SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Mark One:
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-27324
SYNAPTIC PHARMACEUTICAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-2859704
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
215 College Road 07652
Paramus, NJ (Zip Code)
(Address of principal executive offices)
(201) 261-1331
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
As of November 1, 2001, there were 10,944,122 shares of the registrant's
Common Stock outstanding.
SYNAPTIC PHARMACEUTICAL CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED
SEPTEMBER 30, 2001
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements (unaudited).............................. 1
Balance Sheets at September 30, 2001 and December 31, 2000.... 1
Statements of Operations and Comprehensive Income (Loss)
for the three months ended September 30, 2001 and 2000,
and for the nine months ended September 30, 2001 and 2000.... 2
Statements of Cash Flows for the nine months ended
September 30, 2001 and 2000................................... 3
Notes to Financial Statements................................. 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 13
Item 2. Changes in Securities......................................... 14
Item 4. Submission of Matters to a Vote of Security Holders........... 15
Item 6. Exhibits and Reports on Form 8-K.............................. 16
Signatures.................................................... 17
(i)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SYNAPTIC PHARMACEUTICAL CORPORATION
BALANCE SHEETS
(in thousands, except share and per share information)
September 30, December 31,
Assets 2001 2000
--------------------------------------------------------------------------------
(Unaudited) (Audited)
Current assets:
Cash and cash equivalents $49,281 $ 2,037
Marketable securities--current maturities 7,640 20,627
Other current assets 714 814
--------------------------------------------------------------------------------
Total current assets 57,635 23,478
Property and equipment, net 4,495 4,781
Marketable securities 1,557 8,938
Patent and patent application costs, net - 227
Other assets 233 147
--------------------------------------------------------------------------------
$ 63,920 $ 37,571
================================================================================
Liabilities and Stockholders' Equity
--------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 974 $ 1,128
Accrued liabilities 4,213 648
Accrued compensation 261 348
Deferred revenue 398 354
--------------------------------------------------------------------------------
Total current liabilities 5,846 2,478
Deferred rent obligation 775 564
Series B senior redeemable convertible preferred stock;
authorized, issued and outstanding-11,056 shares in 2001,
liquidation preference-$11,056,000 6,039 -
Series C senior redeemable convertible preferred stock;
authorized, issued and outstanding-29,944 shares in 2001,
liquidation preference-$29,944,000 27,570 -
Stockholders' equity:
Series A preferred stock, $.01 par value;
authorized--1,000,000 shares - -
Common Stock, $.01 par value; authorized-25,000,000 shares
issued and outstanding--10,944,022 shares in 2001 and
10,935,772 shares in 2000 109 109
Additional paid-in capital 103,566 99,392
Accumulated other comprehensive income--net unrealized
gains (losses) on securities 151 (183)
Accumulated deficit (80,136 ) (64,789)
--------------------------------------------------------------------------------
Total stockholders' equity 23,690 34,529
--------------------------------------------------------------------------------
$ 63,920 $ 37,571
================================================================================
See notes to financial statements.
1
SYNAPTIC PHARMACEUTICAL CORPORATION
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share and per share information)
(Unaudited)
For the three months For the nine months
ended September 30, ended September 30,
2001 2000 2001 2000
--------------------------------------------------------------------------------
Revenues:
Contract revenue $ 290 $ 319 $ 867 $ 804
License revenue 84 2,584 250 2,667
--------------------------------------------------------------------------------
Total revenues 374 2,903 1,117 3,471
Expenses:
Research and development 4,677 3,866 12,777 10,545
General and administrative 1,605 1,440 5,152 4,278
--------------------------------------------------------------------------------
Total expenses 6,282 5,306 17,929 14,823
--------------------------------------------------------------------------------
Loss from operations (5,908) (2,403) (16,812) (11,352)
Other income, net:
Interest income 315 489 1,093 1,623
Other 118 (84) 372 (67)
--------------------------------------------------------------------------------
Other income, net 433 405 1,465 1,556
--------------------------------------------------------------------------------
Net loss (5,475) (1,998) (15,347) (9,796)
Beneficial conversion feature
and accretion of redemption
value of mandatorily redeemable
convertible preferred stock (4,316) - (4,316) -
--------------------------------------------------------------------------------
Net loss applicable to
common stockholders $(9,791) $(1,998) $(19,663) $(9,796)
================================================================================
Comprehensive loss:
Net loss $(5,475) $(1,998) $(15,347) $(9,796)
Unrealized gains
arising during period 75 310 334 380
--------------------------------------------------------------------------------
Comprehensive loss $(5,400) $(1,688) $(15,013) $(9,416)
================================================================================
Basic and diluted net loss
per share applicable to
common stockholders $(0.89) $(0.18) $(1.80) $(0.90)
================================================================================
Shares used in computation
of net loss per share
applicable to
common stockholders 10,942,755 10,848,045 10,939,822 10,825,552
================================================================================
See notes to financial statements.
2
SYNAPTIC PHARMACEUTICAL CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
For the nine months ended September 30, 2001 and 2000
2001 2000
--------------------------------------------------------------------------------
Operating activities:
Net loss $ (15,347) $ (9,796)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and patent amortization 1,037 1,143
Amortization of premiums (discounts) on
securities 262 351
Deferred rent, net 125 242
Loss on sale of fixed asset - 100
Changes in operating assets and liabilties:
Decrease (increase) in other current assets 100 (191)
Increase (decrease) in accounts payable,
accrued liabilities and accrued compensation 3,324 (125)
Increase in revenue receivable under
license agreement - (2,500)
Increase in deferred revenue 44 719
--------------------------------------------------------------------------------
Net cash (used in) operating activities (10,455) (10,057)
Investing activities:
Proceeds from sale or maturity of investments 22,440 5,987
Purchases of investments (2,000) -
Purchases of property and equipment (540) (826)
Proceeds from sale of equipment 16 70
--------------------------------------------------------------------------------
Net cash provided by investing activities 19,916 5,231
Financing activities:
Issuance of common stock 38 520
Issuance of preferred stock 37,745 -
--------------------------------------------------------------------------------
Net cash provided by financing activities 37,783 520
--------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 47,244 (4,306)
Cash and cash equivalents at beginning of period 2,037 6,236
--------------------------------------------------------------------------------
Cash and cash equivalents at end of period $49,281 $ 1,930
================================================================================
See notes to financial statement.
3
SYNAPTIC PHARMACEUTICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
September 30, 2001
Note 1 -- Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q and may not include all
information and footnotes required for a presentation in accordance with
generally accepted accounting principles. In the opinion of the management of
Synaptic Pharmaceutical Corporation (the "company"), these financial statements
include all normal and recurring adjustments necessary for a fair presentation
of the financial position and the results of operations and cash flows of the
company for the interim periods presented. For more complete financial
information, these financial statements should be read in conjunction with the
audited financial statements for the fiscal year ended December 31, 2000, and
notes thereto included in the company's 2000 Annual Report on Form 10-K. The
results of operations for the fiscal quarter ended September 30, 2001, are not
necessarily indicative of the results of operations to be expected for the full
year.
Note 2 - Senior Redeemable Convertible Preferred Stock
On August 3, 2001, the company sold to investors (the "purchasers"), 9,438
shares of Series B senior redeemable Convertible Preferred Stock (the "Series B
Preferred Stock") in a private placement for $9,438,000. On September 26, 2001,
the company sold 1,618 shares of Series B Preferred Stock and 29,944 shares of
Series C senior redeemable Convertible Preferred Stock (the "Series C Preferred
Stock" and together with the Series B Preferred Stock, the "Preferred Stock")
for $31,562,000. Net proceeds, after giving effect to underwriting discounts and
estimated offering expenses, were approximately $37,745,000. The Preferred Stock
may be converted into 7,564,584 shares of common stock.
The terms of the Series B Preferred Stock and the Series C Preferred Stock
are identical, except that the Series B Preferred Stock has an initial
conversion price of $4.3358 and the Series C Preferred Stock has an initial
conversion price of $5.9713. The purchasers also acquired certain anti-dilution
and registration rights.
Holders of Preferred Stock are entitled to receive dividends on a pari
passu basis, if and when dividends are declared on the common stock, in an
amount equal to the dividends that would have been payable had their shares been
converted to common stock immediately prior to the record date for the dividend.
Upon any liquidation of the company, each holder of Preferred Stock is
entitled to receive $1,000, plus declared but unpaid dividends, if any, for each
share held, prior to the holders of any common stock or junior preferred stock
receiving any assets of the company available for distribution.
Holders of Preferred Stock, voting together as a separate class, will be
entitled to elect two members of the board of directors, as long as 60% of the
Preferred Stock issued and outstanding as of September 26, 2001 remains
outstanding.
The holders of the Preferred Stock are entitled to vote together with the
holders of the common stock on all matters presented to our stockholders for
consideration, except that as long as the holders of the Preferred Stock are
entitled to vote as a separate class to elect members of the board of directors,
they will not be entitled to vote for the remaining directors. Each share of
Preferred Stock has a number of votes equal to the number of shares of common
stock into which it may then be converted.
Each share of Preferred stock may be converted at any time at the option of
the holder thereof into a number of shares of common stock determined by
dividing $1,000 by the conversion price, as
4
appropriately adjusted for any stock splits, stock dividends, combinations or
similar events. All shares of Preferred Stock shall automatically be converted
into common stock upon the vote to so convert of a majority of the Preferred
Stock then outstanding, voting together as a separate class.
The company may redeem all outstanding shares of Preferred Stock at any
time after August 3, 2003, provided that the company can redeem these shares
prior to August 3, 2009, only if the market price of the common stock is at
least 200% of the conversion price then in effect for any 20 consecutive trading
days ending within 10 trading days of the redemption date. The company must
redeem all outstanding shares of Preferred Stock in two annual installments
beginning on August 3, 2009. On any redemption, the redemption price will be
$1,000 per share, as appropriately adjusted for any stock splits, stock
dividends, combinations or similar events, plus declared but unpaid dividends.
The company recorded an adjustment to net loss applicable to common
stockholders of $4,226,000 relating to the beneficial conversion feature
inherent in the issuances of the Series B Preferred Stock. This amount was
determined based upon the excess of the fair value of the Company's common stock
into which the Series B Preferred Stock was immediately convertible less the
initial conversion price of $4.3358 per share in accordance with Emerging Issues
Task Force No. 98-5, "Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios." The company
also recorded an adjustment to net loss applicable to common stockholders of
approximately $90,000 representing the accretion of the Series B Preferred Stock
and Series C Preferred Stock to their respective redemption values.
5
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Synaptic Pharmaceutical Corporation (the "company," "Synaptic," "we," or
"us") is a drug discovery company utilizing G protein-coupled receptors
("GPCRs") as targets for novel therapeutics. GPCRs are an important class of
drug targets that exist on the surface membrane of all cells and are associated
with a wide range of therapeutic categories. We use our large portfolio of
patented GPCR targets as a basis for the creation of improved drugs that act
through these targets. We, and our licensees, are evaluating the function of
receptor targets in the body to identify specific physiological disorders with
which they may be associated. We are using this information to design compounds
that act at these GPCRs and to determine the efficacy of such compounds in
clinical trials.
We currently collaborate with Grunenthal GmbH ("Grunenthal") and Kissei
Pharmaceutical Co., Ltd. ("Kissei"). In connection with our collaborative
arrangement with Grunenthal, we have licensed some of our technology and patent
rights to them. We have also granted licenses to some of our technology and
patent rights to other pharmaceutical companies.
Since our inception, we have financed our operations primarily through the
sale of our stock, through contract and license revenue under license
agreements, and through interest income and capital gains resulting from the
investment of the proceeds of our financing activities pending use of these
funds for operational activities. We have also received funds through government
grants under the Small Business Innovative Research ("SBIR") program of the
National Institutes of Health and through the sale of our New Jersey state tax
net operating loss ("NOL") carryforwards.
To date, our 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 our technologies.
Historically, we have not been profitable, and at September 30, 2001 we had an
accumulated deficit of $80,136,000. We incurred net losses of $6,493,000,
$15,121,000 and $13,859,000 for the fiscal years ended 1998, 1999 and 2000,
respectively. We expect to continue to incur operating losses for a number of
years and may not become profitable, unless and until we receive royalty revenue
or revenue from sales of drugs that may be developed with the use of our
technology or patent rights.
Revenue
We may generate revenue from license grants, royalties, research and
development contracts or sales of drugs. License revenue represents
non-refundable payments for a license to one or more of our patents and/or a
license to our technology. Payments for licenses are recognized as they are
received or, if earlier, when they become guaranteed, provided they are
independent of any continuing research activity. Otherwise, they are recognized
pro-rata during the term of the related research agreement in accordance with
Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements."
Under each of our license agreements (other than the Grunenthal agreement),
we are entitled to receive royalty payments based upon the sales of drugs that
may be developed using the technology or the patent rights that have been
licensed. Under the Grunenthal agreement, we have development and marketing
rights in certain geographical areas with respect to any drugs that are jointly
identified as part of the collaboration with Grunenthal. Accordingly, we may
receive revenue from sales of drugs in our designated geographical areas if we
market them independently, or we may receive royalty payments if we license our
marketing rights to a third party. To date, we have not received either
6
royalty revenue or revenue from the sales of drugs and we do not expect to
receive such revenues for a number of years, if at all.
Contract revenue includes research funding to support a specified number of
our 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.
Research and Development
The company performs research for itself and for its current collaborators,
Kissei and Grunenthal. In addition to this research, the company designates
certain projects for preclinical and clinical development. Until such time as a
lead compound is chosen for development, all costs are considered to be research
expense. Costs incurred during the research phase are not separately
identifiable by project. At this preliminary or investigational stage, research
is performed within a broad family of receptors with the objective of
identifying lead compounds. Once a lead compound enters the preclinical
development stage, costs are accumulated for each specific project. Currently,
the only project for which a lead compound has been chosen is the company's
Depression Program. The lead compound in this program was selected during the
second quarter of 2000. Costs incurred on the project for the three months, nine
months and inception-to-date periods ended September 30, 2001 approximated
$600,000, $1,500,000 and $1,700,000, respectively. Total research costs for the
three and nine-month periods ended September 30, 2001 amounted to $4,677,000 and
$12,777,000, respectively.
In general, from the time a lead compound is chosen until that compound
reaches the market, many years may elapse. During this time, the compound must
undergo clinical trials that include Phase I, Phase II and Phase III trials, the
results of which are subject to review and approval by the U.S. Food & Drug
Administration. Successful completion of each trial carries its own set of risks
and may cost many millions of dollars. At this stage of preclinical development
of the depression program, completion costs and dates cannot be estimated.
Net Loss Applicable to Common Stockholders
During the third quarter of 2001, the company sold shares of Series B
senior redeemable Convertible Preferred Stock (the "Series B Preferred Stock")
and Series C senior redeemable Convertible Preferred Stock (the "Series C
Preferred Stock" and together with the Series B Preferred, the "Preferred
Stock") in a private equity placement. In connection with these issuances, we
recorded an adjustment to net loss applicable to common stockholders of
approximately $4,226,000 relating to the beneficial conversion feature inherent
in the issuances of the Series B Preferred Stock. This amount was determined
based upon the excess of the fair value of the company's common stock into which
the Series B Preferred was immediately convertible less the initial conversion
price of $4.3358 per share in accordance with Emerging Issues Task Force No.
98-5 "Accounting for Convertible Securities with Beneficial Conversion Features
or Contingently Adjustable Conversion Ratios." We also recorded an adjustment to
net loss applicable to common stockholders of approximately $90,000 representing
the accretion of the Series B Preferred Stock and Series C Preferred Stock to
their respective redemption values.
7
Results of Operations
Comparison of the Three Months Ended September 30, 2001 and 2000
Revenues. We recognized revenue of $374,000 and $2,903,000 for the three
months ended September 30, 2001 and 2000, respectively. The decrease in revenue
of $2,529,000 resulted primarily from a decrease in license revenue resulting
from the grant of a non-exclusive license to certain of our technology and
patent rights in the third quarter of 2000.
Research and Development Expenses. We incurred research and development
expenses of $4,677,000, and $3,866,000 for the three months ended September 30,
2001 and 2000, respectively. The increase of $811,000, or 21%, was attributable
primarily to increases in preclinical related testing costs of $557,000 related
to our Depression Program, $352,000 in research costs associated with advancing
additional projects to the stage at which a lead compound can be chosen, offset
by a reduction in supply costs of $190,000.
General and Administrative Expenses. We incurred general and administrative
expenses of $1,605,000 and $1,440,000 for the three months ended September 30,
2001 and 2000, respectively. The increase of $165,000, or 11%, was attributable
primarily to an increase of $74,000 in legal expenses related to a patent
infringement lawsuit, $48,000 in other patent related expenditures and $45,000
in rent related expenses.
Other Income, Net. We recorded other income of $433,000 and $405,000 for
the three months ended September 30, 2001 and 2000, respectively. The increase
of $28,000 was primarily due to an increase in rental income from our sublessees
partially offset by lower weighted-average cash, cash equivalent and marketable
securities balances during 2001.
Net loss applicable to common stockholders. We incurred a net loss
applicable to common stockholders of $9,791,000 ($0.89 per share), and
$1,998,000 ($0.18 per share) for the three months ended September 30, 2001 and
2000, respectively. The increase of $0.71 resulted primarily from the items
described above in the sections entitled "Results of Operations" and "Net Loss
Applicable to Common Stockholders."
Comparison of the Nine Months Ended September 30, 2001 and 2000
Revenues. We recognized revenue of $1,117,000 and $3,471,000 for the nine
months ended September 30, 2001 and 2000, respectively. The decrease in revenue
of $2,354,000 resulted primarily from a decrease in license revenue resulting
from the grant of a non-exclusive license to certain of our technology and
patent rights in the third quarter of 2000.
Research and Development Expenses. We incurred research and development
expenses of $12,777,000, and $10,545,000 for the nine months ended September 30,
2001 and 2000, respectively. The increase of $2,232,000, or 21%, was
attributable primarily to increases in preclinical related testing costs of
$1,427,000 related to our Depression Program, $947,000 in research costs
associated with advancing additional projects to the stage at which a lead
compound can be chosen, offset by a reduction in supply costs of $193,000.
General and Administrative Expenses. We incurred general and administrative
expenses of $5,152,000 and $4,278,000 for the nine months ended September 30,
2001 and 2000, respectively. The increase of $874,000, or 20%, was attributable
primarily to $688,000 in legal expenses related to a patent infringement
lawsuit, $70,000 in other patent related expenditures and an increase of $
104,000 in rent related expenses.
8
Other Income, Net. We recorded other income of $1,465,000 and $1,556,000
for the nine months ended September 30, 2001 and 2000, respectively. The
decrease of $91,000 was primarily due to lower weighted average cash, cash
equivalent and marketable securities balances during 2001 as a result of the
utilization of these resources to fund operations partially offset by an
increase in rental income from our sublessees.
Net loss applicable to common stockholders. We incurred a net loss
applicable to common stockholders of $19,663,000 ($1.80 per share), and
$9,796,000 ($0.90 per share) for the nine months ended September 30, 2001 and
2000, respectively. The increase of $0.90 resulted primarily from the items
described above in the sections entitled "Results of Operations" and "Net Loss
Applicable to Common Stockholders."
Operating Trends
Our revenues may vary from period to period depending on numerous factors,
including the timing of revenue earned under license agreements and revenue that
may be earned under future collaborative and/or license agreements. During 2001
we recognized revenue under our research and licensing agreement with Kissei
Pharmaceutical Co., Ltd. and expect to recognize additional revenues under this
agreement during 2002. Under the terms of some of our license agreements,
revenues may be recognized if specified milestones are achieved. We continue to
assess the opportunity for obtaining additional funding under new collaborative
and/or license agreements. During the third quarter 2001, we sold to investors
$41 million in preferred stock. Net proceeds, after giving effect to
underwriting discounts and estimated offering expenses, were approximately
$37,745,000. We continue to monitor our spending level in order to ensure that
we have enough cash to last at least through the year 2003.
Since late 2000, we have been pursuing a new business strategy of
increasing our internal drug development efforts. This new strategy requires us
to hire additional employees with drug development expertise and to incur
additional preclinical expenses as well as expenses associated with clinical
trials.
Legal expenses are expected to continue to be a significant expense as a
result of a suit filed by the company. See "Legal Proceedings" in PART II, Item
1, hereof.
Other income, net is expected to increase over the remainder of 2001 and in
2002 as funds received from the sale of preferred stock are invested. This
increase will be supplemented by rental income that we expect to recognize under
our existing sublease agreements.
We are pursuing further sales of our state tax NOL carryforwards and our
state research and development credits under the State of New Jersey's
Technology Business Tax Certificate Transfer Program (the "Program"). No
assurance can be given, however, as to the amount of NOL carryforwards that may
be sold under the Program in any one year. External factors that may have an
effect on future NOL sales include limitations imposed by State law and
availability of buyers and related demand.
Property and equipment spending may vary from period to period depending on
numerous factors, including the level of drug development efforts, the number of
collaborations in which we are involved at any given time, and replacement due
to normal wear and obsolescence. Equipment spending in 2001 is expected to
decline from that of 2000.
At September 30, 2001, we held marketable securities with an estimated fair
value of $9,197,000. Our primary interest rate exposure results from changes in
short-term interest rates. We do not purchase financial instruments for trading
or speculative purposes. All of the marketable
9
securities we hold are classified as available-for-sale securities. The
following table provides information about marketable securities that we held at
September 30, 2001:
Principal Amount and Weighted Average Stated Rate Estimated
by Expected Maturity Fair Value
----------------------------------------------------- ------------
(000's) 2001 2002 2003 Total (000's)
----------------------------------------------------- ------------
Principal $5,000 $2,500 $1,500 $9,000 $9,197
Weighted
Average
Stated Rates 9.05% 6.50% 6.20% 7.87% --
----------------------------------------------------- ------------
The stated rates of interest expressed in the above table may not
approximate the actual yield of the securities which we currently hold since we
have purchased some of these 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, we may reinvest the proceeds that we realize 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, we place some of our
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, but the impact of such fluctuations are not
expected to be material.
We do not believe that inflation has had a material impact on our results
of operations.
Liquidity and Capital Resources
At September 30, 2001 and December 31, 2000, cash, cash equivalents and
marketable securities aggregated $58,478,000 and $31,602,000, respectively. This
increase was primarily the result of the sale of $41 million of preferred stock
sold to investors in the third quarter of 2001 partially offset by the
utilization of these resources to fund our operations.
To date, we have met our cash requirements through the sale of our stock,
through contract and license revenue, through interest income and gains
resulting from our investments, through SBIR grants and through the sale of a
portion of our state tax NOL carryforwards.
At September 30, 2001, we had $58,478,000 in cash, cash equivalents and
marketable securities. We intend to utilize these funds primarily for research,
preclinical and clinical development costs, for patent related expenditures, for
general corporate purposes, for leasehold improvements to our facilities and for
the purchase property and equipment. We expect to continue to incur operating
losses for a number of years. We believe that cash, cash equivalents and
marketable securities on hand, and cash that we expect to receive through
existing license arrangements and interest payments on investments, will be
sufficient to fund operations, as well as to support our share of certain
development costs under the Grunenthal Agreement, if any, at least through the
end of the year 2003.
As of December 31, 2000, we had NOL carryforwards of approximately
$57,000,000 for Federal income tax purposes that will expire principally in the
years 2002 through 2020. In addition, we had research and development credit
carryforwards of approximately $1,610,000, which will expire
10
principally in 2002 through 2018. Also at December 31, 2000, we had NOL
carryforwards of approximately $41,637,000 for state income tax purposes and
state research and development credit carryforwards of $475,000. 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
our ownership in 1993 and 1997, the utilization of $25,000,000 of Federal NOL
carryforwards is subject to annual limitation. The utilization of the research
and development credits is similarly limited.
We lease laboratory and office facilities under an agreement expiring on
December 31, 2015. The minimum annual payment under the lease is currently
$2,249,000. The lease provides for fixed escalations in rent payments in the
years 2005 and 2010.
11
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and qualitative disclosures about market risk (i.e.,
interest rate risk) are included in Item 2 of this Report.
12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On June 5, 2000, the company filed suit in the United States District Court
for the District of New Jersey against M.D.S. Panlabs, Inc., a Washington
corporation, and Panlabs Taiwan Ltd., a Taiwanese corporation (collectively,
"Panlabs"). The suit alleges that Panlabs has infringed several issued U.S.
Patents owned by the company, which relate to cloned human receptors and their
use in binding assays. The suit also alleges that Panlabs has been importing,
selling and offering to sell products of the company's patented binding assay
processes to pharmaceutical companies and others in the United States and
particularly in New Jersey.
On October 31, 2001, the company filed an amended suit in the United States
District Court for the District of New Jersey against Euroscreen, S.A., a
Belgian corporation ("Euroscreen"). The suit alleges that Euroscreen has
infringed numerous issued U.S. Patents owned by the company, which relate to
cloned human receptors and their use in binding assays. The suit is part of the
already pending lawsuit against Panlabs. The amended suit alleges that
Euroscreen has been importing, selling and offering to sell products of the
company's patented binding assay processes to pharmaceutical companies and
others in the United States and particularly in New Jersey and that Euroscreen
has conspired with Panlabs to infringe the company's patents.
In the amended suit, the company seeks an injunction against the infringing
activities of Euroscreen and Panlabs, an award of damages for the company's lost
profits, the destruction of data obtained by the infringement of its patents,
and other relief.
Management believes that its complaint against Panlabs and Euroscreen is
well founded and necessary to protect the value of its intellectual property
assets.
Management believes that the ultimate resolution of the above matters could
have a material impact on the company's financial position, results of
operations and cash flows.
13
Item 2. Sales of Unregistered Securities
On August 3, 2001, the company sold to investors (the "purchasers"), 9,438
shares of Series B senior redeemable Convertible Preferred Stock (the "Series B
Preferred Stock") in a private placement for $9,438,000. On September 26, 2001,
the company sold 1,618 shares of Series B Preferred Stock and 29,944 shares of
Series C senior redeemable Convertible Preferred Stock (the "Series C Preferred
Stock and together with the Series B Preferred Stock, the "Preferred Stock") for
$31,562,000. Net proceeds, after giving effect to underwriting discounts and
estimated offering expenses, were approximately $37,745,000. The Preferred Stock
may be converted into 7,564,584 shares of common stock.
General. The terms of the Series B Preferred Stock and the Series C
Preferred Stock are identical, except that the Series B Preferred Stock has an
initial conversion price of $4.3358 and the Series C Preferred Stock has an
initial conversion price of $5.9713.
Dividends. Holders of Preferred Stock are entitled to receive dividends on
a pari passu basis, if and when dividends are declared on the common stock, in
an amount equal to the dividends that would have been payable had their shares
been converted to common stock immediately prior to the record date for the
dividend.
Liquidation Preference. Upon any liquidation of the company, each holder of
Preferred Stock is entitled to receive $1,000, plus declared but unpaid
dividends, if any, for each share held, prior to the holders of any common stock
or junior preferred stock receiving any assets of the company available for
distribution.
Election of Directors. Holders of Preferred Stock, voting together as a
separate class, will be entitled to elect two members of the board of directors,
as long as 60% of the Preferred Stock issued and outstanding as of September 26,
2001 remains outstanding.
Voting Generally. The holders of the Preferred Stock are entitled to vote
together with the holders of the common stock on all matters presented to our
stockholders for consideration, except that as long as the holders of the
Preferred Stock are entitled to vote as a separate class to elect members of the
board of directors, they will not be entitled to vote for the remaining
directors. Each share of Preferred Stock has a number of votes equal to the
number of shares of common stock into which it may then be converted.
Conversion to Common Stock. Each share of Preferred stock may be converted
at any time at the option of the holder thereof into a number of shares of
common stock determined by dividing $1,000 by the conversion price, as
appropriately adjusted for any stock splits, stock dividends, combinations or
similar events. All shares of Preferred Stock shall automatically be converted
into common stock upon the vote to so convert of a majority of the Preferred
Stock then outstanding, voting together as a separate class.
Redemption. The company may redeem all outstanding shares of Preferred
Stock at any time after August 3, 2003, provided that the company can redeem
these shares prior to August 3, 2009, only if the market price of the common
stock is at least 200% of the conversion price then in effect for any 20
consecutive trading days ending within 10 trading days of the redemption date.
The company must redeem all outstanding shares of Preferred Stock in two annual
installments beginning on August 3, 2009. On any redemption, the redemption
price will be $1,000 per share, as appropriately adjusted for any stock splits,
stock dividends, combinations or similar events, plus declared but unpaid
dividends.
14
Item 4. Submission of Matters to a Vote of Security Holders
On September 26, 2001, the company held a special meeting of stockholders
for the following purposes: (i) to approve the issuance of 1,618 shares of
Series B Convertible Preferred Stock and 29,944 shares of Series C Convertible
Preferred Stock (Proposal No. 1); and (ii) to approve the Synaptic
Pharmaceutical Corporation 1996 Incentive Pan, as Amended and Restated (Proposal
No. 2).
The stockholders approved Proposal No. 1 as follows:
VOTES FOR VOTES AGAINST VOTES ABSTAINED
4,570,308 676,925 709,629
The stockholders approved Proposal No. 2 as follows:
VOTES FOR VOTES AGAINST VOTES ABSTAINED
6,379,619 1,035,360 709,418
15
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
On August 3, 2001, the company filed a Current Report on Form 8-K stating
that it had issued a press release announcing that it will raise up to $41
million in a private financing led by Warburg Pincus, LLC.
On September 26, 2001, the company filed a Current Report on Form 8-K
stating that it had issued a press release announcing that it had closed on the
second stage of its $41 million private financing led by Warburg Pincus, LLC.
--------------------
Safe Harbor Statement
This Report on Form 10-Q contains "forward looking statements" within the
meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. Such statements include, but are not limited
to, those relating to future cash and spending plans, amounts of future research
funding, and 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
"expects," "may," "believes," and similar expressions are intended to be among
the words that identify forward-looking statements. Such statements involve
risks and uncertainties, including, but not limited to, those risks and
uncertainties detailed in the company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000 (the "2000 Form 10-K"), including in Item 1
of the 2000 Form 10-K under the captions "Patents, Proprietary Technology and
Trade Secrets," "Competition" and "Government Regulation" as well as in the
section entitled "Disclosure Regarding Forward-Looking Statements" under the
captions "Early Stage of Product Development; Technological Uncertainty,"
"Dependence on Collaborative Partners and Licensees for Development, Regulatory
Approvals, Manufacturing, Marketing and Other Resources" and "Uncertainties
Related to Clinical Trials" or detailed from time to time in filings the company
makes with the SEC. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual outcomes
may vary materially from those indicated. Although the company believes that the
expectations reflected in the forward-looking statements contained herein are
reasonable, it can give no assurance that such expectations will prove to be
correct.
16
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: November 13, 2001 By: /s/ Kathleen P. Mullinix
-----------------------------------
Name: Kathleen P. Mullinix
Title: Chairman, President and
Chief Executive Officer
By: /s/ Robert L. Spence
-----------------------------------
Name: Robert L. Spence
Title: Senior Vice President,
Chief Financial Officer &
Treasurer
17