that can potentially be developed as drugs for treating these disorders. The Company is currently collaborating with Grunenthal GmbH ("Grunenthal"). Concurrently with the establishment of this collaborative arrangement, the Company granted a license to certain of its technology and patent rights to Grunenthal. In addition to its ongoing collaborative arrangement, three other pharmaceutical companies, Eli Lilly and Company ("Lilly"), Novartis Pharma AG ("Novartis"), and Glaxo Group Limited ("Glaxo"), have licenses to certain of the Company's technology and patent rights. The Lilly and Novartis licenses were granted concurrently with the establishment of collaborative arrangements with such companies. While the Lilly collaboration and the Novartis collaboration ended in July 1999 and August 1998, respectively, the associated licenses continue for the respective periods provided in these agreements. For convenience of reference, the 27 agreements pursuant to which the licenses referred to in this paragraph and the preceding paragraph were granted are collectively referred to in this Item 7 as the "License Agreements." Since inception, the Company has financed its operations primarily through the sale of its stock, through contract and license revenue under certain of its License Agreements, and through interest income and capital gains resulting from its investments. The Company also has received revenues from government grants under the Small Business Innovative Research ("SBIR") program of the National Institutes of Health. Under the License Agreements, the Company may receive one or more of the following types of revenue: contract revenue, license revenue, royalty revenue or revenue from the sales of drugs. Contract revenue includes research funding to support a specified number of the Company's scientists and payments upon the achievement of specified research and development milestones. Research funding revenue is recognized ratably over the period of the collaboration to which it relates and is based upon predetermined funding requirements. Research and development milestone payment revenue is recognized when the related research or development milestone is achieved. License revenue represents non-refundable payments for a license to one or more of the Company's patents and/or a license to the Company's technology. Non-refundable payments for licenses were recognized as they were received or when they became guaranteed. Under each of the License Agreements (other than the Grunenthal Agreement), the Company is entitled to receive royalty payments based upon the sales of drugs that may be developed using the Company's technology or that may be covered by the Company's patents. Under the Grunenthal Agreement, the Company has development and marketing rights in certain territories with respect to drugs, if any, that are jointly identified as part of the collaboration with Grunenthal. Accordingly, the Company may receive revenue from sales in its territories (as defined) of such drugs if it markets them independently or the Company may receive royalty payments if it licenses its marketing rights to a third party. To date, the Company has not received either royalty revenue or revenue from the sales of drugs and the Company does not expect to receive such revenues for a number of years, if at all. To date, the Company's expenditures have been for research and development related expenses, general and administrative related expenses, fixed asset purchases and various patent related expenditures incurred in protecting the Company's technologies. The Company has been historically unprofitable and had an accumulated deficit of $50,930,000 at December 31, 1999. The Company expects to continue to incur operating losses for a number of years and may not become profitable, unless and until it receives royalty revenue or revenue from sales of drugs that may be developed with the use of its technology or its patent rights. Results of Operations Comparison of Fiscal Years Ended December 31, 1999, 1998 and 1997 Revenues. The Company recognized revenue of $1,855,000, $9,352,000 and $10,307,000 for the fiscal years of 1999, 1998 and 1997, respectively. The decrease of $7,497,000 from 1999 to 1998 was attributable primarily to the following: a net decrease in contract revenue of $5,347,000 resulting from the contractual termination of three of the Company's collaborative arrangements and the receipt in 1998 of $2,000,000 of non-recurring license revenue under the Glaxo Agreement. The decrease of $955,000 from 1998 to 1997 was attributable primarily to the following: a net decrease in contract revenue of $2,583,000 resulting primarily from the contractual termination of the Novartis Agreements on August 3, 1998 as well as the reduction in full-time equivalent scientists being funded under 28 another of the License Agreements and a decrease in grant revenue of $372,000, which were offset by the receipt in 1998 of $2,000,000 of non-recurring license revenue under the Glaxo Agreement. Research and Development Expenses. The Company incurred research and development expenses of $14,592,000, $15,274,000 and $13,781,000 for the fiscal years of 1999, 1998 and 1997, respectively. The decrease of $682,000, or 4%, from 1998 to 1999 was attributable primarily to: a reduction in compensation and fringe benefit expenses due to a net decrease in headcount as well as corresponding reductions in travel and supply costs, all of which were partially offset by increased rent expense for facilities resulting from previously contracted increases in square footage. The increase of $1,493,000, or 11%, from 1997 to 1998 was attributable primarily to increases in compensation and fringe benefit expenses, facility related costs, and research supply costs. General and Administrative Expenses. The Company incurred general and administrative expenses of $5,060,000, $4,302,000 and $4,072,000 for the fiscal years of 1999, 1998 and 1997, respectively. The increase of $758,000, or 18%, from 1998 to 1999 was attributable primarily to increases in: rent expense resulting from previously contracted increases in square footage; and compensation and fringe benefit expenses. The increase of $230,000, or 6%, from 1997 to 1998 was attributable primarily to an increase in compensation and fringe benefit expenses. Other Income, Net. The Company recorded other income of $2,676,000, $3,731,000 and $2,200,000 for the fiscal years of 1999, 1998 and 1997, respectively. The decrease of $1,055,000 from 1998 to 1999 in other income was primarily due to lower interest income as a result of lower average cash, cash equivalent and marketable securities balances during 1999. The increase of $1,531,000 from 1997 to 1998 in other income was primarily due to higher interest income as a result of higher average cash, cash equivalent and marketable securities balances during 1998 which resulted from the receipt of net proceeds from a public offering of its common stock completed in November 1997. Net Loss and Basic and Diluted Net Loss Per Share. The net loss incurred by the Company was $15,121,000 ($1.41 per share), $6,493,000 ($0.61 per share) and $5,346,000 ($0.66 per share) for the fiscal years of 1999, 1998 and 1997, respectively. The increase in net loss per share of $0.80 from 1998 to 1999 resulted primarily from the recognition of lower total revenue and of higher total expenses. The decrease in net loss per share of $0.05 from 1997 to 1998 resulted primarily from higher average outstanding shares during 1998 partially offset by the recognition of higher total expenses. The increase in average outstanding shares primarily relates to the sale of 2,875,000 shares of common stock in a public offering in the fourth quarter of 1997 as well as the sale of 137,648 shares of common stock pursuant to the exercise of stock warrants in January 1998. Operating Trends. Revenues may vary from period to period depending on numerous factors including the timing of revenue earned under the License Agreements and revenue that may be earned under future collaborative and/or license agreements. On January 24, 2000, the Company entered into a research and licensing agreement with Kissei Pharmaceutical Co., Ltd. The Company will recognize revenue under this agreement during 2000 and expects to recognize revenue under this agreement during 2001 and 2002. Under 29 the terms of certain of the License Agreements, revenues may be recognized if certain milestones are achieved. Management continues to assess the opportunity for obtaining additional funding under new collaborative and/or license agreements as well as obtaining financing through equity transactions. The Company continues to monitor its spending level in order to insure that it has enough cash to last through the year 2001. Other income, net is expected to decline in 2000 and 2001 as existing funds are utilized to fund the Company's operations. Property and equipment spending may vary from period to period depending on numerous factors including: the number of collaborations in which the Company is involved at any given time; replacement due to obsolescence and replacement due to normal wear. Consequently, equipment spending in 2000 is expected to increase from that of 1999. At December 31, 1999, the Company held marketable securities with an estimated fair value of $35,907,000. The Company's primary interest rate exposure results from changes in short-term interest rates. The Company does not purchase financial instruments for trading or speculative purposes. All of the marketable securities held by the Company are classified as available-for-sale securities. The following table provides information about marketable securities held by the Company at December 31, 1999: Estimated Principal Amount and Weighted Average Stated Rate Fair by Expected Maturity Value - ---------------------------------------------------- --------- (000's) 2000 2001 2002 2003 Total (000's) - ---------------------------------------------------- --------- Principal $6,487 $20,440 $2,500 $6,500 $35,927 $35,907 Weighted Average Stated Rates 6.39% 7.91% 6.50% 5.77% 7.15% -- - ---------------------------------------------------- --------- The stated rates of interest expressed in the above table may not approximate the actual yield of the securities which the Company currently holds since the Company has purchased some of its marketable securities at other than face value. Additionally, some of the securities represented in the above table may be called or redeemed, at the option of the issuer, prior to their expected due dates. If such early redemptions occur, the Company may reinvest the proceeds realized on such calls or redemptions in marketable securities with stated rates of interest or yields that are lower than those of current holdings, affecting both future cash interest streams and future earnings. In addition to investments in marketable securities, the Company places some of its cash in money market funds in order to keep cash available to fund operations and to hold cash pending investments in marketable securities. Fluctuations in short term interest rates will affect the yield on monies invested in such money market funds. Such fluctuations can have an impact on future cash interest streams and future earnings of the Company, but the impact of such fluctuations are not expected to be material. The Company does not believe that inflation has had a material impact on its results of operations. Management believes that it has remedied all of its information technology and non-information technology systems that may have been affected by the year 2000 issue. The Company did not experience any problems or issues arising from the date change from 1999 to 2000. Through 1999, the Company spent less 30 than $50,000 to remedy systems that may have been affected by the year 2000 issue and does not expect any future expenses. Liquidity and Capital Resources At December 31, 1999 and December 31, 1998, cash, cash equivalents and marketable securities aggregated $42,143,000 and $56,378,000, respectively. This decrease was a result of the utilization of these resources to fund the Company's operations. To date, the Company has met its cash requirements through the sale of its stock, through contract and license revenue, through SBIR grants and through interest income and gains resulting from its investments. If the current biotechnology financing environment remains unfavorable, raising additional capital may be difficult. At December 31, 1999, the Company had invested an aggregate of $11,301,000 in property and equipment. The Company leases laboratory and office facilities under an agreement expiring on December 31, 2015. The minimum annual payment under the lease is currently $1,575,000. The lease provides for fixed escalations in rent payments in the years 2005 and 2010. At December 31, 1999, the Company had $42,143,000 in cash, cash equivalents and marketable securities. The Company currently intends to utilize these funds primarily to conduct certain of its research programs, for patent related expenditures, for general corporate purposes, to make leasehold improvements to its facilities and to purchase property and equipment. The Company expects to continue to incur operating losses for a number of years. The Company believes that its cash on hand and cash that it expects to receive through interest payments on its investments, will be sufficient to fund its operations, as well as the Company's share of certain development costs under the Grunenthal Agreement, through the year 2001. As of December 31, 1999, the Company had net operating loss carryforwards of approximately $45,000,000 for Federal income tax purposes that will expire principally in the years 2002 through 2019. In addition, the Company had research and development credit carryforwards of $1,610,000 which will expire principally in 2002 through 2018. For financial reporting purposes, a valuation allowance has been recognized to offset the deferred tax assets related to these carryforwards. Due to limitations imposed by the Tax Reform Act of 1986, and as a result of a significant change in the Company's ownership in 1993 and 1997, the utilization of $25,000,000 of net operating loss carryforwards is subject to annual limitation. The utilization of the research and development credits is similarly limited. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging Activities" ("SFAS 133"), which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. SFAS 133, as amended, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. As the Company does 31 not currently intend to engage in derivatives or in hedging transactions, the Company does not anticipate any effect on its results of operations, financial position or cash flows upon the adoption of SFAS 133. Disclosure Regarding Forward-Looking Statements This Report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. These forward-looking statements include, but are not limited to, those relating to future cash and spending plans, amounts of future research funding, patent-related plans, additional drug discovery programs, the effectiveness, efficacy, or other results of any of the Company's technology or drugs, any other statements regarding future growth, future cash needs, future operations, business plans and financial results, and any other statements which are not historical facts. When used in this document, the words "anticipate," "estimate," "expect," "may," "project," and similar expressions are intended to be among the statements that identify forward-looking statements. Such statements involve risks and uncertainties, including, but not limited to, those risks and uncertainties relating to those described below, as well as other factors detailed elsewhere in this Report, including in Item 1 of this Report under the captions "Patents, Proprietary Technology and Trade Secrets," "Competition" and "Government Regulation" ("Cautionary Statements"). Such Cautionary Statements qualify the forward-looking statements included in this Report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. Early Stage of Product Development; Technological Uncertainty Since its inception in January 1987, the Company has focused its activities on the discovery and cloning of receptor genes and the use of such genes as tools in the design of precisely targeted compounds for a broad range of therapeutic applications. To date, neither the Company nor any of its collaborative partners or other licensees has completed the development of drugs designed with the use of the Company's technology and the Company does not expect that any drugs resulting from its or its collaborative partners' or other licensees' research and development efforts will be commercially available for a number of years, if at all. All compounds discovered by the Company and its collaborative partners and other licensees will require extensive preclinical and clinical testing prior to submission of any regulatory application for commercial use. Extensive preclinical and clinical testing required to establish safety and efficacy will take several years, and the time required to commercialize new drugs cannot be predicted with accuracy. Moreover, potential products that appear to be promising at early stages of development may never reach the market for a number of reasons. Such reasons include, but are not limited to, the possibilities that potential products are found during preclinical testing or clinical trials to be ineffective or to cause harmful side effects, that they fail to receive necessary regulatory approvals, that they are difficult or uneconomical to manufacture on a large scale, that they fail to achieve market acceptance or that they are precluded from commercialization by proprietary rights of third parties. There can be no assurance that the Company's approach to drug discovery, its research and development efforts or the efforts of Grunenthal, Kissei, Lilly, Novartis or Glaxo, or any future collaborative partner or other licensee of the Company, will result in the development of any drugs, or that any drugs, if successfully developed, will be proven to be safe and effective in clinical trials, receive required regulatory approvals, be capable of being manufactured in commercial quantities at reasonable costs or be successfully commercialized. Product development of new pharmaceuticals is highly uncertain, and unanticipated developments, including clinical or regulatory delays, unexpected adverse effects and inadequate therapeutic 32 efficacy, would slow or prevent product development efforts of the Company and its collaborative partners and other licensees and have a material adverse effect on the Company's operations. Dependence on Collaborative Partners and Licensees for Development, Regulatory Approvals, Manufacturing, Marketing and Other Resources A key element of the Company's business strategy is to leverage resources by entering into collaborative and licensing arrangements with pharmaceutical companies. Under the Company's agreements with Kissei, Lilly and Novartis, the Company's collaborative partners and licensees are each responsible for conducting preclinical testing and clinical trials of compounds developed through the use of the Company's technology, obtaining regulatory approvals and manufacturing and commercializing any resulting drugs. Under the Grunenthal Agreement, Grunenthal is responsible for conducting certain preclinical testing and clinical trials of compounds developed through the use of the Company's technology. The Company has no involvement in the research and development activities of Glaxo under the Glaxo Agreement. As a result, the Company's receipt of revenues (whether in the form of drug development milestones, royalties on sales or net sales proceeds) in respect of drugs resulting from its collaborative and licensing arrangements is dependent upon the activities of its collaborative partners and other licensees. The amount and timing of resources dedicated by the Company's collaborative partners and other licensees to the development of drugs that would be subject to royalties payable to the Company are not within the Company's control. Moreover, there can be no assurance that the interests of the Company will continue to coincide with those of its collaborative partners or other licensees, that one or more of the Company's collaborative partners or other licensees will not develop independently or with third parties drugs that could compete with drugs of the types covered by their arrangements with the Company, or that disagreements over rights or technology or other proprietary interests will not occur. If any of the Company's collaborative partners or other licensees breaches its agreement with the Company, or fails to devote adequate resources to or conduct in a timely manner its collaborative or licensed activities, the related research programs or the development and commercialization of drug candidates subject to such arrangement could be materially adversely affected. There can be no assurance that the Company's collaborative or licensing arrangements will be successful. Further, there can be no assurance that the Company will be able to enter into acceptable collaborative or licensing arrangements with other pharmaceutical companies in the future, or that, if negotiated, such arrangements will be successful. History of Operating Losses and Accumulated Deficit The Company has incurred significant operating losses since its inception in January 1987. At December 31, 1999, the Company's accumulated deficit was $50,930,000. Losses have resulted principally from costs incurred in connection with the Company's research and development activities and from general and administrative costs associated with the Company's operations. The Company expects to continue to incur substantial operating losses at least over the next several years and expects losses to increase as research funding under its collaborative arrangements diminish. As of December 31, 1999, the only revenues generated by the Company had resulted from payments under collaborative and license agreements, and government grants under the SBIR program of the National Institutes of Health. The Company's revenues, expenses and losses may fluctuate from quarter to quarter and year to year. Research payments under the Novartis Agreements expired in 1998, research payments under the Merck Agreement expired in February 1999, and research payments under the Lilly Agreement expired in July 1999. The Company anticipates that there will 33 initially be little, if any, biological knowledge regarding many of its future gene discoveries and, as a result, it may have fewer opportunities to enter into collaborative arrangements focused on such discoveries. The Company does not expect to achieve revenues or royalties from sales of drugs for a number of years, if at all. The Company will not achieve revenues or royalties from drug sales unless it or one of its collaborative partners or other licensees successfully completes clinical trials with respect to a drug candidate, obtains regulatory approvals for that drug candidate and commercializes the resulting drug. Failure to achieve significant revenue or profitable operations could impair the Company's ability to sustain operations and there can be no assurance that the Company will ever achieve significant revenues or profitable operations. Future Capital Needs; Uncertainty of Additional Funding The operation of the Company's business requires substantial capital resources and such requirements are likely to increase in the future. The Company's future financial requirements will depend on many factors, including the continued progress of its research and development programs, the timing and results of preclinical testing and clinical trials, if any, of its or its collaborative partners' or other licensees' drug candidates, the timing of regulatory approvals, if any, technological advances, determinations as to the commercial potential of its or its collaborative partners' or other licensees' proposed products and the status of competitive products. The Company's capital requirements will also depend on the Company's ability to establish and maintain collaborative or licensing arrangements with others and on whether its future collaborative partners provide research funding to the Company and are responsible for all development activities, preclinical testing and regulatory approvals and, if such approvals are obtained, the manufacturing and marketing of products. In addition, such capital requirements will depend on the time and expense associated with filing and, if necessary, prosecuting and enforcing patent claims. The Company entered into the Grunenthal Agreement in January 1998. Under this agreement, the Company will retain certain ownership rights to products that result from the collaboration. In addition, the Company will be significantly involved in the development of any such potential products but may also be required to contribute substantial financial resources towards such development. Accordingly, the cost to the Company of this arrangement may be significantly greater than the cost to it of participating in a royalty-based collaboration. No assurance can be given that the Company's existing cash on hand and marketable securities and funds it will receive under its collaborative and license agreements, together with interest income, will be sufficient. The Company expects that it will, in the future, seek to raise additional funding from other sources, including other collaborative partners and licensees, and through public or private financings, including sales of equity or debt securities. Any such collaborative or licensing arrangement could result in limitations on the Company's ability to control the research and development of potential drugs and the commercialization of resulting drugs, if any, as well as its profits therefrom. Any such equity financing could result in dilution to the Company's then existing stockholders. There can be no assurance that additional funds will be available on favorable terms or at all, or that such funds, if raised, would be sufficient to permit the Company to continue to conduct its operations. If adequate funds are not available, the Company may be required to curtail significantly or eliminate one or more of its receptor or drug discovery programs. 34 Uncertainties Related to Clinical Trials Before obtaining required regulatory approvals for the commercial sale of each product under development, the Company or its collaborators and other licensees must demonstrate through preclinical studies and clinical trials that such product is safe and efficacious for use. The results of preclinical studies and initial clinical trials are not necessarily predictive of results that will be obtained from large-scale clinical trials, and there can be no assurance that clinical trials of any product under development will demonstrate the safety and efficacy of such product or will result in a marketable product. The safety and efficacy of a therapeutic product under development by the Company or its collaborative partners or other licensees must be supported by extensive data from clinical trials. A number of companies have suffered significant setbacks in advanced clinical trials, despite promising results in earlier trials. The failure to demonstrate adequately the safety and efficacy of a therapeutic drug under development would delay or prevent regulatory approval of the product and could have a material adverse effect on the Company. In addition, the FDA or other Regulatory Agency may require additional clinical trials, which could result in increased costs and significant development delays. The rate of completion of clinical trials of the Company's or its collaborative partners' and other licensees' products is dependent upon, among other factors, obtaining adequate clinical supplies and the rate of patient accrual. Patient accrual is a function of many factors, including the size of the patient population, the proximity of patients to clinical sites and the eligibility criteria for the trial. Delays in planned patient enrollment in clinical trials may result in increased costs, program delays or both, which could have a material adverse effect on the Company. In addition, the Company's collaborative partners and other licensees generally have the right to control the planning and execution of product development and clinical programs, and there can be no assurance that such partners and licensees will conduct such programs in accordance with schedules that are satisfactory to the Company. There can be no assurance that, if clinical trials are completed, the Company or its collaborative partners and other licensees will submit NDAs with respect to any potential products or that any such application will be reviewed and approved by the FDA in a timely manner, if at all. Lack of Manufacturing Experience; Reliance on Contract Manufacturers The Company currently has no manufacturing facilities and relies on its collaborative partners and other licensees or other manufacturers to produce its compounds for research and development, preclinical and clinical purposes. The products under development by the Company and its collaborative partners and other licensees have never been manufactured on a commercial scale and there can be no assurance that such products can be manufactured at a cost or in quantities necessary to make them commercially viable. If the Company were unable to contract for a sufficient supply of its compounds on acceptable terms, or if it should encounter delays or difficulties in its relationships with manufacturers, any preclinical or clinical testing schedule of the Company would be delayed, resulting in delay in the submission of products for regulatory approval or the market introduction and subsequent sales of such products, which could have a material adverse effect on the Company. Moreover, manufacturers that the Company may use must adhere to current GMP regulations enforced by the FDA through its facilities inspection program. If these facilities cannot pass a pre-approval plant inspection, the FDA pre-market approval of the products will not be granted. Lack of Sales and Marketing Capability The creation of infrastructure to commercialize pharmaceutical products is a difficult, expensive and time-consuming process. Synaptic currently has no sales or marketing capability. To market directly any 35 product it may develop, the Company would need to establish a marketing and sales force with technical expertise and distribution capability or contract with other pharmaceutical and/or health care companies with distribution systems and direct sales forces. There can be no assurance that the Company would be able to establish direct or indirect sales and distribution capabilities or be successful in gaining market acceptance for licensing arrangements. To the extent that the Company enters into co-promotion or licensing arrangements, any revenues received by the Company will be dependent on the efforts of third parties, and there can be no assurance that any such efforts will be successful. Dependence on Key Personnel The Company is highly dependent on its management and scientific staff. Loss of the services of any key individual could have an adverse effect on the Company. The Company believes that its future success will depend, in part, on its ability to attract and retain highly talented managerial, scientific, software and bioinformatics personnel and consultants. The Company faces intense competition for such personnel from, among others, biotechnology and pharmaceutical companies, as well as academic and other research institutions. There can be no assurance that it will be able to attract and retain the personnel it requires on acceptable terms. Failure to attract and retain such personnel could have a material adverse effect on the Company. External Environment Over the past several years, there has been a significant reduction in the number of investors who are willing to commit capital to the biotechnology industry. With over 300 public biotechnology companies and over 1,000 private biotechnology companies, the lack of capital is severely impairing the ability of many of these companies to carry out their research. Additionally, many pharmaceutical companies are now routinely performing many of the types of research and services that have historically been performed by biotechnology companies. As a consequence, many pharmaceutical companies are less interested than in the past both in engaging in collaborations with biotechnology companies in a number of areas and in providing them with research funding and other sources of revenue. Over time, the Company could be materially adversely affected by a lack of available capital and/or a lack of interest on the part of the pharmaceutical industry in its services or products. This unfavorable external environment could result in the Company's inability to complete certain of its research projects and/or in the need for the Company to downsize until it begins to receive royalty income pursuant to outstanding licensing arrangements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Quantitative and qualitative disclosures about market risk (i.e., interest rate risk) are included in Item 7 of this Report. 36 Item 8. Financial Statements SYNAPTIC PHARMACEUTICAL CORPORATION INDEX TO FINANCIAL STATEMENTS Page ---- Report of Independent Auditors...............................................38 Balance Sheets at December 31, 1999 and 1998.................................39 Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 1999, 1998 and 1997............................................40 Statements of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997............................................41 Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997............................................43 Notes to Financial Statements................................................44 37 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders SYNAPTIC PHARMACEUTICAL CORPORATION We have audited the accompanying balance sheets of Synaptic Pharmaceutical Corporation as of December 31, 1999 and 1998, and the related statements of operations and comprehensive income (loss), 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 financial position of Synaptic Pharmaceutical Corporation at December 31, 1999 and 1998, and the 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. ERNST & YOUNG LLP Hackensack, New Jersey February 4, 2000 38 SYNAPTIC PHARMACEUTICAL CORPORATION BALANCE SHEETS (in thousands, except share and per share information) December 31, 1999 and 1998 Assets 1999 1998 - ------------------------------------------------------------------------------- Current assets: Cash and cash equivalents $ 6,236 $ 16,590 Restricted cash -- 600 Marketable securities--current maturities 6,471 7,133 Other current assets 847 1,064 - ------------------------------------------------------------------------------- Total current assets 13,554 25,387 Property and equipment, net 5,186 5,733 Marketable securities 29,436 32,655 Patent and patent application costs, net of accumulated amortization (1999--$1,801; 1998--$1,454) 574 921 - ------------------------------------------------------------------------------- $ 48,750 $ 64,696 =============================================================================== Liabilities and Stockholders' Equity - ------------------------------------------------------------------------------- Current liabilities: Accounts payable $ 486 $ 966 Accrued liabilities 525 645 Accrued compensation 386 326 Deferred revenue -- 83 - ------------------------------------------------------------------------------- Total current liabilities 1,397 2,020 Deferred rent obligation 247 -- Stockholders' equity: Preferred Stock, $.01 par value; authorized--1,000,000 shares Common Stock, $.01 par value; authorized--25,000,000 shares; issued and outstanding--10,764,661 shares in 1999 and 10,711,374 shares in 1998 108 107 Additional paid-in capital 98,719 98,516 Accumulated other comprehensive income--net unrealized losses on securities (791) (77) Deferred compensation -- (61) Accumulated deficit (50,930) (35,809) - ------------------------------------------------------------------------------- Total stockholders' equity 47,106 62,676 - ------------------------------------------------------------------------------- $ 48,750 $ 64,696 =============================================================================== See notes to financial statements. 39 SYNAPTIC PHARMACEUTICAL CORPORATION STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (in thousands, except share and per share information) For the Years Ended December 31, 1999, 1998 and 1997 1999 1998 1997 - ------------------------------------------------------------------------- Revenues: Contract revenue $ 1,855 $ 7,202 $ 9,785 License revenue -- 2,000 -- Grant revenue -- 150 522 - ------------------------------------------------------------------------- Total revenues 1,855 9,352 10,307 Expenses: Research and development 14,592 15,274 13,781 General and administrative 5,060 4,302 4,072 - ------------------------------------------------------------------------- Total expenses 19,652 19,576 17,853 - ------------------------------------------------------------------------- Loss from operations (17,797) (10,224) (7,546) Other income, net: Interest income 2,674 3,603 2,205 Interest expense -- -- (5) Gain on sale of securities 2 128 -- - ------------------------------------------------------------------------- Other income, net 2,676 3,731 2,200 - ------------------------------------------------------------------------- Net loss $ (15,121) $ (6,493) $(5,346) ======================================================================== Comprehensive loss: Net loss $ (15,121) $ (6,493) $(5,346) Unrealized (losses) gains arising during period (702) (82) 27 Less: reclassification adjustment for gains included in net income (12) (21) -- - ------------------------------------------------------------------------ Comprehensive loss $ (15,835) $ (6,596) $(5,319) ======================================================================== Basic and diluted net loss per share $ (1.41) $ (0.61) $ (0.66) ======================================================================== Shares used in computation of net loss per share 10,742,296 10,684,892 8,129,260 ======================================================================== See notes to financial statements. 40 SYNAPTIC PHARMACEUTICAL CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands, except share information) Net Unrealized Gains Total Additional (Losses) Deferred Accumu- Stock- Common Stock Paid-In on Compen- lated Treasury holders' Shares Amount Capital Securities sation Deficit Stock Equity ------ ------ ------- ---------- ------ ------- ----- ------------ Balance at January 1, 1997 7,633,543 76 63,231 (1) (296) (23,970) -- 39,040 Purchase of 438 shares of Treasury Stock at cost -- -- -- -- -- -- (1) (1) Forfeiture of Deferred Compensation related to Stock Incentive Plan -- -- (12) -- 12 -- -- -- Amortization of Deferred Compensation -- -- -- -- 124 -- -- 124 Issuance of 18,480, shares of common stock pursuant 18,042 1 36 -- -- -- 1 38 to exercise of stock options Issuance of 2,875,000 share of common stock in public offering 2,875,000 28 33,794 -- -- -- -- 33,822 Adjustment to reflect net unrealized loss on securities -- -- -- 27 -- -- -- 27 Net loss for the year ended December 31, 1997 -- -- -- -- -- (5,346) -- (5,346) ---------- ------- -------- ---------- --------- ------------ ----- ------------ Balance at December 31, 1997 10,526,585 $ 105 $ 97,049 $ 26 $ (160) $ (29,316) $ -- $ 67,704 Purchase of 375 shares of Treasury Stock at cost -- -- -- -- -- -- (1) (1) Forfeiture of Deferred Compensation related to Stock Incentive Plan -- -- (20) -- 20 -- -- -- Amortization of Deferred Compensation -- -- -- -- 79 -- -- 79 Issuance of 47,516, shares of common stock pursuant 47,141 1 127 -- -- -- 1 129 to exercise of stock options Issuance of 137,648 shares of common stock pursuant to exercise of stock warrants 137,648 1 1,307 -- -- -- -- 1,308 Adjustment to reflect net unrealized gain on securities -- -- -- (103) -- -- -- (103) Adjustment to reflect recognition of short-swing profits realized on sale of stock by stockholder -- -- 53 -- -- -- -- 53 Net loss for the year ended December 31, 1998 -- -- -- -- -- (6,493) -- (6,493) ---------- ------- -------- ---------- --------- ------------ ----- ------------ Balance at December 31, 1998 10,711,374 $ 107 $ 98,516 $ (77) $ (61) $ (35,809) $ -- $ 62,676 ========== ======= ======== ========== ========= ============= ===== ============
See notes to financial statements. 41 SYNAPTIC PHARMACEUTICAL CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY -- (Continued) (in thousands, except share information) Net Unrealized Gains Total Additional (Losses) Deferred Accumu- Stock- Common Stock Paid-In on Compen- lated Treasury holders' Shares Amount Capital Securities sation Deficit Stock Equity ------ ------ ------- ---------- ------- --------- ----- ----------- Balance at December 31, 1998 10,711,374 $ 107 $ 98,516 $ (77) $ (61) $ (35,809) $ -- $ 62,676 Forfeiture of Deferred Compensation related to Stock Incentive Plan -- -- (11) -- 11 -- -- -- Amortization of Deferred Compensation -- -- -- -- 50 -- -- 50 Issuance of 53,287, shares of common stock pursuant to exercise of stock options 53,287 1 214 -- -- -- -- 215 Adjustment to reflect net unrealized gain on securities -- -- -- (714) -- -- -- (714) Net loss for the year ended December 31, 1999 -- -- -- -- -- (15,121) -- (15,121) ---------- ----- --------- ---------- -------- --------- ----- ----------- Balance at December 31, 1999 10,764,661 $ 108 $ 98,719 $ (791) $ (--) $ (50,930) $ -- $ 47,106 ========== ===== ========= ========== ======== ========= ===== ===========
See notes to financial statements. 42 SYNAPTIC PHARMACEUTICAL CORPORATION STATEMENTS OF CASH FLOWS (in thousands) For the Years Ended December 31, 1999, 1998 and 1997 1999 1998 1997 - -------------------------------------------------------------------------------- Operating activities: Net loss $(15,121) $ (6,493) $ (5,346) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and patent amortization 1,609 1,505 1,209 Amortization of premiums/(discounts) on securities 479 226 (123) Amortization of deferred compensation 50 79 124 Gain on sales of securities (2) (128) -- Loss on sale of equipment 32 -- -- Deferred rent obligation 247 -- -- Changes in operating assets and liabilities: Decrease (increase) in other assets 817 (390) (816) (Decrease) increase in accounts payable, accrued liabilities and accrued compensation (540) 239 490 Decrease in license agreement revenue receivable -- 40 152 (Decrease) increase in deferred revenue (83) 83 -- - -------------------------------------------------------------------------------- Net cash (used in) operating activities (12,512) (4,839) (4,310) Investing activities: Proceeds from sale or maturity of investments 19,039 70,797 27,666 Purchases of investments (16,349) (71,799) (35,696) Purchases of property and equipment 80 (2,171) (2,888) Increase in patent and patent application costs (827) -- -- - -------------------------------------------------------------------------------- Net cash (used in) investing activities 1,943 (3,173) (10,918) Financing activities: Issuance of common stock, net of repurchases 215 1,436 33,859 Short-swing profits realized on sale of stock by stockholder -- 53 -- Payments on capital lease -- -- (107) ------------------------------------------------------------------------------- Net cash provided by financing activities 215 1,489 33,752 - -------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (10,354) (6,523) 18,524 Cash and cash equivalents at beginning of period 16,590 23,113 4,589 - -------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 6,236 $ 16,590 $ 23,113 ================================================================================ Supplemental cash flow disclosure: Cash paid for interest $ -- $ -- $ 5 ================================================================================ See notes to financial statements. 43 SYNAPTIC PHARMACEUTICAL CORPORATION NOTES TO FINANCIAL STATEMENTS December 31, 1999 Note 1 -- Summary of Significant Accounting Policies Organization. Synaptic Pharmaceutical Corporation ("Synaptic" or the "Company") is a biotechnology company engaged in the development of a broad platform of enabling technology which it calls "human receptor-targeted drug design technology." The Company is utilizing this technology in its genomics program to discover and clone the genes that code for human receptors. The Company and its licensees are also utilizing this technology in functional genomics programs to discover the function of these receptors in the body and thus specific physiological disorders with which they may be associated. The Company and its licensees are in turn utilizing the cloned receptor genes to design compounds that can potentially be developed as drugs for treating these disorders. Basic and Diluted Net Loss Per Share. Net loss per share is computed using the weighted average number of shares of common stock outstanding. As a result of the Company's operating losses and the anti-dilutive effect from stock options and warrants, such instruments are excluded from the computation of diluted net loss per share. Revenue Recognition. Research funding revenue is recognized ratably over the period of the collaboration to which it relates. Payments received in advance under the related contracts are recorded as deferred revenue until the research is performed. Research milestone payment revenue is recognized at the time the related research milestone is achieved. License revenue represents non-refundable payments for licenses to the Company's technology and/or patent rights. Non-refundable payments for licenses were recognized at such time as they were received or, if earlier, became guaranteed. Government grant receipts are recorded as revenue in the period in which the related research is performed. Cash Equivalents. Cash equivalents consist of highly liquid investments with a maturity of three months or less when purchased. Included in cash equivalents at December 31, 1999, is approximately $6,234,000 related to investments in money market funds. At December 31, 1998, this amount totaled $16,393,000. Marketable Securities. All of the Company's marketable securities are classified as available-for-sale securities and are carried at fair value, with the unrealized gains and losses reported as a separate component of stockholders' equity. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. Realized gains and losses and declines in value judged to be other than temporary, if any, are included in other income. The cost of securities sold is based on the specific identification method. Investments held as of December 31, 1999 consist primarily of U.S. Government and Federal Agency obligations, U.S. corporate debt securities and mortgage-backed securities. The maturities range from March 1, 2000, through November 17, 2003. The Company has established guidelines relative to diversification, credit ratings and maturities to maintain safety and liquidity. The guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. Property and Equipment. Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Scientific equipment, office equipment and furniture and fixtures are depreciated over a life of 7 years. Leasehold improvements are depreciated principally over the life of the facility lease, which is currently 17 years (see Note 9). Software is depreciated 44 SYNAPTIC PHARMACEUTICAL CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1999 over a life of 3 years. Assets acquired under capital lease arrangements were depreciated over the life of the related leases. Patents. Prior to October 1, 1996, patent and patent application costs were capitalized and amortized over 7 years or the estimated life of the patent, if less, using the straight-line method. Capitalized costs through October 1, 1996 will continue to be amortized over the remaining portions of their seven-year lives. Effective October 1, 1996, patent and patent application costs are expensed as incurred. The Company periodically reviews capitalized costs to assess ongoing recoverability. Accrued Liabilities. Included in accrued liabilities at December 31, 1999 and 1998 are accrued professional fees totaling $270,000 and $506,000, respectively. Stock-Based Compensation. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), in accounting for its employee stock options. Under APB No. 25, compensation expense is recognized only when the exercise price of options is below the market price of the underlying stock on the date of grant. Such expense is recognized ratably over the vesting period. 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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Comprehensive Income (Loss). In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This pronouncement, which was adopted effective January 1, 1998, requires the presentation of a statement of comprehensive income. Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period resulting from transactions and other events and circumstances from nonowner sources. Comprehensive loss for the Company, in addition to net loss, includes unrealized gains and losses on marketable securities held for sale, currently recorded in stockholders' equity. Recent Accounting Pronouncements. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging Activities" ("SFAS 133"), which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. SFAS 133, as amended, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. As the Company does not currently intend to engage in derivatives or in hedging transactions, the Company does not anticipate any effect on its results of operations, financial position or cash flows upon the adoption of SFAS 133. 45 SYNAPTIC PHARMACEUTICAL CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1999 Note 2 -- Marketable Securities The following is a summary of all of the Company's marketable securities. All of these securities are classified as available-for-sale securities. Determination of estimated fair value is based on quoted market prices: Gross Gross Unrealized Unrealized Estimated Cost Gains (Losses) Fair Value - -------------------------------------------------------------------------------- December 31, 1999: U.S. Treasury obligations and obligations of U.S. government agencies $ 8,000,000 $ -- $(279,000) $ 7,721,000 U.S. corporate debt securities 28,698,000 -- (512,000) 28,186,000 - -------------------------------------------------------------------------------- $36,698,000 $ -- $(791,000) $35,907,000 ================================================================================ December 31, 1998: U.S. Treasury obligations and obligations of U.S. government agencies $12,998,000 -- $(43,000) $12,955,000 U.S. corporate debt securities 25,851,000 $41,000 (79,000) 25,813,000 Mortgage-backed securities 1,016,000 4,000 -- 1,020,000 - -------------------------------------------------------------------------------- $39,865,000 $45,000 $(122,000) $39,788,000 ================================================================================ The gross realized gains on sale of available-for-sale securities for the years ending December 31, 1999, 1998 and 1997 totaled $2,000, $128,000 and $0, respectively, and the gross realized losses totaled $0, $0 and $0, respectively. The net adjustment to unrealized (losses) gains on available-for-sale securities included as a separate component of stockholders' equity totaled $(714,000) in 1999, $(103,000) in 1998 and $27,000 in 1997. 46 SYNAPTIC PHARMACEUTICAL CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1999 Note 3 -- Collaborative and Licensing Arrangements At December 31, 1999, the Company was engaged in a collaboration with Grunenthal GmbH ("Grunenthal"). In addition to this ongoing collaborative arrangement, the Company has granted licenses to certain of its technology and patent rights to four other pharmaceutical companies. Details of these arrangements are set forth below: Grunenthal GmbH. The Company and Grunenthal are parties to a collaborative and licensing agreement pursuant to which they are collaborating to discover and develop drugs for the treatment of pain. The Company is using its receptor-targeted drug design technology to identify compounds of interest and Grunenthal is using its expertise to evaluate the compounds in pain model systems and conduct preclinical studies. Grunenthal will conduct clinical studies with promising compounds. The companies will each be responsible for their own research costs and equally share the development costs through Phase IIa clinical trials. The Company will retain manufacturing and marketing rights in the U.S., Canada and Mexico and share these rights in countries outside of Europe, South and Central America where Grunenthal retains such rights. To date, the Company has not recognized any revenue under this collaboration. Eli Lilly and Company. The Company and Eli Lilly and Company ("Lilly") are parties to a collaborative and licensing agreement under which the Company granted Lilly an exclusive license to use all but two of the Company's serotonin drug discovery systems to promote the discovery and development of receptor subtype-selective drugs for the treatment of serotonin-related disorders. Through July 1999, Lilly provided funding to the Company to support a specified number of the Company's scientists who conducted research as part of the collaboration. Under the terms of the agreement, the collaboration and associated research funding ended on July 30, 1999. Lilly is required to pay royalties on sales of any products developed through the use of the Company's technology and is required to make payments upon the achievement of certain milestones. During 1999, 1998 and 1997, the Company recognized $1,676,000, $4,659,000, and $4,748,000, respectively, in revenue under this agreement. Revenues that have been recognized are not subject to repayment. Merck & Co., Inc. The Company and Merck & Co., Inc. ("Merck") were parties to a collaborative and licensing agreement to identify and develop alpha-1a antagonists, principally for the treatment of BPH. The Company had granted Merck certain licenses and know-how to develop and commercialize alpha-1a antagonists. Through February 1999, Merck provided funding to the Company to support a specified number of the Company's scientists who conducted research as part of the collaboration. Under the terms of the agreement, the collaboration and associated research funding ended on February 28, 1999. In March 2000, certain licenses granted to Merck under this agreement will automatically terminate concurrently with the termination of the agreement. Merck will continue to have a non-exclusive license to use certain of the Company's know-how. During 1999, 1998 and 1997, the Company recognized $83,000, $482,000 and $1,631,000, respectively, in revenue under this agreement. Revenues that have been recognized are not subject to repayment. 47 SYNAPTIC PHARMACEUTICAL CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1999 At December 31, 1998, the Company had received $83,000 in advance for work performed in January and February 1999. Novartis Pharma AG. The Company and Novartis Pharma AG ("Novartis") are parties to two collaborative and licensing agreements under which the Company granted Novartis an exclusive worldwide license to use the Company's neuropeptide Y technology to develop, manufacture and sell compounds that work through neuropeptide Y receptor subtypes for the treatment of obesity and eating disorders. Through August 4, 1998, Novartis provided funding to the Company to support a specified number of the Company's scientists who conducted research as part of the collaboration. Under the terms of the agreements, the collaboration and associated research funding ended on August 4, 1998. After August 4, 2001, all of these licenses and rights become nonexclusive. Novartis is required to pay royalties on certain product sales and is required to make payments upon the achievement of certain milestones. During 1998 and 1997, the Company recognized $2,041,000 and $3,406,000, respectively, in revenue under this agreement. Revenues that have been recognized are not subject to repayment. At December 31, 1999, Novartis held 695,715 shares of the Company's common stock which represents 6.5% of the outstanding shares of the Company. Glaxo Group Limited. The Company and Glaxo Group Limited of the United Kingdom ("Glaxo") are parties to a licensing agreement under which Glaxo currently holds a nonexclusive license under the Company's alpha 1 adrenergic receptor patents to develop and sell alpha-1a selective compounds for therapeutic applications other than the treatment of BPH. During 1998, the Company recognized $2,000,000 in revenue under this licensing arrangement. Revenue that has been recognized is not subject to repayment. Synaptic is entitled to receive royalties on sales of all alpha-1a selective drugs sold by Glaxo so long as Synaptic has an issued patent relating to an alpha 1 adrenergic receptor subtype in at least one major market country. 48 SYNAPTIC PHARMACEUTICAL CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1999 Note 4 -- Property and Equipment Property and equipment consists of the following as of December 31, 1999 and 1998: 1999 1998 - ------------------------------------------------------------------------ Scientific equipment $ 6,745,000 $ 6,332,000 Furniture and fixtures 192,000 188,000 Office equipment 521,000 514,000 Leasehold improvements 2,218,000 2,003,000 Software 967,000 923,000 Equipment under capitalized leases 658,000 658,000 - ------------------------------------------------------------------------ 11,301,000 10,618,000 Accumulated depreciation and amortization (6,115,000) (4,885,000) - ------------------------------------------------------------------------ $ 5,186,000 $ 5,733,000 ========================================================================= Note 5 -- Capital Leases The Company and a bank were parties to a master lease agreement under which the Company leased laboratory and computer equipment with a cost basis of $658,000. The effective interest rate on the leases approximated 10.5%. The assets were depreciated over the related lease terms, the last of which ended in 1997. Accumulated amortization on leased equipment as of December 31, 1999 and 1998 was $658,000. 49 SYNAPTIC PHARMACEUTICAL CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1999 Note 6 -- Stockholders' Equity Common Stock. In 1997, the Company completed a public offering of 2,875,000 shares of its common stock. In January 1998, warrants to purchase 137,648 shares of the Company's Common Stock were exercised at $9.50 per share. There are currently no common stock warrants outstanding. The total number of shares of Common Stock outstanding was 10,764,661 as of December 31, 1999. None of the outstanding common stock is subject to repurchase. Stockholders' Rights Plan. In November 1995, the Company's Board of Directors approved the adoption of a stockholders' rights plan (the "Rights Plan"). The Rights Plan provides for the distribution of one right (a "Right") with respect to each share of outstanding common stock and any new issuances of common stock. Upon completion of the initial public offering in December 1995, the Board of Directors designated Series A Junior Participating Preferred Stock and declared a dividend of one Right with respect to each share of common stock outstanding. Each Right will become exercisable to purchase from the Company, at an exercise price of $160.00, 1/1000th of a share of Series A Junior Participating Preferred Stock or that number of shares of common stock having a market value equal to two times the exercise price of the Right. The Rights generally become exercisable for the Series A Junior Participating Preferred Stock ten days following the announcement by any person or group of an intention to make a tender offer or exchange offer, the consummation of which would cause any person or group to become the owner of 15% or more of the outstanding common stock, and generally become exercisable for common stock ten days following the acquisition by any person or group of more than 15% of the outstanding common stock. The Rights will expire in the year 2005. The Rights Plan may discourage certain types of transactions involving an actual or potential change in control of the Company. Each 1/1000th of a share of Series A Junior Participating Preferred Stock will have one vote. Each share of Series A Junior Participating Preferred Stock will be entitled to a preferential quarterly dividend per share equal to the larger of (i) an amount equal to any dividend declared on the common stock and (ii) $.00025. Additionally, in the event of a liquidation, each 1/1000th of a share of the Series A Junior Participating Preferred Stock would be entitled to a preferential liquidation payment equal to $0.01 plus an amount equal to the amount that would be distributed with respect to each share of common stock. Preferred Stock. The Company is authorized to issue up to 1,000,000 shares of preferred stock, 200,000 of which is designated as Series A Junior Participating and 800,000 of which is undesignated. The Board of Directors is authorized to provide for the issuance of preferred stock in one or more classes or series and to fix the number of shares constituting any such class or series, and the voting powers, designations, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof, including the dividend rights, dividend rate, terms of redemption, redemption price or prices, conversion rights and liquidation preferences of the shares constituting any class or series, without any further vote or action by the shareholders of the Company. 50 SYNAPTIC PHARMACEUTICAL CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1999 Note 7 -- Incentive/Stock Plans The Company currently has three stock incentive plans: the 1996 Incentive Plan (the "1996 Plan"), the 1988 Amended and Restated Incentive Plan (the "1988 Plan" and, together with the 1996 Plan, the "Incentive Plans") and the 1996 Nonemployee Director Stock Option Plan (the "Director Plan"). The Company has elected to follow APB No. 25 in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under Financial Accounting Standards Board Statement No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123") requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB No. 25, compensation expense is required to be recognized when the exercise price of the Company's employee stock options is at a price below the market price of the underlying stock on the date of grant. Incentive Plans. The 1996 Plan and the 1988 Plan were adopted in October 1995 and June 1988, respectively. In May 1998, the Company's stockholders approved an amendment to the 1996 Plan which increased the maximum number of shares available for awards under the 1996 Plan from 1,100,000 to 2,100,000. Effective as of January 1, 1996, the 1996 Plan replaced the 1988 Plan with respect to all future stock and option awards by the Company to its employees and consultants. A committee of the Company's Board of Directors (the "Committee") approves the sale of shares and the granting of nonstatutory or incentive stock options. In addition, under the 1996 Plan, the Committee may grant stock appreciation rights to employees and consultants of the Company. The purchase price for shares and the exercise price of options are determined by the Committee (although, the exercise price of incentive stock options may be no less than the fair market value of the common stock on the date of grant). In general, options granted under the Incentive Plans vest over a four-year period. Unvested options are forfeited upon termination of the employee or consulting relationship. Vested options, if not exercised within a specified period of time following the termination of the employment or consulting relationship, are also forfeited. Options generally expire 10 years from the date of grant. Shares of common stock sold under the Incentive Plans are also generally subject to vesting. Unvested shares of common stock which are sold under the Incentive Plans may be repurchased by the Company, at its option, at the original sale price upon termination of the employment or consulting relationship of the holder with the Company. Options granted and shares sold to employees under the Incentive Plans generally become fully vested upon the occurrence of a change in control of the Company (as defined) if the holders thereof are terminated in connection with such change in control other than for cause (as defined). At December 31, 1999, 693,603 shares remain available for future awards under the 1996 Plan. As of December 31, 1999, no stock appreciation rights had been awarded under the 1996 Plan. Director Plan. The Director Plan was adopted by the Board of Directors in March 1996 and approved by the stockholders in June 1996. In general, under the Director Plan, each nonemployee director of the Company is automatically granted an option on the date that he or she first becomes a member of the Board of Directors. In addition, on June 1 of each year, commencing in 1997, each nonemployee director is granted an additional option to purchase 2,500 shares of common stock at an exercise price equal to the fair market value on the date of grant. The maximum number of shares subject to the Director Plan is 250,000. In general, options granted under the Director Plan become exercisable as to 1/24th of the total number of shares subject to the option for each calendar month elapsed after the date of the option grant. In the event of a change in control of the Company (as defined) or the death or disability of the optionee, any unvested portion of the options will become exercisable in full. Options granted under the Director Plan will expire upon the earliest 51 SYNAPTIC PHARMACEUTICAL CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1999 to occur of the following: (a) the expiration of ten years from the date of grant of the option, (b) one year after the optionee ceases to be a director of the Company by reason of death or disability of the optionee, or (c) three months after the date the optionee ceases to be a director of the Company for any reason other than death or disability. Option activities under the Incentive Plans and the Director Plan are detailed in the following table: Weighted Average Option 1996 1988 Director Price Plan Plan Plan Per Share - ------------------------------------------------------------------------------ Outstanding at January 1, 1997 415,762 291,511 17,500 $ 8.55 Granted 503,751 -- 15,000 $12.99 Exercised (625) (17,855) -- $ 2.01 Forfeited (67,825) (8,354) (2,500) $12.88 - ------------------------------------------------------------------------------ Outstanding at December 31, 1997 851,063 265,302 30,000 $10.47 Granted 339,543 -- 15,000 $13.36 Exercised (4,453) (43,063) -- $ 2.70 Forfeited (60,918) (4,375) -- $12.36 - ------------------------------------------------------------------------------ Outstanding at December 31, 1998 1,125,235 217,864 45,000 $11.39 Granted 432,100 -- 20,000 $ 4.92 Exercised (22,542) (30,745) -- $ 4.03 Forfeited (158,516) (625) -- $12.86 - ------------------------------------------------------------------------------ Outstanding at December 31, 1999 1,376,277 186,494 65,000 $ 9.69 ============================================================================== Exercisable at December 31, 1999 345,592 186,494 46,562 $ 9.90 ============================================================================== Exercisable at December 31, 1998 202,195 211,276 30,000 $ 8.10 ============================================================================== Exercisable at December 31, 1997 71,511 221,212 15,000 $ 5.27 ============================================================================== 52 SYNAPTIC PHARMACEUTICAL CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1999 The following table discloses at December 31, 1999, for each of the following classes of options as determined by range of exercise price, the information regarding weighted-average exercise price and weighted-average remaining contractual life of each said class: Weighted Weighted Weighted Average Average Average Remaining Exercise Exercise Contractual Number Of Price of Number Of Price of Life Of Options Options Options Outstanding Outstanding Currently Currently Option Class Outstanding Options Options Exercisable Exercisable ------------ ----------- ------- ------- ----------- ----------- Prices ranging from $1.76 - $2.00 186,494 $ 1.78 2.4 years 186,494 $ 1.78 Prices ranging from $4.25 - $6.875 444,100 $ 4.72 9.9 years 5,312 $ 6.15 Prices ranging from $10.125 - $15.25 868,677 $12.90 8.0 years 283,592 $12.86 Prices ranging from $16.50 - $17.75 128,500 $16.66 6.5 years 103,250 $16.62 Other Disclosures. During 1999, 1998 and 1997, all options were granted with an exercise price equal to the market price of the common stock on the date of grant. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had been accounting for its employee stock options under the fair value method of SFAS No. 123. The weighted-average fair value of options granted during 1999, 1998 and 1997 approximated $3.19, $7.66 and $7.59, respectively. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions for 1999, 1998 and 1997, respectively: weighted average risk-free interest rates of 6.13%, 4.70% and 5.92%; no dividends; and a weighted-average expected life of the options of 5 years. Weighted average volatility factors of the expected market price of the Company's common stock of .741, .628 and .623, were used for 1999, 1998 and 1997, respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. 53 SYNAPTIC PHARMACEUTICAL CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1999 For purposes of pro forma net loss disclosures, the estimated fair value of options granted subsequent to 1994 is amortized to expense over the options' vesting period. The Company's pro forma net loss information is as follows: 1999 1998 1997 - ------------------------------------------------------------------------------- Pro forma net loss $(16,801,000) $(7,863,000) $(6,113,000) Pro forma net loss per share $ (1.56) $ (0.74) $ (0.75) - ------------------------------------------------------------------------------- For certain options granted prior to 1997, the Company recorded pursuant to APB No. 25 deferred compensation expense representing the difference between the exercise price thereof and the market value of the common stock as of the date of grant. This compensation expense was being amortized over the vesting period of each option granted. Amortization of deferred compensation under the Incentive Plans amounted to approximately $50,000, $79,000 and $124,000 during 1999, 1998 and 1997, respectively. In addition, approximately $11,000, $20,000 and $12,000 of deferred compensation as it relates to the Incentive Plans was reversed during 1999, 1998 and 1997, respectively, due to the forfeiture of the unvested options. At December 31, 1999, all such deferred compensation has been amortized. Note 8 -- Income Taxes The liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. At December 31, 1999 and 1998, the Company had net operating loss ("NOL") carryforwards of approximately $45,000,000 and $30,000,000, respectively, for Federal income tax purposes that will expire principally in the years 2002 through 2019. In addition, the Company had research and development credit carryforwards of approximately $1,610,000 which will expire principally in 2002 through 2018. For financial reporting purposes, a valuation allowance has been recognized to offset the deferred tax assets related to these carryforwards. Due to the limitations imposed by the Tax Reform Act of 1986, and as a result of significant changes in the Company's ownership in 1993 and 1997, the utilization of approximately $25,000,000 of net operating loss carryforwards is subject to annual limitation. The utilization of the research and development credits is similarly limited. 54 SYNAPTIC PHARMACEUTICAL CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1999 A reconciliation of the Company's income tax expense (benefit) at U.S. federal statutory tax rates to recorded income tax provision is as follows: 1999 1998 1997 - -------------------------------------------------------------------------------- Tax at U.S. statutory rates $(5,141,000) $(2,208,000)$(1,818,000) State income taxes (898,000) (386,000) (318,000) Research and development credit -- (110,000) -- Expiration of state NOL's 248,000 2,000 356,000 Other (16,000) 50,000 108,000 Valuation allowance recorded 5,807,000 2,652,000 1,672,000 - -------------------------------------------------------------------------------- Recorded tax provision -- -- -- ================================================================================ Significant components of the Company's deferred tax assets as of December 31, 1999 and 1998, are as follows: 1999 1998 - -------------------------------------------------------------------------------- Deferred tax assets: Net operating loss carryforwards $ 17,233,000 $ 11,782,000 Research and development credit carryforwards 1,610,000 1,610,000 Book over tax amortization 1,638,000 1,282,000 - -------------------------------------------------------------------------------- Total deferred tax assets 20,481,000 14,674,000 Valuation allowance (20,481,000) (14,674,000) - -------------------------------------------------------------------------------- Net deferred tax assets -- -- ================================================================================ Note 9 -- Commitments The Company leases facilities under an agreement expiring on December 31, 2015. Rent expense for the years ended December 31, 1999, 1998 and 1997 approximated $1,749,000, $693,000, and $703,000, respectively, and included executory costs of $579,000, $120,000 and $93,000, respectively. At December 31, 1998, a standby letter of credit for $580,000 had been outstanding as a security deposit. A bank imposed restriction had been placed on $600,000 in cash held in the Company's investment account to secure the letter of credit. 55 SYNAPTIC PHARMACEUTICAL CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1999 As of December 31, 1999, future minimum annual payments under the lease are as follows: 2000 $ 1,575,000 2001 1,611,000 2002 1,611,000 2003 1,611,000 2004 1,611,000 Thereafter 22,498,000 ------------ Total $ 30,517,000 ============ The Company is party to a license agreement with a major research university. Under the terms of this agreement, the Company received a worldwide nonexclusive license under a patent issued in January 1991, which patent expires in 2008. The Company is committed under this agreement to pay royalties on future net sales of products employing the technology or falling under claims of the patents covered by this agreement. The Company has an employment agreement with its Chairman, President and Chief Executive Officer which provides for severance payments of up to one year of base salary upon the occurrence of certain events, including early termination and termination upon a change in control, as defined. In addition to severance payments, under certain circumstances, the agreement calls for immediate vesting of any unvested shares of common stock and stock options. At December 31, 1999, the Company had entered into agreements with each of its Senior Vice President and Chief Financial Officer, Vice President for Research, Vice President and General Counsel and Vice President of Business Development which provide for severance payments in amounts equal to 50% of annual base salary, on substantially the same terms as stated above. In addition to severance, under certain circumstances, the agreements call for immediate vesting of any unvested shares of common stock and stock options. Note 10 -- Employee Benefit Plans The Company established a defined contribution employee retirement plan (the "Plan") effective January 1, 1990, conforming to Section 401(k) of the Internal Revenue Code ("IRC"). All eligible employees with six months service may elect to have a portion of their salary deducted and contributed to the Plan up to the maximum allowable limitations of the IRC. The Company matches 50% of each participant's contribution up to the first 5% of annual compensation (as defined) with a maximum employer contribution of 2.5% of a participant's compensation. The Company's matching portion, which amounted to approximately $133,000, $117,000 and $107,000 for the years ended December 31, 1999, 1998 and 1997, respectively, vests over a six-year period. 56 SYNAPTIC PHARMACEUTICAL CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1999 The Company currently provides medical, dental, long-term disability and life insurance benefits for its full-time employees. The Company does not presently provide any post-retirement health benefits. Note 11 -- Subsequent Event On January 24, 2000, the Company entered into a research and licensing agreement with Kissei Pharmaceutical Co., Ltd. ("Kissei"), to identify and develop drugs that act through novel receptors which will be identified utilizing the Company's genomics discovery technologies. Under the term of the three-year agreement, Kissei will provide funding to the Company to support research that is aimed at discovering novel receptors through the use of the Company's proprietary genomics technologies. In addition to the research funding, the agreement provides for a license fee, milestone payments and royalty payments to the Company on sales of any products. In return, the Company granted Kissei worldwide exclusive rights to use selected receptors resulting from the collaboration to develop, manufacture and market drugs that act through such receptors. 57 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Part III Item 10. Directors and Executive Officers of the Registrant The information required by this item is incorporated herein by reference from the information under the captions "ELECTION OF DIRECTORS" and "COMPENSATION AND OTHER INFORMATION CONCERNING OFFICERS, DIRECTORS AND CERTAIN STOCKHOLDERS" contained in the Proxy Statement. Item 11. Executive Compensation The information required by this item is incorporated herein by reference from the information under the caption "COMPENSATION AND OTHER INFORMATION CONCERNING OFFICERS, DIRECTORS AND CERTAIN STOCKHOLDERS" contained in the Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this item is incorporated herein by reference from the information under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" contained in the Proxy Statement. Item 13. Certain Relationships and Related Transactions The information required by this item is incorporated herein by reference from the information under the caption "COMPENSATION AND OTHER INFORMATION CONCERNING OFFICERS, DIRECTORS AND CERTAIN STOCKHOLDERS" contained in the Proxy Statement. 58 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) (1) Financial Statements Reference is made to the Index to Financial Statements under Item 8, Part II hereof. (2) Financial Statement Schedules The Financial Statement Schedules have been intentionally omitted either because they are not required or because the information has been included in the notes to the Financial Statements included in this Report on Form 10-K. (3) Exhibits Exhibit No. Description 3.1(a) Amended and Restated Certificate of Incorporation of the Company, filed December 19, 1995 (incorporated by reference to Exhibit 3.1(a) to the Company's Quarterly Report on Form 10-Q filed for the quarter ended June 30, 1996, Commission File Number 0-27324) 3.1(b) Certificate of Designations of Series A Junior Participating Preferred Stock filed December 19, 1995 (incorporated by reference to Exhibit 3.1(b) to the Company's Quarterly Report on Form 10-Q filed for the quarter ended December 31, 1995, Commission File Number 0-27324) 3.1(c) Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, filed June 5, 1996 (incorporated by reference to Exhibit 3.1(c) to the Company's Quarterly Report on Form 10-Q filed for the quarter ended June 30, 1996, Commission File Number 0-27324) 3.2 Amended and Restated By-Laws of the Company, as amended on March 24, 1999 (incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q filed for the quarter ended March 31, 1999, Commission File Number 0-27324) 4.1 Specimen of Certificate of Common Stock of the Company (incorporated by reference to Exhibit 4 to the Company's Registration Statement on Form S-1, as amended (File Number 33-98366), which became effective on December 13, 1995) 4.2 Rights Agreement dated as of December 11, 1995, between the Company and Chase Mellon Shareholder Services, as Rights Agent (incorporated by reference to Exhibit 4.2 to the Company's Annual Report on Form 10-K filed for the fiscal year ended December 31, 1995, Commission File Number 0-27324) 59 *10.1 Research, Option and License Agreement dated as of January 25, 1991, between the Company and Eli Lilly and Company, as amended by Addendum dated as of January 1, 1995 (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1, as amended (File Number 33-98366), which became effective on December 13, 1995) *10.2 Research Collaboration and License Agreement dated as of November 30, 1993, between the Company and Merck & Co., Inc., as amended by Amendment No. 1 dated as of February 15, 1995, and as modified by the Letter Agreement dated August 25, 1995 (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1, as amended (File Number 33-98366), which became effective on December 13, 1995) *10.3 Research and License Agreement dated as of August 4, 1994, between the Company and Ciba-Geigy Limited (predecessor-in-interest of Novartis AG, the parent of Novartis Pharma AG) (incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1, as amended (File Number 33-98366), which became effective on December 13, 1995) +10.4 1988 Amended and Restated Incentive Plan of the Company (incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1, as amended (File Number 33-98366), which became effective on December 13, 1995) +10.5 Form of Restricted Stock Purchase Agreement under the 1988 Amended and Restated Incentive Plan of the Company (incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1, as amended (File Number 33-98366), which became effective on December 13, 1995) +10.6 Form of Incentive Stock Option Agreement under the 1988 Amended and Restated Incentive Plan of the Company (incorporated by reference to Exhibit 10.11 to the Company's Registration Statement on Form S-1, as amended (File Number 33-98366), which became effective on December 13, 1995) +10.7 Form of Nonqualified Stock Option Agreement under the 1988 Amended and Restated Incentive Plan of the Company (incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1, as amended (File Number 33-98366), which became effective on December 13, 1995) 10.8 Third Amended and Restated Registration Rights Agreement dated as of January 19, 1993, as amended by Amendment No. 1 dated as of August 4, 1994 (incorporated by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-1, as amended (File Number 33-98366), which became effective on December 13, 1995) 10.9 Form of Common Stock Purchase Warrant dated as of January 1993 (incorporated by reference to Exhibit 10.15 to the Company's Registration Statement on Form S-1, as amended (File Number 33-98366), which became effective on December 13, 1995) 60 10.10 License Agreement dated June 3, 1991, between the Company and the Trustees of Columbia University in the City of New York (incorporated by reference to Exhibit 10.16 to the Company's Registration Statement on Form S-1, as amended (File Number 33-98366), which became effective on December 13, 1995) +10.11 Employment Agreement dated as of February 14, 1994, between the Company and Robert I. Taber (incorporated by reference to Exhibit 10.21 to the Company's Registration Statement on Form S-1, as amended (File Number 33-98366), which became effective on December 13, 1995) +10.12 Employment Agreement dated as of April 6, 1995, between the Company and Richard L. Weinshank (incorporated by reference to Exhibit 10.24 to the Company's Registration Statement on Form S-1, as amended (File Number 33-98366), which became effective on December 13, 1995) 10.13 Form of Indemnification Agreement between the Company and each of its executive officers and directors (incorporated by reference to Exhibit 10.25 to the Company's Registration Statement on Form S-1, as amended (File Number 33-98366), which became effective on December 13, 1995) +10.14 1996 Incentive Plan of the Company, as amended on May 12, 1998 (incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K filed for the fiscal year ended December 31, 1998, Commission File Number 0-27324) +10.15 Incentive Stock Option Agreement dated October 1, 1993, between the Company and Kathleen P. Mullinix (incorporated by reference to Exhibit 10.28 to the Company's Registration Statement on Form S-1, as amended (File Number 33-98366), which became effective on December 13, 1995) +10.16 Incentive Stock Option Agreement dated February 14, 1994, between the Company and Robert I. Taber (incorporated by reference to Exhibit 10.29 to the Company's Registration Statement on Form S-1, as amended (File Number 33-98366), which became effective on December 13, 1995) +10.17 Incentive Stock Option Agreement dated February 7, 1994, between the Company and Lisa L. Reiter (incorporated by reference to Exhibit 10.30 to the Company's Registration Statement on Form S-1, as amended (File Number 33-98366), which became effective on December 13, 1995) +10.18 Incentive Stock Option Agreement dated as of March 21, 1996, between the Company and Kathleen P. Mullinix (incorporated by reference to Exhibit 10.25 to the Company's Quarterly Report on Form 10-Q filed for the quarter ended March 31, 1996, Commission File Number 0-27324) +10.19 Incentive Stock Option Agreement dated as of March 21, 1996, between the Company and Robert L. Spence (incorporated by reference to Exhibit 10.26 to the Company's Quarterly Report on Form 10-Q filed for the quarter ended March 31, 1996, Commission File Number 0-27324) 61 +10.20 Incentive Stock Option Agreement dated as of March 21, 1996, between the Company and Lisa L. Reiter (incorporated by reference to Exhibit 10.27 to the Company's Quarterly Report on Form 10-Q filed for the quarter ended March 31, 1996, Commission File Number 0-27324) +10.21 Nonqualified Stock Option Agreement dated as of March 21, 1996, between the Company and Richard L. Weinshank (incorporated by reference to Exhibit 10.28 to the Company's Quarterly Report on Form 10-Q filed for the quarter ended March 31, 1996, Commission File Number 0-27324) +10.22 Form of Incentive Stock Option Agreement under the 1996 Incentive Plan (incorporated by reference to Exhibit 10.29 to the Company's Quarterly Report on Form 10-Q filed for the quarter ended March 31, 1996, Commission File Number 0-27324) +10.23 Form of Nonqualified Stock Option Agreement under the 1996 Incentive Plan (incorporated by reference to Exhibit 10.30 to the Company's Quarterly Report on Form 10-Q filed for the quarter ended March 31, 1996, Commission File Number 0-27324) ***10.24 Research and License Agreement dated as of May 31, 1996, between the Company and Ciba-Geigy Limited (predecessor-in-interest of Novartis AG, parent of Novartis Pharma AG) (incorporated by reference to Exhibit 10.31 to the Company's Quarterly Report on Form 10-Q/A filed for the quarter ended June 30, 1996, Commission File Number 0-27324) ***10.25 Supplement No. 1 to Research and License Agreement dated as of August 4, 1994, between the Company and Ciba-Geigy Limited (predecessor-in-interest of Novartis AG, parent of Novartis Pharma AG) (incorporated by reference to Exhibit 10.32 to the Company's Quarterly Report on Form 10-Q/A filed for the quarter ended June 30, 1996, Commission File Number 0-27324) 10.26 1996 Nonemployee Director Stock Option Plan of the Company (incorporated by reference to Exhibit 10.33 to the Company's Quarterly Report on Form 10-Q filed for the quarter ended June 30, 1996, Commission File Number 0- 27324) 10.27 Form of Stock Option Agreement under the 1996 Nonemployee Director Stock Option Plan of the Company (incorporated by reference to Exhibit A attached to Exhibit 10.33 to the Company's Quarterly Report on Form 10-Q filed for the quarter ended June 30, 1996, Commission File Number 0-27324) **10.28 Addendum No. 2 to Research, Option and License Agreement dated as of October 31, 1996, between the Company and Eli Lilly and Company (incorporated by reference to Exhibit 10.35 to the Company's Annual Report on Form 10-K filed for the fiscal year ended December 31, 1996, Commission File No. 0-27324) ***10.29 Amendment No.2 to Research Collaboration and License Agreement dated as of October 9, 1996, between the Company and Merck & Co., Inc. (incorporated by reference to Exhibit 10.36 to the Company's Annual Report on Form 10-K filed for the fiscal year ended December 31, 1996, Commission File No. 0-27324) 62 +10.30 Incentive Stock Option Agreement dated as of December 13, 1996, between the Company and Kathleen P. Mullinix (incorporated by reference to Exhibit 10.37 to the Company's Annual Report on Form 10-K filed for the fiscal year ended December 31, 1996, Commission File No. 0-27324) +10.31 Form of Incentive Stock Option Agreement dated as of December 13, 1996, entered into between the Company and each of Robert L. Spence, Robert I. Taber, Lisa L. Reiter and Richard L. Weinshank (incorporated by reference to Exhibit 10.38 to the Company's Annual Report on Form 10-K filed for the fiscal year ended December 31, 1996, Commission File No. 0-27324) ***10.32 Collaborative Research and License Agreement dated as of July 28, 1997, between the Company and the Warner-Lambert Company (incorporated by reference to Exhibit 10.39 to the Company's Quarterly Report on Form 10-Q filed for the quarter ended September 30, 1997, Commission File Number 0- 27324) +10.33 Executive Employment Agreement effective as of October 1,1997, between the Company and Dr. Kathleen P. Mullinix (incorporated by reference to Exhibit 10.34 to the Company's Annual Report on Form 10-K filed for the fiscal year ended December 31, 1997, Commission File No. 0-27324) 10.34 Lease Agreement dated November 19, 1997, between the Company and Century Associates, which becomes effective January 1, 1998 (incorporated by reference to Exhibit 10.35 to the Company's Annual Report on Form 10-K filed for the fiscal year ended December 31, 1997, Commission File No. 0- 27324) 10.35 Amendment No. 3 to Research Collaboration and License Agreement dated as of December 1, 1997, between the Company and Merck & Co., Inc. (incorporated by reference to Exhibit 10.36 to the Company's Annual Report on Form 10-K filed for the fiscal year ended December 31, 1997, Commission File No. 0-27324) +10.36 Amended and Restated Employment Agreement dated as of January 1, 1998, between the Company and Robert L. Spence (incorporated by reference to Exhibit 10.37 to the Company's Annual Report on Form 10-K filed for the fiscal year ended December 31, 1997, Commission File No. 0-27324) ***10.37 Cooperation Agreement dated as of January 12, 1998, between the Company and Grunenthal GmbH (incorporated by reference to Exhibit 10.38 to the Company's Annual Report on Form 10-K filed for the fiscal year ended December 31, 1997, Commission File No. 0-27324) +10.38 Amended and Restated Employment Agreement dated as of February 7, 1998, between the Company and Lisa L. Reiter (incorporated by reference to Exhibit 10.39 to the Company's Annual Report on Form 10-K filed for the fiscal year ended December 31, 1997, Commission File No. 0-27324) 10.39 Amendment No.4 to Research Collaboration and License Agreement dated as of March 2,1998, between the Company and Merck & Co., Inc. (incorporated by reference to Exhibit 10.40 to the Company's Annual Report on Form 10-K filed for the fiscal year ended December 31, 1997, Commission File No. 0-27324) 63 ***10.40 Option and License Agreement dated as of March 2, 1998, between the Company and Glaxo Group Limited (incorporated by reference to Exhibit 10.41 to the Company's Annual Report on Form 10-K filed for the fiscal year ended December 31, 1997, Commission File No. 0-27324) +10.41 Employment Agreement dated as of April 1, 1998, between the Company and Theresa A. Branchek (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed for the quarter ended March 31, 1998, Commission File Number 0-27324) +10.42 Incentive Stock Option Agreement dated as of May 12, 1998, between the Company and Theresa A. Branchek (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed for the quarter ended June 30, 1998, Commission File Number 0-27324) +10.43 Nonqualified Stock Option Agreement dated as of May 12, 1998, between the Company and Theresa A. Branchek (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed for the quarter ended June 30, 1998, Commission File Number 0-27324) 10.44 Amendment No. 1 to Cooperation Agreement between the Company and Grunenthal GmbH (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed for the quarter ended September 30, 1998, Commission File Number 0-27324) 10.45 First Amendment to Lease dated as of November 25, 1998, between ARE-215 College Road, LLC, and the Company (incorporated by reference to Exhibit 10.45 to the Company's Annual Report on Form 10-K filed for the fiscal year ended December 31, 1998, Commission File No. 0-27324) 10.46 Amendment No. 5 to Research Collaboration and License Agreement dated as of December 1, 1998, between the Company and Merck & Co., Inc. (incorporated by reference to Exhibit 10.46 to the Company's Annual Report on Form 10-K filed for the fiscal year ended December 31, 1998, Commission File No. 0-27324) 10.47 Addendum No. 3 to Research, Option and License Agreement effective as of January 1, 1999, between the Company and Eli Lilly and Company (incorporated by reference to Exhibit 10.47 to the Company's Annual Report on Form 10-K filed for the fiscal year ended December 31, 1998, Commission File No. 0-27324) 23.1 Consent of Independent Auditors, Ernst & Young LLP 24 Powers of Attorney 27 Financial Data Schedule - ----------------- * Portions of this Exhibit were omitted and confidential treatment thereof has been granted by the Secretary of the Securities and Exchange Commission in response to the Registrant's Application Requesting Confidential Treatment under Rule 406 under the Securities Act of 1933, as amended. 64 ** Portions of this Exhibit have been omitted and filed separately with the Secretary of the Securities and Exchange Commission pursuant to the Registrant's Application Requesting Confidential Treatment under Rule 24b-2 under the Securities Exchange Act of 1934, as amended. *** Portions of this Exhibit were omitted and confidential treatment thereof has been granted by the Secretary of the Securities and Exchange Commission in response to the Registrant's Application Requesting Confidential Treatment under Rule 246-2 under the Securities Act of 1933, as amended. + Management contracts and compensatory plans or arrangements (b) Reports on Form 8-K There were no reports on Form 8-K filed by the Registrant during the fourth quarter of the fiscal year ended December 31, 1999. Supplemental Information Copies of the Registrant's Proxy Statement and copies of the form of proxy to be used at the Annual Meeting of Stockholders to be held on May 11, 2000, will be furnished to the Securities and Exchange Commission at the time they are distributed to the Registrant's stockholders. Imitrex(R) and Zantac(R) are registered trademarks of Glaxo Wellcome Inc. Hytrin(R) is the registered trademark of Abbott Laboratories. Claritin(R) is the registered trademark of Schering Corporation. Propulsid(R) is the registered trademark of Johnson & Johnson. All other brand names or trademarks appearing in this Report are the property of their respective owners. 65 SIGNATURE PAGE 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. SYNAPTIC PHARMACEUTICAL CORPORATION Date: March 24, 2000 By: /s/ Kathleen P. Mullinix --------------------------- Name: Kathleen P. Mullinix Title: Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated. Signature Title Date - --------------------------- -------------------------------- -------------- /s/ Kathleen P. Mullinix Chairman, President and - --------------------------- Chief Executive Officer March 24, 2000 Kathleen P. Mullinix, Ph.D. /s/ Robert L. Spence Senior Vice President and - --------------------------- Chief Financial Officer Robert L. Spence (Principal Accounting Officer) March 24, 2000 * Director March 24, 2000 - --------------------------- Jonathan J. Fleming * Director March 24, 2000 - --------------------------- Zola P. Horovitz, Ph.D. * Director March 24, 2000 - --------------------------- Eric R. Kandel, M.D. * Director March 24, 2000 - --------------------------- John E. Lyons * Director March 24, 2000 - --------------------------- Patrick J. McDonald * Director March 24, 2000 - --------------------------- Sandra Panem * Director March 24, 2000 - --------------------------- Alison Taunton-Rigby, Ph.D. * By: /s/ Kathleen P. Mullinix Name: Kathleen P. Mullinix, Ph.D. Title: Attorney-in-Fact EX-23.1 2 EXHIBIT 23.1 ------------ Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333- 05793) pertaining to the 1988 Amended and Restated Incentive Plan, 1996 Incentive Plan and the 1996 Nonemployee Director Stock Option Plan of Synaptic Pharmaceutical Corporation of our report dated February 4, 2000, with respect to the financial statements of Synaptic Pharmaceutical Corporation included in the Annual Report (Form 10-K) for the year ended December 31, 1999. /s/ ERNST & YOUNG LLP Hackensack, New Jersey March 22, 2000 EX-24 3 EXHIBIT 24 ---------- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Kathleen P. Mullinix and Lisa L. Koff, or either of them, such person's true and lawful attorney-in-fact and agent with full power of substitution and re- substitution for such person and in his or her name, place and stead, in any and all capacities, to sign this Annual Report on Form 10-K and any or all amendments thereto and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the National Association of Securities Dealers, granting unto said attorney-in-fact and agent full power and authority, to do and perform each and every act and thing requisite or necessary to be done in and about the premises, to all intents and purposes and as fully as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or her substitutes may lawfully do or cause to be done by virtue hereof. Signature Title Date - ------------------------------ ---------------------- -------------- /s/ Kathleen P. Mullinix Chairman of the Board, March 20, 2000 - ------------------------------ President, and Chief Kathleen P. Mullinix Executive Officer /s/ Robert L. Spence Senior Vice President, March 20, 2000 - ------------------------------ Chief Financial Officer, Robert L. Spence and Treasurer /s/ Jonathan J. Fleming Director March 20, 2000 - ------------------------------ Jonathan J. Fleming /s/ Zola P. Horovitz, Ph.D Director March 20, 2000 - ------------------------------ Zola P. Horovitz, Ph.D /s/ Eric R. Kandel, M.D Director March 20, 2000 - ------------------------------ Eric R. Kandel, M.D /s/ John E. Lyons Director March 20, 2000 - ------------------------------ John E. Lyons /s/ Patrick J. McDonald Director March 20, 2000 - ------------------------------ Patrick J. McDonald /s/ Sandra Panem, Ph.D Director March 20, 2000 - ------------------------------ Sandra Panem, Ph.D /s/ Alison Taunton-Rigby, Ph.D Director March 20, 2000 - ------------------------------ Alison Taunton-Rigby, Ph.D EX-27 4
5 YEAR DEC-31-1999 DEC-31-1999 6,236,000 35,907,000 0 0 0 13,554,000 11,301,000 6,115,000 48,750,000 1,397,000 0 0 0 108,000 46,998,000 48,750,000 0 1,855,000 0 19,652,000 0 0 0 (15,121,000) 0 (15,121,000) 0 0 0 (15,121,000) (1.41) (1.41)
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