10-K/A 1 0001.txt AMENDMENT #1 TO FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ______________________ FORM 10-K/A (Amendment No. 1) ______________________ (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 0-28150 NEUROCRINE BIOSCIENCES, INC. (Exact name of registrant as specified in its charter) Delaware 33-0525145 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 10555 Science Center Drive, San Diego, CA 92121 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (858) 658-7600 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 15, 2000 totaled approximately $527.6 million based on the closing stock price as reported by the Nasdaq National Market. As of March 15, 2000, there were 21,830,471 shares of the Registrant's Common Stock, $.001 par value per share, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Certain information required by Part III of Form 10-K is incorporated by reference from the Registrant's Proxy Statement for the Annual Meeting of Stockholders held on May 24, 2000 (the "Proxy Statement"), which was filed with the Securities and Exchange Commission on April 27, 2000. ================================================================================ PART II ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations section contains forward-looking statements which involve risks and uncertainties, pertaining generally to the expected continuation of our collaborative agreements, the receipt of research payments thereunder, the future achievement of various milestones in product development and the receipt of payments related thereto, the potential receipt of royalty payments, preclinical testing and clinical trials of potential products, the period of time that our existing capital resources will meet our funding requirements, and our financial results and operations. Actual results could differ materially from those anticipated in such forward-looking statements as a result of various factors, including those set forth below. Overview We incorporated in California in 1992 and we reincorporated in Delaware in 1996. Since we were founded, we have been engaged in the discovery and development of novel pharmaceutical products for diseases and disorders of the central nervous and endocrine systems. To date, we have not generated any revenues from the sale of products, and we do not expect to generate any product revenues in the foreseeable future. We have funded our operations primarily through private and public offerings of our common stock and payments under research and development agreements. We are developing a number of products with corporate collaborators and will rely on existing and future collaborators to meet funding requirements. We expect to generate future net losses in anticipation of significant increases in operating expenses as products are advanced through the various stages of clinical development. As of December 31, 1999, we have incurred a cumulative deficit of $41.7 million and we expect to incur operating losses in the future, which may be greater than losses in prior years. Results of Operations Our revenues for the year ended December 31, 1999 were $16.8 million compared with $16.0 million in 1998, and $26.1 million in 1997. Although similar in amount, revenues for 1999 and 1998 had a different composition resulting from several significant events. During 1999, we entered into a collaborative agreement with Wyeth-Ayerst and agreed to a two-year extension of our 1995 collaboration with Janssen Pharmaceutica. Revenues received in 1999 under the new agreements consisted of $5.4 million of sponsored research and development funding and $3.0 million in milestone achievements. The increase in 1999 revenues generated by the new agreements was offset by a decline in revenues received under the Eli Lilly, Novartis and Neuroscience Pharma (NPI), Inc. collaborations that were concluded during the year. Revenues in 1998 for sponsored research and development funding and milestone achievements under these agreements were $12.2 million and $2.3 million, respectively. Revenues recorded during 1997 included the initiation of the Eli Lilly collaboration and the final year of sponsored research funding under the 1995 Janssen agreement. Revenues in 1997 for sponsored research and development funding and milestone achievements under these and the Novartis agreements were $20.0 million and $5.3 million, respectively. Research and development expenses increased to $29.2 million during 1999 compared with $21.8 million in 1998 and $18.8 million in 1997. Increased expenses reflect advancement of our drug candidates through progressive clinical development phases. We expect to incur significant increases in future periods as later phases of development typically involve an increase in the scope of studies and number of patients treated. Page 2 General and administrative expenses increased to $7.5 million during 1999 compared with $6.6 million in 1998 and $5.7 million in 1997. Increased expenses resulted from additional professional services, including patent and legal services, to support our expanded clinical development efforts. We anticipate similar increases in general and administrative expenses in the future as these efforts continue. During 1998, we wrote-off acquired in-process research and development costs of $4.9 million. This amount included the acquisition of Northwest NeuroLogic and the in-licensing of drug candidates for our insomnia and malignant glioma programs. Both of the in-licensed programs are currently under clinical development. Interest income decreased to $3.1 million during 1999 compared with $4.2 million for 1998 and $4.1 million in 1997. The decrease in 1999 compared with 1998 and 1997 primarily resulted from lower investment balances. Management anticipates an increase in interest income during future periods resulting from cash reserves generated by the sale of our common stock in December 1999 and increased revenues from anticipated collaborations. In December 1999, we sold our investment in Neuroscience Pharma (NPI), Inc. and recorded a gain of $526,000. Our proportionate share of NPI operating losses during 1999, 1998 and 1997 were $764,000, $3.4 million and $1.1 million, respectively. In addition, we recorded a write-down in the investment value of $646,000 during 1999 and $3.8 million during 1998 relating to the decline in cash redemption value of the NPI preferred shares. Net loss for 1999 was $16.8 million, or $0.88 per share, compared to net loss of $20.0 million, or $1.10 per share, for 1998 and net income of $5.1 million, or $0.30 per share, for 1997. Management expects to incur similar operating losses in the next two to three years as our clinical development efforts continue to grow. To date, our revenues have come principally from funded research and achievements of milestones under corporate collaborations. The nature and amount of these revenues from period to period may lead to substantial fluctuations in the results of year-to-year revenues and earnings. Accordingly, results and earnings of one period are not predictive of future periods. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1999, our cash, cash equivalents, and short-term investments totaled $91.1 million compared with $62.7 million at December 31, 1998. The increase in cash balances at December 31, 1999 resulted from the private placement of our common stock, which resulted in net cash proceeds of $39.3 million. Net cash used by operating activities during fiscal year 1999 was $10.3 million compared with $10.7 million in fiscal year 1998 and net cash provided of $11.0 million in fiscal year 1997. The decrease in cash used in operations during 1999 compared with 1998 resulted primarily from increased sponsored research and milestone revenues received under our collaborations during 1999. The increase in cash used during 1998 compared with 1997 resulted primarily from higher sponsored research and milestone revenues received under our collaborations during 1997, which included a $5.0 million lump sum payment from Eli Lilly, in addition to lower operating expenses. Net cash used by investing activities during fiscal year 1999 was $21.2 million compared with net cash provided of $4.7 million in fiscal year 1998 and net cash used of $7.2 million in fiscal year 1997. The fluctuations in cash used resulted primarily from the timing differences in the investment purchases, sales, maturities and the fluctuations in our portfolio mix between cash equivalents and short-term investment holdings. We expect similar fluctuations to continue in future periods. Capital equipment purchases are expected to be $2.4 million for the fiscal year 2000, of which $2.0 million will be financed through leasing arrangements. Net cash provided by financing activities during fiscal year 1999 was $41.0 million compared with $1.9 million and $659,000 during fiscal years 1998 and 1997, respectively. Cash provided during 1999 resulted from net proceeds received from the private sale of our common stock and exercise of employee stock options. Cash provided during 1998 resulted from capital lease financing of equipment purchases. Cash provided during 1997 resulted from the issuance of our common stock upon the exercises of stock options and warrants and proceeds received from a note payable used to finance the purchase of land. Page 3 In September 1999, we signed an amendment to our 1995 agreement with Janssen Pharmaceutica, N.V. The amendment provides for a new sponsored research period designed to identify new corticotropin-releasing factor receptor antagonists, which will be subject to the terms of the original agreement signed in 1995. The term of the amendment is from April 1999 through February 2001. Under the agreement, we will receive $5.0 million in sponsored research funding, up to $3.5 million in milestone achievements, $500,000 for research already conducted under this technology and reimbursement of all outside and third-party costs associated with the project. As of December 31, 1999, we have received $1.9 million in sponsored research and $500,000 payment for prior research. In March 1999, we entered into an agreement with Wyeth-Ayerst Laboratories, the pharmaceutical division of American Home Products, on the research, development and commercialization of compounds, which modulate excitatory amino acid transporters for the treatment of neurodegenerative and psychiatric diseases. The Wyeth-Ayerst agreement includes sharing proprietary technologies, funding for research, payments for milestones reached, plus royalties on sales from products resulting from the collaboration. Under the terms of the agreement, we expect to receive three to five years of funding for research and development as well as worldwide royalties on commercial sales of products that result from the collaboration. Wyeth-Ayerst will also provide us with access to chemical libraries for screening within the collaborative field. As of December 31, 1999, we have received $3.0 million in sponsored research payments and $3.0 million for the achievement of four milestones. During 1998, we expensed acquired in-process research and development of $4.9 million. These charges consisted of $4.2 million for the acquisition of Northwest NeuroLogic, through which we received licenses to the melanocortin receptor and excitatory amino acid transporters programs, and $710,000 for licenses to an insomnia and brain cancer compounds. We performed scientific due diligence related to the acquired projects and because they were based on narrow scientific hypothesis, we concluded that none of these programs had alternative future uses. The nature and efforts required to develop the acquired in-process research and development into commercially viable products include research to identify a clinical candidate, preclinical development, clinical testing, FDA approval and commercialization. This process may cost in excess of $100 million and can take as long as 10 years to complete. It is also important to note that if a clinical candidate is identified, the further development of that candidate can be halted or abandoned at any time due to a number of factors. These factors include, but are not limited to, funding constraints, safety or a change in market demand. Because of our limited financial resources, our strategy to develop some of our programs is to enter into collaborative agreements with major pharmaceutical companies. Through these collaborations, we could partially recover our research costs through contract research and milestone revenues. The collaborators would then be financially responsible for all clinical development and commercialization costs. In May 1998, when we acquired the in-process research and development programs from Northwest NeuroLogic, we estimated the costs to identify a clinical candidate and provide minimal research support during the clinical development stages for the melanocortin receptor program to be $15.4 million over an 8-year period. Costs to identify a clinical candidate and provide minimal research support during the clinical development stages of the excitatory amino acid transporters program were estimated at $22.4 million. Estimated revenues from the collaborative arrangements were anticipated to reduce our net costs. The clinical development and commercialization costs were to be completely funded by the collaborator. During fiscal year 2000, we anticipate that our gross costs for continued research on these programs will approximate $5 million. Our research efforts may not result in clinical candidates for either compound. We intend to collaborate on the melanocortin receptor technology. We would expect the collaborator to then be responsible for the clinical development, commercialization and funding. Our excitatory amino acid transporters program is currently under a collaborative agreement with Wyeth-Ayerst. Consequently, we cannot estimate the time or resources they will commit to the development of this program. Our insomnia and brain cancer compounds are both in the early stages of clinical testing. During 2000, we expect to spend approximately $20 million on additional clinical testing of the brain cancer and insomnia compounds. We expect the clinical testing of both compounds to continue for at least the next two years, but our efforts may not result Page 4 in commercially viable products. If our efforts were completely successful and we did not collaborate on these compounds, we estimate that each compound could cost an additional $50-$150 million and take up to five years to reach commercial viability. For each of our programs, we periodically assess the scientific progress and merits of the programs to determine if continued research and development is economically viable. Certain of our programs have been terminated due to the lack of scientific progress and lack of prospects for ultimate commercialization. Because of the uncertainties associated with research and development of these programs, we may not be successful in achieving commercialization. As such, the ultimate timeline and costs to commercialize a product cannot be accurately estimated. We believe that our existing capital resources, together with interest income and future payments due under our strategic alliances, will be sufficient to satisfy our current and projected funding requirements for at least the next 12 months. However, we cannot assure you that these capital resources and payments will be sufficient to conduct our research and development programs as planned. The amount and timing of expenditures will vary depending upon a number of factors, including progress of our research and development programs. We will require additional funding to continue our research and product development programs, to conduct preclinical studies and clinical trials, for operating expenses, to pursue regulatory approvals for our product candidates, for the costs involved in filing and prosecuting patent applications and enforcing or defending patent claims, if any, the cost of product in-licensing and any possible acquisitions, and we may require additional funding to establish manufacturing and marketing capabilities in the future. We may seek to access the public or private equity markets whenever conditions are favorable. We may also seek additional funding through strategic alliances and other financing mechanisms, potentially including off-balance sheet financing. We cannot assure you that adequate funding will be available on terms acceptable to us, if at all. If adequate funds are not available, we may be required to curtail significantly one or more of our research or development programs or obtain funds through arrangements with collaborators or others. This may require us to relinquish rights to certain of our technologies or product candidates. We expect to incur operating losses over the next several years as our research, development, preclinical studies and clinical trial activities increase. To the extent that we are unable to obtain third-party funding for such expenses, we expect that increased expenses will result in increased losses from operations. We cannot assure you that we will successfully develop our products under development or that our products, if successfully developed, will generate revenues sufficient to enable us to earn a profit. INTEREST RATE RISK We are exposed to interest rate risk on our short-term investments and on our long-term debt. The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we invest in highly liquid and high quality government and other debt securities. To minimize our exposure due to adverse shifts in interest rates, we invest in short-term securities with maturities of less than 44 months. If a 10% change in interest rates were to have occurred on December 31, 1999, this change would not have had a material effect on the fair value of our investment portfolio as of that date. Due to the short holding period of our investments, we have concluded that we do not have a material financial market risk exposure. Interest risk exposure on long-term debt relates to our note payable, which bears a floating interest rate of prime plus one quarter percent (8.75% at December 31, 1999 and 8.00% at December 31, 1998). At December 31, 1999 and 1998, the note balance was $461,000 and $610,000, respectively. This note is payable in equal monthly installments through January 2003. Based on the balance of our long-term debt, we have concluded that we do not have a material financial market risk exposure. Page 5 IMPACT OF YEAR 2000 Beginning in 1998, we conducted a program to address the impact of the Year 2000 on the processing of date sensitive information by our computer systems and software ("IT Systems"), embedded systems in our non-computer equipment ("Non-IT Systems") and relationships with certain third parties. Assessment, testing, and remediation of our critical systems were completed in mid-October 1999. Based on survey responses and Year 2000 website statements, we also assessed Year 2000 readiness of third parties with which we have significant relationships. Contingency plans were formulated for each of our critical systems and third-party relationships, which were deficient in compliance criteria. The total costs, both out-of-pocket and internal, of our Year 2000 program were estimated at $175,000 and were funded with available cash. There are no further costs anticipated. Other internal systems projects were not significantly deferred as a result of the Year 2000 readiness program, because much of the Year 2000 assessment and remediation efforts were integrated into our routine maintenance and upgrade programs. To date, there have been no material adverse effects caused by the January 1, 2000 date change on our IT and Non-IT Systems, third-party relationships, nor our results of operations. CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS Our business is subject to significant risks, including but not limited to, the risks inherent in our research and development activities, including the successful continuation of our strategic collaborations, the successful completion of clinical trials, the lengthy, expensive and uncertain process of seeking regulatory approvals, uncertainties associated both with the potential infringement of patents and other intellectual property rights of third parties, and with obtaining and enforcing our own patents and patent rights, uncertainties regarding government reforms and of product pricing and reimbursement levels, technological change and competition, manufacturing uncertainties and dependence on third parties. Even if our product candidates appear promising at an early stage of development, they may not reach the market for numerous reasons. Such reasons include the possibilities that the product will be ineffective or unsafe during clinical trials, will fail to receive necessary regulatory approvals, will be difficult to manufacture on a large scale, will be uneconomical to market or will be precluded from commercialization by proprietary rights of third parties. NEW ACCOUNTING PRONOUNCEMENTS In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." SAB 101 provides guidance in applying generally accepted accounting principles to revenue recognition in financial statements, including the recognition of nonrefundable up-front fees received in conjunction with a research and development arrangement. We are required to adopt this pronouncement effective in the fourth quarter of 2000. As required by the adoption, we reviewed all up-front payments, license fees and milestones received in the current and prior years. Up-front payments have been received for program cost reimbursements incurred during a negotiation period. License fees are received in exchange for a grant to use our proprietary technologies on an as-is basis, for the term of the collaborative agreement. Milestones are received for specific scientific achievements determined at the beginning of the collaboration. These achievements are remote and unpredictable at the onset of the collaboration and are based on the success of scientific efforts. Based on that review, we have determined that there were no up-front payments or license fees received during 1999 or in prior years, which will be subject to the adoption of SAB 101. We are continuing to review the impact of the adoption on milestones revenues. Currently, we believe that $3.0 million in milestones payments received from Wyeth-Ayerst during 1999 may be subject to the accounting provisions of SAB 101. All other fees received relate to agreements under which the scientific milestones have been achieved and the research portion of the collaboration has been completed, or the agreements have been terminated entirely. Page 6 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Quantitative and Qualitative Disclosures about Market Risk is contained in Item 7, Management Discussion and Analysis--Interest Rate Risk. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See the list of the Company's Financial Statements filed with this Form 10-K under Item 14 below. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this report 1. List of Financial Statements. The following financial statements of Neurocrine Biosciences, Inc. and Report of Ernst & Young LLP, Independent Auditors, are included in this report: Report of Ernst & Young LLP, Independent Auditors Consolidated Balance Sheet as of December 31, 1999 and 1998 Consolidated Statement of Operations for the years ended December 31, 1999, 1998 and 1997 Consolidated Statement of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997 Consolidated Statement of Cash Flows for the years ended December 31, 1999, 1998 and 1997 Notes to the Consolidated Financial Statements 2. List of all Financial Statement schedules. All schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or notes thereto. 3. List of Exhibits required by Item 601 of Regulation S-K. See part (c) below. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended December 31, 1999. (c ) Exhibits. The following exhibits are filed as part of, or incorporated by reference into, this report: Exhibit Number Description -------------------------------------------------------------------------------- 2.1 Agreement and Plan of Reorganization dated May 1, 1998, between Northwest NeuroLogic, Inc., NBI Acquisition Corporation and the Registrant (7) 2.2 Form of Warrant pursuant to the Agreement and Plan of Reorganization dated May 1, 1998 (7) 3.1 Restated Certificate of Incorporation (1) 3.2 Bylaws (1) Page 7 Exhibit Number Description -------------------------------------------------------------------------------- 3.3 Certificate of Amendment of Bylaws (1) 4.1 Form of Common Stock Certificate (1) 4.2 Form of warrant issued to existing warrant holders (1) 4.3** Information and Registration Rights Agreement dated September 15, 1992, as amended 4.4 Form of Series A warrant issued in connection with the execution by the Registrant of the Unit Purchase Agreement (see below) (1) 4.5** New Registration Rights Agreement dated March 29, 1996 among the Registrant and the investors signatory thereto 4.6 Letter of Intent between Northwest NeuroLogic, Inc. and the Registrant dated February 27, 1998 (6) 4.7* Registration Rights Agreement dated May 28, 1998, between certain investors and the Registrant (7) 4.8 Amended and Restated Rights Agreement by and between the Registrant and American Stock Transfer & Trust Company, as Rights Agent, dated as of July 19, 1999 (9) 4.9 Stock Purchase Agreement dated December 20 through 23, 1999, between Neurocrine Biosciences, Inc. and each of the Purchasers named therein (11) 10.1 Purchase and Sale Agreement and Escrow Instructions between MS Vickers II, LLC and the Registrant dated February 13, 1997 (3) 10.2 1992 Incentive Stock Plan, as amended (10) 10.3 1996 Employee Stock Purchase Plan (1) 10.4 1996 Director Stock Option Plan and form of stock option agreement (1) 10.5 Form of Director and Officer Indemnification Agreement (1) 10.6 Employment Agreement dated March 1, 1997, between the Registrant and Gary A. Lyons, as amended (4) 10.7 Employment Agreement dated March 1, 1997, between the Registrant and Errol B. De Souza, as amended (4) 10.8 Employment Agreement dated March 1, 1997, between the Registrant and Paul W. Hawran (4) 10.9 Employment Agreement dated March 1, 1997, between the Registrant and Stephen Marcus, MD (4) 10.10 Consulting Agreement dated September 25, 1992, between the Registrant and Wylie A. Vale, Ph.D. (1) 10.11 Consulting Agreement effective January 1, 1992, between the Registrant and Lawrence J. Steinman, MD (1) 10.12 Lease Agreement dated June 1, 1993, between the Registrant and Hartford Accident and Indemnity Company, as amended (1) 10.13 Exclusive License Agreement dated as of July 1, 1993, by and between the Beckman Research Institute of the City of Hope and the Registrant covering the treatment of nervous system degeneration and Alzheimer's disease (1) 10.14 Exclusive License Agreement dated as of July 1, 1993, by and between the Beckman Research Institute of the City of Hope and the Registrant covering the use of Pregnenolone for the enhancement of memory (1) 10.15 License Agreement dated May 20, 1992, by and between The Salk Institute for Biological Studies and the Registrant (1) 10.16 License Agreement dated July 17, 1992, by and between The Salk Institute for Biological Studies and the Registrant (1) 10.17 License Agreement dated November 16, 1993, by and between The Salk Institute for Biological Studies and the Registrant (1) 10.18 License Agreement dated October 19, 1992, by and between the Board of Trustees of the Leland Stanford Junior University and the Registrant (1) 10.19 Agreement dated January 1, 1995, by and between the Registrant and Janssen Pharmaceutica, N.V. (1) 10.20 Letter Agreement dated January 19, 1996, by and between the Registrant and Ciba-Geigy Limited (1) 10.21* Unit Purchase Agreement dated March 29, 1996, by and between Neuroscience Pharma, Inc. the Registrant and the investors signatory thereto (1) Page 8 Exhibit Number Description -------------------------------------------------------------------------------- 10.22* Exchange Agreement dated March 29, 1996, by and between Neurocrine Biosciences (Canada), Inc., the Registrant and the investors signatory thereto (1) 10.23* Research and Development Agreement dated March 29, 1996, by and between Neurocrine Biosciences (Canada), Inc. and Nueorscience Pharma, Inc. (1) 10.24* Intellectual Property and License Grants Agreement dated March 29, 1996, by and between the Registrant and Neurocrine Biosciences (Canada), Inc. (1) 10.25* Development and Commercialization Agreement dated December 20, 1996, by and between Ciba-Geigy Ltd. and the Registrant (2) 10.26* Letter and Purchase Order dated June 7, 1996, by and between Ciba-Geigy and the Registrant (2) 10.27 Third Lease Amendment dated June 6, 1996, by and between Talcott Realty I Limited Partnership and the Registrant (2) 10.28* Research and License Agreement dated October 15, 1996, between the Registrant and Eli Lilly and Company (2) 10.29* Lease between Science Park Center LLC and the Registrant dated July 31, 1997 (5) 10.30* Option Agreement between Science Park Center LLC (Optionor) and the Registrant dated July 31, 1997 (Optionee) (5) 10.31* Construction Loan Agreement Science Park Center LLC and the Registrant dated July 31, 1997 (5) 10.32 Secured Promissory Note Science Park Center LLC and the Registrant dated July 31, 1997 (5) 10.33* Operating Agreement for Science Park Center LLC between Nexus Properties, Inc. and the Registrant dated July 31, 1997 (5) 10.34 Form of incentive stock option agreement and nonstatutory stock option agreement for use in connection with 1992 Incentive Stock Plan (1) 10.35* Patent License Agreement dated May 7, 1998, between the US Public Health Service and the Registrant (7) 10.36* Patent License Agreement dated April 28, 1998, between and among Ira Pastan, David Fitzgerald and the Registrant (7) 10.37* Sub-License and Development Agreement dated June 30, 1998, by and between DOV Pharmaceutical, Inc. and the Registrant (7) 10.38* Warrant Agreement dated June 30, 1998, between DOV Pharmaceutical, Inc. and the Registrant (7) 10.39* Warrant Agreement dated June 30, 1998, between Jeff Margolis and the Registrant (7) 10.40* Warrant Agreement dated June 30, 1998, between Stephen Ross and the Registrant (7) 10.41* Collaboration and License Agreement dated January 1, 1999, by and between American Home Products Corporation acting through its Wyeth-Ayerst Laboratories Division and the Registrant (8) 10.42* Employment Agreement dated January 1, 1999, between the Registrant and Margaret Valeur-Jensen (8) 10.43* Employment Agreement dated February 9, 1998, between the Registrant and Bruce Campbell (8) 10.44 Amended 1992 Incentive Stock Plan, as amended May 27, 1997, May 27, 1998 and May 21, 1999 (8) 10.45* Agreement by and among Dupont Pharmaceuticals Company, Janssen Pharmaceutica, N.V. and Neurocrine Biosciences, Inc. dated September 28, 1999 (10) 10.46* Amendment Number One to the Agreement between Neurocrine Biosciences, Inc. and Janssen Pharmaceutica, N.V. dated September 24, 1999 (10) 21+ Subsidiaries of the Company 23** Consent of Ernst & Young LLP, Independent Auditors 24+ Power of Attorney 27+ Financial Data Schedule -------------------------------------------------------------------------------- (1) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-03172) (2) Incorporated by reference to the Company's Report on Form 10-K for the fiscal year ended December 31, 1996 (3) Incorporated by reference to the Company's amended Quarterly Report on Form 10-Q filed on August 15, 1997 (4) Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed on August 14, 1997 Page 9 Exhibit Number Description -------------------------------------------------------------------------------- (5) Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed on November 14, 1997 (6) Incorporated by reference to the Company's Report on Form 8-K filed on March 13, 1998 (7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed on November 16, 1998 (8) Incorporated by reference to the Company's Report on Form 10-K for the fiscal year ended December 31, 1998 (9) Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed on August 11, 1999 (10) Incorporated by reference to the Company's Quarterly Report on Form 10-Q filed on November 12, 1999 (11) Incorporated by reference to the Company's Report on Form S-3 filed on January 20, 2000 * Confidential treatment has been granted with respect to certain portions of the exhibit ** Filed herewith + Previously filed (d) Financial Statement Schedules. See Item 14 (a)(2) above. Page 10 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NEUROCRINE BIOSCIENCES, INC. A Delaware Corporation By: /s/ Gary A. Lyons ------------------ Gary A. Lyons President and Chief Executive Officer Date: November 30, 2000 Page 11 NEUROCRINE BIOSCIENCES, INC. INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Report of Ernst & Young LLP, Independent Auditors F-2 Consolidated Balance Sheet F-3 Consolidated Statement of Operations F-4 Consolidated Statement of Stockholders' Equity F-5 Consolidated Statement of Cash Flows F-6 Notes to the Consolidated Financial Statements F-7
Page F-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Neurocrine Biosciences, Inc. We have audited the accompanying consolidated balance sheet of Neurocrine Biosciences, Inc. as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Neurocrine Biosciences, Inc. at December 31, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP --------------------- ERNST & YOUNG LLP San Diego, California January 27, 2000 Page F-2 NEUROCRINE BIOSCIENCES, INC. Consolidated Balance Sheet (in thousands)
December 31, --------------------------------------- 1999 1998 ----------------- -------------- ASSETS Current assets: Cash and cash equivalents $ 21,265 $ 11,708 Short-term investments, available-for-sale 69,833 50,962 Receivables under collaborative agreements 1,458 863 Receivables from related parties - 544 Other current assets 2,257 1,556 ---------------- -------------- Total current assets 94,813 65,633 Property and equipment, net 11,181 10,899 Licensed technology and patent applications costs, net 615 967 Other assets 2,613 3,030 ---------------- -------------- Total assets $ 109,222 $ 80,529 ================ ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,447 $ 2,481 Accrued liabilities 5,069 2,077 Deferred revenues 155 169 Current portion of long-term debt 149 149 Current portion of capital lease obligations 825 693 ---------------- -------------- Total current liabilities 8,645 5,569 Long-term debt, net of current portion 312 461 Capital lease obligations, net of current portion 1,827 1,786 Deferred rent 1,005 257 Other liabilities 1,079 498 ---------------- -------------- Total liabilities 12,868 8,571 Commitments and contingencies (See Note 6) - - Stockholders' equity: Preferred Stock, $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding - - Common Stock, $0.001 par value; 100,000,000 shares authorized; issued and outstanding shares were 21,608,011 in 1999 and 18,930,865 in 1998 22 19 Additional paid in capital 138,798 97,064 Deferred compensation (411) (187) Stockholder notes (119) (119) Accumulated other comprehensive (loss) income (264) 31 Accumulated deficit (41,672) (24,850) ---------------- -------------- Total stockholders' equity 96,354 71,958 ---------------- -------------- Total liabilities and stockholders' equity $ 109,222 $ 80,529 ================ ==============
See accompanying notes. Page F-3 NEUROCRINE BIOSCIENCES, INC. Consolidated Statement of Operations (in thousands)
Year-ended December 31, -------------------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Revenues: Sponsored research and development $ 12,171 $ 8,751 $ 14,985 Sponsored research and development from related party 491 3,610 - Milestones and license fees 3,000 2,500 10,250 Grant income and other revenues 1,129 1,176 909 ----------- ----------- ----------- Total revenues 16,791 16,037 26,144 Operating expenses: Research and development 29,169 21,803 18,758 General and administrative 7,476 6,594 5,664 Write-off of acquired in-process research and development and licenses - 4,910 - ----------- ----------- ----------- Total operating expenses 36,645 33,307 24,422 Income (loss) from operations (19,854) (17,270) 1,722 Other income and expenses: Interest income 3,082 4,151 4,084 Interest expense (231) (151) (153) Equity in NPI losses and other adjustments, net (885) (7,188) (1,130) Other income 1,066 504 818 ----------- ----------- ----------- Income (loss) before taxes (16,822) (19,954) 5,341 Income taxes - 1 214 ----------- ----------- ----------- Net income (loss) $ (16,822) $ (19,955) $ 5,127 =========== =========== =========== Earnings (loss) per common share: Basic $ (0.88) $ (1.10) $ 0.30 Diluted $ (0.88) $ (1.10) $ 0.28 Shares used in the calculation of earnings (loss) per common share: Basic 19,072 18,141 16,930 Diluted 19,072 18,141 18,184
See accompanying notes. Page F-4 NEUROCRINE BIOSCIENCES, INC. Consolidated Statement of Stockholders' Equity (in thousands)
Notes Additional Receivable Common Stock Paid In Unearned from --------------------- Shares Amount Capital Compensation Stockholders ---------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 16,777 $ 17 $ 83,234 $ (376) $ (128) Net income - - - - - Unrealized loss on short-term investments - - - - - Comprehensive income - - - - - Issuance of common stock for warrants 182 - 59 - - Issuance of common stock for option exercises 106 - 453 - - Issuance of common stock pursuant to the Employee Stock Purchase Plan 22 - 175 - - Issuance of common stock in exchange for NPI Preferred Stock 600 1 4,473 - - Payments received on stockholder notes - - - - 8 Deferred compensation and related amortization, net - - 192 (63) - --------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 17,687 18 88,586 (439) (120) Net loss - - - - - Unrealized gain on short-term investments - - - - - Comprehensive loss - - - - - Issuance of common stock for warrants 60 - 142 - - Issuance of common stock for option exercises 81 - 286 - - Issuance of common stock pursuant to the Employee Stock Purchase Plan 30 - 205 - - Issuance of common stock in exchange for NPI Preferred Stock 679 1 3,854 - - Issuance of common stock for NNL Acquisition 392 - 4,032 - - Issuance of common stock for milestone achievement 2 - 17 - - Payments received on stockholder notes - - - - 1 Amortization of deferred compensation, net - - (58) 252 - --------------------------------------------------------------- BALANCE AT DECEMBER 31, 1998 18,931 19 97,064 (187) (119) Net loss - - - - - Unrealized gain on short-term investments - - - - - Comprehensive loss - - - - - Issuance of common stock for option exercises 307 - 1,507 - - Issuance of common stock pursuant to the Employee Stock Purchase Plan 42 - 213 - - Issuance of common stock, net of offering costs 2,328 3 39,293 - Amortization of deferred compensation, net - - 721 (224) - --------------------------------------------------------------- BALANCE AT DECEMBER 31, 1999 21,608 $ 22 $ 138,798 $ (411) $ (119) =============================================================== Accumulated Other Total Comprehensive Accumulated Stockholders' Income (Loss) Deficit Equity ------------------------------------------- BALANCE AT DECEMBER 31, 1996 $ 42 $ (10,022) $ 72,767 Net income - 5,127 5,127 Unrealized loss on short-term investments (40) - (40) ---------- Comprehensive income - - 5,087 Issuance of common stock for warrants - - 59 Issuance of common stock for option exercises - - 453 Issuance of common stock pursuant to the Employee Stock Purchase Plan - - 175 Issuance of common stock in exchange for NPI Preferred Stock - - 4,474 Payments received on stockholder notes - - 8 Deferred compensation and related amortization, net - - 129 ------------------------------------------- BALANCE AT DECEMBER 31, 1997 2 (4,895) 83,152 Net loss - (19,955) (19,955) Unrealized gain on short-term investments 29 - 29 ---------- Comprehensive loss - - (19,926) Issuance of common stock for warrants - - 142 Issuance of common stock for option exercises - - 286 Issuance of common stock pursuant to the Employee Stock Purchase Plan - - 205 Issuance of common stock in exchange for NPI Preferred Stock - - 3,855 Issuance of common stock for NNL Acquisition - - 4,032 Issuance of common stock for milestone achievement - - 17 Payments received on stockholder notes - - 1 Amortization of deferred compensation, net - - 94 ------------------------------------------- BALANCE AT DECEMBER 31, 1998 31 (24,850) 71,958 Net loss - (16,822) (16,822) Unrealized gain on short-term investments (295) - (295) ---------- Comprehensive loss - - (17,117) Issuance of common stock for option exercises - - 1,507 Issuance of common stock pursuant to the Employee Stock Purchase Plan - - 213 Issuance of common stock, net of offering costs 39,296 Amortization of deferred compensation, net - - 497 ------------------------------------------- BALANCE AT DECEMBER 31, 1999 $ (264) $ (41,672) $ 96,354 ===========================================
Page F-5 See accompanying notes. Page F-6 NEUROCRINE BIOSCIENCES, INC. Consolidated Statement of Cash Flows (in thousands)
Twelve Months Ended December 31, ---------------------------------------------------- 1999 1998 1997 -------------- ------------- ---------------- CASH FLOW FROM OPERATING ACTIVITIES Net (loss) income $ (16,822) $ (19,955) $ 5,127 Adjustments to reconcile net income (loss) to net cash Provided by (used in) operating activities: Acquisition of Northwest NeuroLogic for Common Stock - 4,200 - Equity in NPI losses and other adjustments, net 885 7,188 1,130 Depreciation and amortization 2,066 1,720 1,322 Loss on abandonment of assets 133 460 76 Gain on sale of equipment - (15) - Deferred revenues (14) (1,750) 1,000 Deferred rent 748 (402) 384 Compensation expenses recognized for stock options 497 194 129 Change in operating assets and liabilities, net of acquired business: Accounts receivable and other current assets (752) (2,898) 885 Other non-current assets (357) 291 (1,274) Accounts payable and accrued liabilities 3,360 271 2,213 -------------- ------------- ---------------- Net cash flows (used in) provided by operating activities (10,256) (10,696) 10,992 CASH FLOW FROM INVESTING ACTIVITIES Purchases of short-term investments (87,728) (41,618) (113,080) Sales/maturities of short-term investments 68,562 50,006 112,315 Purchases of property and equipment, net (2,061) (3,683) (6,440) -------------- ------------- ---------------- Net cash flows (used in) provided by investing activities (21,227) 4,705 (7,205) CASH FLOW FROM FINANCING ACTIVITIES Issuance of Common Stock 41,016 433 687 Proceeds received from long-term obligations 981 2,500 747 Principal payments on long-term obligations (957) (1,006) (783) Payments received on notes receivable from stockholders - 1 8 -------------- ------------- ---------------- Net cash flows provided by financing activities 41,040 1,928 659 -------------- ------------- ---------------- Net increase (decrease) in cash and cash equivalents 9,557 (4,063) 4,446 Cash and cash equivalents at beginning of the period 11,708 15,771 11,325 -------------- ------------- ---------------- Cash and cash equivalents at end of the period $ 21,265 $ 11,708 $ 15,771 ============== ============= ================ SUPPLEMENTAL DISCLOSURES Supplemental disclosures of cash flow information: Interest paid $ 231 $ 150 $ 153 Taxes paid - 1 250 Schedule of noncash investing and financing activities: Conversion of note receivable to investment in NPI $ - $ 1,401 - Conversion of NPI Preferred Stock to investment in NPI - 3,855 4,474
See accompanying notes. Page F-7 NEUROCRINE BIOSCIENCES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Activities. Neurocrine Biosciences, Inc. (the "Company") was incorporated in California on January 17, 1992 and was reincorporated in Delaware in March 1996. The Company is a neuroscience-based company focused on the discovery and development of novel therapeutics for neuropsychiatric, neuroinflammatory and neurodegenerative diseases and disorders. The Company's neuroscience, endocrine and immunology disciplines provide a unique biological understanding of the molecular interaction between central nervous, immune and endocrine systems for the development of therapeutic interventions for anxiety, depression, insomnia, stroke, malignant brain tumors, multiple sclerosis, obesity and diabetes. Principles of Consolidation. The consolidated financial statements include the accounts of Neurocrine Biosciences, Inc. (the "Company") and its wholly owned subsidiary, Northwest NeuroLogic, Inc. ("NNL"). Significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. Cash Equivalents. The Company considers all highly liquid investments with a maturity of three months or less when purchased, to be cash equivalents. Short-Term Investments Available-for-Sale. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Debt and Equity Securities," short-term investments are classified as available-for- sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in comprehensive income. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in investment income. Realized gains and losses and declines in value judged to be other-than- temporary, if any, on available-for-sale securities are included in investment income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income. The Company invests its excess cash primarily in investment grade debt instruments, marketable debt securities of U.S. government agencies, and high- grade commercial paper. Management has established guidelines relative to diversification and maturities that maintain safety and liquidity. Property and Equipment. Property and equipment are carried at cost. Depreciation and amortization are provided over the estimated useful lives of the assets, ranging from three to ten years, using the straight-line method. Licensed Technology and Patent Application Costs. Licensed technology consists of worldwide licenses to patents related to the Company's platform technology which are capitalized at cost and amortized over periods of 7 to 11 years. These costs are regularly reviewed to determine that they include costs for patent applications the Company is pursuing. Costs related to applications that are not being actively pursued are evaluated under Accounting Principles Board Statement 17 "Intangible Assets" and are adjusted to an appropriate amortization period which generally results in immediate write-off. Assets written-off during 1999 had a net book value of $133,000. Accumulated amortization at December 31, 1999 and 1998 was $685,000 and $679,000, respectively. Impairment of long-lived assets. In accordance with SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", if indicators of impairment exist, the Company assesses the recoverability of the affected long-lived assets by determining whether the carrying value of such assets can be recovered through undiscounted future operating cash flows. If impairment is indicated, the Company measures the amount of such impairment by comparing the carrying value of the asset to the present value of the expected future cash flows associated with the use of the asset. While the Company's current and historical operating and cash flow Page F-8 NEUROCRINE BIOSCIENCES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 losses are indicators of impairment, the Company believes the future cash flows to be received from the long-lived assets will exceed the assets carrying value, and accordingly the Company has not recognized any impairment losses through December 31, 1999. Industry Segment and Geographic Information. The Company operates in a single industry segment - the discovery and development of therapeutics for the treatment of diseases and disorders of the central, nervous and immune systems. The Company has no foreign operations. Research and Development Revenue and Expenses. Revenues under collaborative research agreements and grants are recognized as research costs are incurred over the period specified in the related agreement or as the services are performed. These agreements are on a best-efforts basis and do not require scientific achievement as a performance obligation and provide for payment to be made when costs are incurred or the services are performed. All fees are nonrefundable to the collaborators. Up-front, nonrefundable payments for license fees are recognized as revenues upon receipt. These licenses grant the use of the Company's proprietary technology on an as-is basis for the term of the collaborative agreement. They do not require the Company to expend additional efforts or provide financial support. Advance payments for sponsored research revenues received in excess of amounts earned are classified as deferred revenue and recognized as income in the period earned. Milestone payments are recognized as revenue upon achievement of pre-defined scientific events. Revenues from government grants are recognized based on a percentage-of-completion basis as the related costs are incurred. The Company recognizes revenue only on payments that are nonrefundable and when the work is performed. Research and development costs are expensed as incurred. Such costs include proprietary research and development activities and expenses associated with collaborative research agreements. Research and development expenses relating to collaborative agreements and grants were approximately $7.2 million, $12.0 million and $9.4 million during 1999, 1998 and 1997, respectively. Stock-Based Compensation. As permitted by SFAS 123, "Accounting for Stock- Based Compensation", the Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for stock-based employee compensation. Deferred compensation is recorded for employee options only in the event that the fair market value of the stock on the date of the option grant exceeds the exercise price of the options. The deferred compensation is amortized over the vesting period of the options. Deferred charges for options granted to non-employees has been determined in accordance with SFAS 123 and EITF 96-18 as the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. Deferred charges for options granted to non-employees are periodically remeasured as the underlying options vest and are included in deferred compensation in the financial statements. Earnings Per Share. Basic and diluted earnings per share are calculated in accordance with SFAS 128, "Earnings per Share". All earnings per share amounts for all periods have been presented, and where appropriate, were restated to conform to the requirements of SFAS 128. Comprehensive Income. Comprehensive income is calculated in accordance with SFAS 130, "Comprehensive Income". The Statement requires the disclosure of all components of comprehensive income, including net income and changes in equity during a period from transactions and other events and circumstances generated from non-owner sources. The Company's other comprehensive income consisted of gains and losses on short-term investments and is reported in the consolidated statement of stockholders' equity. Reclassifications. Certain reclassifications have been made to prior year amounts to conform to the presentation for the year ended December 31, 1999. Impact of Recently Issued Accounting Standards. In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." SAB 101 provides guidance in applying generally Page F-9 NEUROCRINE BIOSCIENCES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 accepted accounting principles to revenue recognition in financial statements, including the recognition of nonrefundable up-front fees received in conjunction with a research and development arrangement. We are required to adopt this pronouncement effective in the fourth quarter of 2000. As required by the adoption, we reviewed all up-front payments, license fees and milestones received in the current and prior years. Up-front payments have been received for program cost reimbursements incurred during a negotiation period. License fees are received in exchange for a grant to use our proprietary technologies on an as-is basis, for the term of the collaborative agreement. Milestones are received for specific scientific achievements determined at the beginning of the collaboration. These achievements are remote and unpredictable at the onset of the collaboration and are based on the success of scientific efforts. Based on that review, we have determined that there were no up-front payments or license fees received during 1999 or in prior years, which will be subject to the adoption of SAB 101. We are continuing to review the impact of the adoption on milestones revenues. Currently, we believe that $3.0 million in milestones payments received from Wyeth-Ayerst during 1999 may be subject to the accounting provisions of SAB 101. All other fees received relate to agreements under which the scientific milestones have been achieved and the research portion of the collaboration has been completed, or the agreements have been terminated entirely. In June 1998, the Financial Accounting Standards Board issued SFAS 133,"Accounting for Derivative Instruments and Hedging Activities". The Company expects to adopt the new Statement effective January 1, 2001. This statement requires the recognition of all derivative instruments as either assets or liabilities in the statement of financial position and the measurement of those instruments at fair value. The Company does not expect the adoption of this statement to have a material impact on its results of operations or financial position. Note 2. Short-Term Investments The following is a summary of short-term investments classified as available-for-sale securities (in thousands):
--------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------------------------------------------------------- December 31, 1999 US Government securities $ 1,997 $ - $ (24) $ 1,973 Corporate debt securities 68,100 7 (247) 67,860 -------- ------ --------- -------- Total securities $ 70,097 $ 7 $ (271) $ 69,833 ======== ====== ========= ======== December 31, 1998 US Government securities $ 6,000 $ 17 $ - $ 6,017 Certificates of deposit 260 - - 260 Commercial paper 5,420 - - 5,420 Corporate debt securities 39,141 61 (87) 39,115 Other 110 40 - 150 -------- ------ --------- -------- Total securities $ 50,931 $ 118 $ (87) $ 50,962 ======== ====== ========= ========
Gross realized gains and losses were not material for any of the reported periods. The amortized cost and estimated fair value of debt securities by contractual maturity at December 31, 1999, are shown below (in thousands). Page F-10 NEUROCRINE BIOSCIENCES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 Amortized Estimated Cost Fair Value ---------- ---------- Due in one year or less $ 2,004 $ 2,000 Due after one year through four years 68,093 67,833 ---------- ---------- $ 70,097 $ 69,833 ========== ========== Page F-11 NEUROCRINE BIOSCIENCES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 Note 3. PROPERTY AND EQUIPMENT Property and equipment at December 31, 1999 and 1998, consist of the following (in thousands): 1999 1998 ---- ---- Land $ 5,299 $ 5,299 Furniture and fixtures 1,982 1,856 Equipment 9,046 7,356 Leasehold improvements 875 562 -------- -------- 17,202 15,073 Less accumulated depreciation and amortization (6,021) (4,174) -------- -------- Net property and equipment $ 11,181 $ 10,899 ======== ======== Furniture and equipment under capital leases were $6.7 million and $5.8 million at December 31, 1999 and 1998, respectively. Accumulated depreciation of furniture and equipment under capital leases totaled $4.0 million and $3.1 million at December 31, 1999 and 1998, respectively. In 1999, the Company entered into $981,000 of additional capital leases. Similar transactions in 1998 totaled $2.5 million. Note 4. ACCRUED LIABILITIES Accrued liabilities at December 31, 1999 and 1998 consist of the following (in thousands): 1999 1998 ---- ---- Accrued employee benefits $ 1,331 $ 1,120 Accrued professional fees 270 438 Accrued offering expenses 1,222 - Accrued development costs 1,828 333 Taxes payable 27 15 Other accrued liabilities 391 171 -------- -------- $ 5,069 $ 2,077 ======== ======== Note 5. LONG-TERM DEBT During 1997, the Company partially financed the purchase of land under a 5 year note payable for approximately $747,000, which bears interest at a floating rate of prime plus one quarter percent (8.75% and 8.00% at December 31, 1999 and 1998, respectively). The note is repayable in equal monthly installments beginning February 1998. At December 31, 1999, the balance of the note was $ 461,000. The repayment schedule for the note is $149,000 for each year 2000 through 2002 and $13,000 in the year 2003. Note 6. COMMITMENTS AND CONTINGENCIES Capital Lease Obligations. The Company has financed certain equipment under capital lease obligations, which expire on various dates through the year 2004 and bear interest at rates between 7.6% and 10.1%. The lease commitments are repayable in monthly installments. Operating Leases. In May 1997, the Company purchased two adjacent parcels of land in San Diego for $5.0 million. In August 1997, the Company sold one parcel to Science Park Center LLC, a California limited liability Page F-12 NEUROCRINE BIOSCIENCES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 company (the "LLC"), of which the Company owns a nominal minority interest, in exchange for a note receivable in the amount of $3.5 million plus interest of 8.25%. However, for accounting purposes, this transaction does not qualify as a sale under SFAS No. 98 and therefore, the entire amount of the note receivable is included in land. The amount included in land at December 31, 1999 and 1998 was $3.8 million. During 1998, the LLC constructed an expanded laboratory and office complex which was leased by the Company under a 15 year operating lease, commencing September 1998. The Company has the option to purchase the facility at any time during the term of the lease at a predetermined price. The lease contains a 4% per year escalation in base rent fees, effective with each anniversary. In November 1998, the Company subleased a portion of this facility to an unrelated third party through August 2000. The Company will hold the second parcel of land until such time as additional facilities are required. In November 1998, the lease obligation relating to the Company's former operating facility was amended to reduce the amount of square footage leased and to shorten the lease term to conclude in June 2000. The Company currently subleases this space to an unrelated third party and is obligated to continue this arrangement through June 2000. Repayment schedules for the capital lease obligations and operating lease commitments at December 31, 1999 are as follows (in thousands): Capital Operating Fiscal Year: Leases Leases ------------ ----------- ----------- 2000 $ 996 $ 2,731 2001 1,163 2,525 2002 573 2,626 2003 173 2,731 2004 66 2,841 Thereafter - 29,880 -------- --------- Total minimum payments $ 2,971 $ 43,334 ========= Less: amounts representing interest (319) -------- Future minimum payments 2,652 Less: current portion (825) -------- Future payments on capital lease obligations $ 1,827 ======== Rent expense was $2.7 million, $2.4 million and $2.1million for the years ended December 31, 1999, 1998 and 1997, respectively. Sublease income was $1.2 million, $837,000 and $917,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Future minimum sublease income to be received under non-cancelable subleases at December 31, 1999 will be $657,000 for the year ending December 31, 2000. Licensing and Research Agreements. The Company has entered into licensing agreements with various universities and research organizations, which are cancelable at the option of the Company with 30 days written notice. Under the terms of these agreements, the Company has received licenses to technology, or technology claimed, in certain patents or patent applications. The Company is required to pay royalties on future sales of products employing the technology or falling under claims of a patent, and certain agreements require minimum royalty payments. Certain agreements also require the Company to make payments upon the achievement of specified milestones. Due to the uncertainty of the pharmaceutical development process, the Company continually reassesses the value of the license agreements and cancels them as research efforts are discontinued on these programs. Page F-13 NEUROCRINE BIOSCIENCES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 Note 7. Stockholders' Equity Common Stock Issuances. From inception through 1996, the Company has issued Common Stock in various private and public offerings, as well as to corporate collaborators, at prices between $5.00 and $10.50 per share resulting in aggregate net proceeds of approximately $72.1 million. In December 1999, the Company sold 2.3 million shares of Common Stock in a private placement at $18.00 per share. The offering resulted in net proceeds of $39.3 million. Options. The Company has authorized 5.6 million shares of its Common Stock for issuance upon exercise of options or stock purchase rights granted under the 1992 Incentive Stock Option Plan, 1996 Director Option Plan and the 1997 NNL Stock Option Plan (collectively "the Plan"). These plans provide for the grant of stock options and stock purchase rights to officers, directors, and employees of, and consultants and advisors to, the Company. Options under these plans have terms of up to 10 years from the date of grant and may be designated as incentive stock options or nonstatutory stock options under the Plan. A summary of the Company's stock option activity, and related information for the years ended December 31 follows:
1999 1998 1997 ---------------------------------------------------------------------------------------------- Weighted Weighted Weighted Options Average Options Average Options Average (in thousands) Exercise Price (in thousands) Exercise Price (in thousands) Exercise Price ---------------------------------------------------------------------------------------------- Outstanding at January 1, 2,793 $6.02 2,653 $5.84 1,739 $4.48 Granted 1,142 $6.03 677 $6.26 1,072 $7.86 Exercised (412) $4.79 (81) $3.64 (100) $4.10 Canceled (365) $6.52 (456) $5.76 (58) $5.88 ---------------------------------------------------------------------------------------------- Outstanding at December 31, 3,158 $5.91 2,793 $6.02 2,653 $5.85 ==============================================================================================
A summary of options outstanding as of December 31, 1999 follows:
Options Outstanding Options Exercisable --------------------------------------------------------------------------------------------------------------------- Weighted Average Outstanding Remaining Weighted Exercisable Weighted Range of as of Contractual Average As of Average Exercise Prices 12/31/99 Life Exercise Price 12/31/99 Exercise Price --------------------------------------------------------------------------------------------------------------------- $0.02 to $2.50 478 4.3 $2.29 425 $2.42 $4.03 to $4.25 459 5.6 $4.24 406 $4.25 $4.66 to $5.25 501 8.7 $4.99 119 $5.01 $5.27 to $6.50 410 8.8 $5.79 97 $5.97 $6.56 to $7.37 509 7.7 $7.16 271 $7.25 $7.50 to $8.25 361 7.2 $7.95 219 $8.00 $8.31 to $20.50 440 7.4 $9.66 251 $9.04 --------------------------------------------------------------------------------------------------- 3,158 7.1 $5.91 1,788 $5.54
The weighted average fair values of the options granted during 1999, 1998 and 1997 were $3.75, $5.59 and $5.01, respectively. Page F-14 NEUROCRINE BIOSCIENCES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 Pro forma information regarding net income (loss) is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model using the following weighted-average assumptions for 1999, 1998 and 1997, respectively: risk-free interest rates of 6.4%, 5.5% and 5.8%; a dividend yield of 0.0% (for all years), volatility factors of the expected market price of the Company's common stock of .74, .88 and .43; and a weighted average expected life of the option of 5 years (for all years presented). For purposes of pro forma disclosures, the estimated fair value of the options granted is amortized to expense over the options' vesting period. The pro forma effect on net losses for 1999 and 1998 and net income in 1997, is not likely to be representative of the effects on reported income or loss in future years because these amounts reflect less than full vesting for options granted during these periods. The Company's pro forma information for the years ended December 31, 1999, 1998 and 1997 follows (in thousands, except for per share data):
1999 1998 1997 --------------------------------------- Net income (loss) as reported $(16,822) $(19,955) $5,127 Earnings (loss) per share (diluted) $ (0.88) $ (1.10) $ 0.28 Pro forma net income (loss) $(18,303) $(20,758) $4,364 Pro forma earnings (loss) per share (diluted) $ (0.96) $ (1.14) $ 0.24
Employee Stock Purchase Plan. The Company has reserved 125,000 shares of Common Stock for issuance under the 1996 Employee Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan permits eligible employees to purchase Common Stock through payroll deductions at a purchase price equal to 85% of the lesser of the fair market value per share of Common Stock on the start date of an offering period or on the date on which the shares are purchased. Through December 31, 1999, 93,000 shares had been issued pursuant to the Purchase Plan. Warrants. The Company has outstanding warrants to purchase 384,000 shares of Common Stock at an exercise price of $10.50 per share. These warrants generally expire in 2007. At December 31, 1999, all outstanding warrants were exercisable. The following shares of Common Stock are reserved for future issuance at December 31, 1999 (in thousands): Stock option plans 3,653 Employee stock purchase plan 32 Warrants 384 ----- Total 4,069 ===== Of the shares available for future issuance under the Plan, 3.2 million are outstanding grants and 495,000 remain available for future grant. NOTE 8. ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT AND LICENSES Northwest NeuroLogic, Inc.: In May 1998, the Company acquired the assets and liabilities of Northwest NeuroLogic, Inc. ("NNL"), in exchange for the Company's Common Stock and stock options valued at $4.2 million. Since the acquisition, the operations of NNL have been included in the Company's consolidated statements of operations. The acquisition was accounted for as a purchase and, accordingly, the purchase price was allocated to the assets acquired and the liabilities assumed based on the estimated fair market values. Substantially all the purchase Page F-15 NEUROCRINE BIOSCIENCES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 price was allocated to the in-process research and development. The value allocated to the technology was then expensed because it had not reached technological feasibility and had no future alternative uses. The Company performed scientific due diligence related to the acquired projects and because they were based on narrow scientific hypothesis, the Company concluded that neither program had alternative future uses. The nature and efforts required to develop the acquired in-process research and development into commercially viable products include research to identify a clinical candidate, preclinical development, clinical testing, FDA approval and commercialization. This process may cost in excess of $100 million and can take as long as 10 years to complete. It is also important to note that if a clinical candidate is identified, the further development of that candidate can be halted or abandoned at any time due to a number of factors. These factors include, but are not limited to, funding constraints, safety or a change in market demand. Because of limited financial resources, the Company's strategy to develop some of its programs is to enter into collaborative agreements with major pharmaceutical companies. Through these collaborations, the Company could partially recover its research costs through contract research and milestone revenues. The collaborators would then be financially responsible for all clinical development and commercialization costs. In May 1998, when the Company acquired the in-process research and development programs from NNL, it estimated the costs to identify a clinical candidate and provide minimal research support during the clinical development stages for the melanocortin receptor program to be $15.4 million over an 8-year period. Costs to identify a clinical candidate and provide minimal research support during the clinical development stages of the excitatory amino acid transporters program were estimated at $22.4 million. Estimated revenues from the collaborative arrangements were anticipated to reduce the Company's net costs. The clinical development and commercialization costs were to be completely funded by the collaborator. During fiscal year 2000, the Company anticipates that its gross costs for continued research on these programs will approximate $5 million. The Company cannot be certain that its research efforts will result in clinical candidates for either compound. The Company intends to collaborate on the melanocortin receptor technology. The Company would expect the collaborator to then be responsible for the clinical development, commercialization and funding. The excitatory amino acid transporters program is currently under a collaborative agreement with Wyeth-Ayerst. Consequently, the Company cannot estimate the time or resources Wyeth-Ayerst will commit to the development of this program. The following are pro forma unaudited results of operations for the year ended December 31, 1998 (in thousands, except per share data) had the purchase of NNL been consummated as of January 1, 1998. This pro forma information is not necessarily indicative of the actual results that would have been achieved nor is it necessarily indicative of future results. Revenues $ 16,325 Net loss (20,013) Loss per share basic and diluted $ (1.09) Other: During 1998, the Company purchased licenses for technologies relating to insomnia and brain cancer in the amount of $710,000. These projects were in the early stages of development, have not reached technological feasibility and have no known alternative uses. Consequently, the costs of these licenses were expensed. The insomnia and brain cancer compounds are both in the early stages of clinical testing. During 2000, the Company expects to spend approximately $20 million on additional clinical testing of the brain cancer and insomnia compounds. The Company expects the clinical testing of both compounds to continue for at least the next two years, but its efforts may not result in commercially viable products. If the Company's efforts were completely successful and it did not collaborate on these compounds, it is estimated that each compound could cost an additional $50 - $150 million and take up to five years to reach commercial viability. Page F-16 NEUROCRINE BIOSCIENCES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 NOTE 9. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS Taisho. In December 1999, Neurocrine signed an exclusive agreement with Taisho Pharmaceutical Co. LTD ("Taisho") providing Taisho an option to obtain European and Asian commercialization rights for Neurocrine's altered peptide ligand (APL) for diabetes (NBI-6024). Neurocrine would retain all rights in the rest of the world, including North America. The resulting collaboration could be valued at up to $45 million, if a product is commercialized, consisting of: licensing and option fees, payments for certain development and regulatory milestones, and reimbursement of 50% of the worldwide development expenses. In addition, Neurocrine would receive royalties on product sales in Europe and Japan. Wyeth-Ayerst. In March 1999, the Company entered into an agreement with Wyeth-Ayerst Laboratories, the pharmaceutical division of American Home Products Corporation, on the research, development and commercialization of compounds which modulate excitatory amino acid transporters (EAATs) for the treatment of neurodegenerative and psychiatric diseases. EAATs are part of the family of neurotransmitter transporters and play a key role in regulating the actions of neurotransmitters and brain function. The agreement, valued at up to $81 million if a product is commercialized, includes: sharing proprietary technologies, funding for research, payments for milestones reached, plus royalties on sales from products resulting from the collaboration. Under the terms of the agreement, Neurocrine expects to receive three to five years of funding for research and development as well as worldwide royalties on commercial sales of products that result from the collaboration. Wyeth-Ayerst will also provide Neurocrine with access to chemical libraries for screening within the collaborative field. As of December 31, 1999, the Company has received $3.0 million in sponsored research payments and $3.0 million for the achievement of four milestones. Eli Lilly. In October 1996, the Company entered into an agreement with Eli Lilly and Company under which the Company expects to receive $22.0 million in research payments of which $17.7 million have been received as of December 31, 1999. The Company is also entitled to milestone payments for certain development and regulatory accomplishments. The Company will have the option to receive co-promotion rights and share profits from commercial sales of select products, which result from the collaboration in the U.S. or receive royalties on U.S. product sales. The Company will receive royalties on product sales for the rest of the world. The collaborative research portion of the agreement was completed as scheduled in 1999. The Company will continue to receive milestone payments and royalties upon the successful continuation of the development portion of the agreement, if any. Janssen. In January 1995, the Company entered into a research and development agreement (the "Janssen Agreement") with Janssen, under which Janssen paid the Company $2.0 million in up-front license fees and $9.7 million in sponsored research payments during the three-year term of the collaborative research portion of the agreement. The research portion of the agreement was completed in 1997. Under the Janssen Agreement, the Company is entitled to receive up to $10.0 million in milestone payments for the indications of anxiety, depression and substance abuse, and up to $9.0 million in additional milestone payments for other indications. Milestone payments of $3.5 million had been received as of December 31, 1998. There were no additional milestone payments received during 1999. The Company has granted Janssen an exclusive worldwide license to manufacture and market products developed under the Janssen Agreement. The Company is entitled to receive royalties on worldwide product sales and has certain rights to co-promote such products in North America. Janssen is responsible for funding all clinical development and marketing activities, including reimbursement to Neurocrine for its promotional efforts, if any. Page F-17 NEUROCRINE BIOSCIENCES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 The collaborative research portion of the agreement was completed as scheduled in 1997 with the selection of a clinical candidate and the commencement of clinical trials in Europe. The Company will continue to receive milestone payments and royalties upon the successful continuation of the development portion of the agreement. Janssen has the right to terminate the Agreement upon six months notice. However, in the event of termination, other than termination by Janssen for cause or as a result of the acquisition of Neurocrine, all product and technology rights become the exclusive property of Neurocrine. In September 1999, the Company signed an amendment to its 1995 agreement with Janssen Pharmaceutica, N.V. ("Janssen"). The amendment provides for a new sponsored research period designed to identify new corticotropin-releasing factor ("CRF") receptor antagonists which will be subject to the terms of the original agreement signed in 1995. The term of the amendment is from April 1999 through February 2001. Under the agreement, the Company will receive $5.0 million in sponsored research funding, up to $3.5 million in milestone achievements, $500,000 for research already conducted under this certain technology and reimbursement of all outside and third party costs associated with the project. As of December 31, 1999, the Company has received $1.9 million in sponsored research and the $500,000 payment for prior research. Novartis. In January 1996, the Company entered into an agreement with Novartis under which Novartis paid the Company $5.0 million in up-front license fees and was obligated to provide Neurocrine with $7.0 million in research and development funding during the first two years of the agreement and up to $15.5 million in further research and development funding thereafter. As of December 31, 1999, the Company has received $18.8 million in sponsored research and development payments and $9.1 million of milestone payments. On July 7, 1999, Novartis exercised its right to terminate the Development and Commercialization Agreement, effective January 7, 2000. As a result, Neurocrine will reacquire the worldwide rights to its multiple sclerosis compound, MSP771. NOTE 10. RELATED PARTY TRANSACTIONS Neuroscience Pharma, Inc. In March 1996, the Company along with a group of Canadian institutional investors (the "Canadian Investors") established Neuroscience Pharma Inc. ("NPI"). The Company's contribution was to license certain technology and Canadian marketing rights to NPI. The Canadian Investors contributed approximately $9.5 million in cash in exchange for the Preferred Stock of NPI, which was convertible into the Company's Common Stock at the option of the Canadian Investors, and warrants exercisable for 383,875 shares of the Company's Common Stock at an exercise price of $10.50 per share. The Canadian Investors are also eligible to receive additional warrants upon the attainment of certain additional funding. During 1997 and 1998, the Investors converted their Preferred Shares to the Company's Common Stock. As a result, the Company recorded an investment in NPI equal to the market value of Common Stock issued in exchange for the Preferred Shares and has recognized its proportionate share of the NPI net losses in accordance with the equity method of accounting. Equity in NPI losses totaled $764,000, $3.4 million and $1.1 million in 1999, 1998 and 1997, respectively. The Preferred Shares were redeemable for cash at the Company's option. The redemption feature of the Preferred Shares limits their value to the balance of cash and cash equivalents maintained by NPI. Consequently, the Company reduced the value of its NPI investment by $646,000 during 1999 and $3.8 million during 1998. The balance of the Company's investment in NPI was $0 and $1.4 million at December 31, 1999 and 1998, respectively. During 1996, the Company entered into a sponsored research agreement with NPI. The terms of the agreement called for NPI to fund additional research efforts on technologies licensed to NPI by the Company. Associated with the costs of research on those certain programs, the Company recognized revenues of $491,000 and $3.6 million during 1999 and 1998 respectively. Page F-18 NEUROCRINE BIOSCIENCES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 During December 1999, the Company sold its investment in NPI in exchange for cash, receivables and potential royalties on worldwide sales resulting from certain of NPI's future products. The Company recorded a gain of $526,000 on the sale of this investment. The gain was calculated using the total consideration of cash and receivables, less the carrying value of the NPI investment. No value was assigned to potential royalties on future product sales due to the uncertainty of this event. This transaction, as well as those discussed above, is included in "Equity in NPI losses and other adjustments, net" reported on the Consolidated Statement of Operations. NOTE 11. EARNINGS PER SHARE The following data show the amounts used in computing earnings per share and the effect on income and the weighted-average number of shares of dilutive potential common stock (in thousands except for earning per share data):
Year Ended December 31, ------------------------------------------------ 1999 1998 1997 ------------------------------------------------ Numerator: Net income (loss) $ (16,822) $ (19,955) $ 5,127 Effect of dilutive securities - - - ---------- ---------- -------- Numerator for earnings (loss) per share $ (16,822) $ (19,955) $ 5,127 ========== ========== ======== Denominator: Denominator for basic earnings (loss) per share 19,072 18,141 16,930 Effect of dilutive securities: Employee stock options ** ** 909 Convertible preferred stock ** ** 204 Warrants ** ** 141 ---------- ---------- -------- Dilutive potential of common shares ** ** 1,254 ---------- ---------- -------- Denominator for diluted earnings (loss) per share 19,072 18,141 18,184 =========== ========== ======== Basic earnings (loss) per share $ (0.88) $ (1.10) $ 0.30 =========== ========== ======== Diluted earnings (loss) per share $ (0.88) $ (1.10) $ 0.28 =========== ========== ========
**Antidilutive NOTE 12. INCOME TAXES At December 31, 1999, the Company had federal and California income tax net operating loss carryforwards of approximately $20.3 million and $5.4 million, respectively. The federal and California tax loss carryforwards will begin to expire in 2010 and 2003, respectively, unless previously utilized. The Company also has federal and California research tax credit carryforwards of approximately $3.5 million and $1.3 million, respectively, which will begin to expire in 2007 and 2012, respectively, unless previously utilized. The Company has federal Alternative Minimum Tax credit carryforwards of approximately $257,000, which will carryforward indefinitely. Pursuant to Internal Revenue Code Sections 382 and 383, annual use of the Company's net operating loss and credit carryforwards may be limited because of cumulative changes in ownership of more than 50% which occurred during 1992 and 1993. However, the Company does not believe such changes will have a material impact upon the utilization of these carryforwards. Significant components of the Company's deferred tax assets as of December 31, 1999 and 1998 are shown below. A valuation allowance of $13.5 million and $6.5 million at December 31, 1999 and 1998, respectively, have Page F-19 NEUROCRINE BIOSCIENCES, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 been recognized to offset the net deferred tax assets as realization of such assets is uncertain. Amounts are shown in thousands as of December 31, of the respective years:
1999 1998 ------------ ------------ Deferred tax assets: Net operating loss carryforwards $ 7,400 $ 3,744 Tax credit carryforwards 4,649 2,069 Capitalized research and development 935 453 Other, net 520 204 -------- -------- Total deferred tax assets 13,504 6,470 Valuation allowance (13,504) (6,470) -------- -------- Net deferred tax assets $ - $ - ======== ========
The provision for income taxes on earnings subject to income taxes differs from the statutory federal rate at December 31, 1999, 1998 and 1997, due to the following:
1999 1998 1997 -------------------------------------------- Federal income taxes at 34% $ (5,719) $ (6,785) $ 1,816 State income tax, net of federal benefit - 1 87 Increase in tax credits (1,981) - - Tax effect on non-deductible expenses 932 4,213 21 Increase in valuation allowance 7,034 2,572 (1,837) Alternative Minimum Tax - - 127 Other (266) - - -------------------------------------------- $ - $ 1 $ 214 --------------------------------------------
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