10-Q 1 e10-q.txt FORM 10-Q QUARTERLY PERIOD ENDED JUNE 30,2000 1 U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________TO _________. Commission File Number 000-21141 PHARMAPRINT INC. (Name of small business issuer as specified in its charter) DELAWARE 33-0640125 (State or other jurisdiction of (I.R.S. employer identification no.) incorporation or organization) 4701 VON KARMAN AVE SUITE 201, NEWPORT BEACH, CALIFORNIA 92660 (Address of principal executive offices) (Zip code) REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 794-7778 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 Issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X] Number of shares outstanding as of August 16, 2000: Common Stock: 17,152,507 2 PHARMAPRINT INC. AND SUBSIDIARIES INDEX

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This report contains "forward-looking" statements. The Company is including this statement for the express purpose of availing itself of protections of the safe harbor provided by the Private Securities Litigation Reform Act of 1995 with respect to all such forward-looking statements. Examples of forward-looking statements include, but are not limited to: (a) projections of revenues, capital expenditures, growth, prospects, dividends, capital structure and other financial matters; (b) statements of plans and objectives of the Company or its management or Board of Directors; (c) statements of future economic performance; (d) statements of assumptions underlying other statements and statements about the Company and its business relating to the future; and (e) any statements using the words "anticipate," "expect," "may," "project," "intend" or similar expressions. The Company's ability to predict projected results or the effect of certain events on the Company's operating results is inherently uncertain. Therefore, the Company wishes to caution each reader of this report to carefully consider the following factors and certain other factors discussed herein and in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2000 filed on August 17, 2000, any or all of which have in the past and could in the future affect the ability of the Company to achieve its anticipated results and could cause actual results to differ materially than those discussed herein: cost and availability of botanical extracts, cost and availability of manufacturing service contractors, ability to obtain and enforce patents, limited manufacturing experience, dependence on third parties, uncertainties related to the PharmaPrint(TM) Process, government regulation and uncertainty of product approvals, ability to commercialize and market products, cost and results of research and development and clinical and toxicology studies, technological advances by third parties and competition, future capital needs of the Company, control by existing shareholders and general economic and business conditions. PharmaPrint(TM) is a trademark of the Company 3 PART I -- FINANCIAL INFORMATION PHARMAPRINT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these condensed consolidated financial statements 3 4 PHARMAPRINT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these condensed consolidated financial statements 4 5 PHARMAPRINT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these condensed consolidated financial statements 5 6 PHARMAPRINT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION The financial statements of PharmaPrint, Inc. ("PharmaPrint") for the three months ended June 30, 2000 and 1999 are unaudited. Certain information and note disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been omitted. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in PharmaPrint's Form 10-K as of and for the year ended March 31, 2000. In the opinion of management, the financial statements contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial position of PharmaPrint for the periods presented. The interim operating results may not be indicative of operating results for the full year or for any other interim periods. NOTE 2 - GOING CONCERN/RISK FACTORS Risk Factors Since inception (September 15, 1994) the Company has incurred significant losses (totaling $74,643,349 through June 30, 2000) and has a working capital deficit of $12,346,502 at June 30, 2000. On October 21, 1999, the Company received a one-year termination notice regarding the manufacture of certain products for AHP. From October 21, 1999 through November 15, 1999, the Company engaged in discussions with AHP to resolve certain issues between the companies. On November 15, 1999, the Company was informed that, on November 8, 1999, AHP initiated a legal action against PharmaPrint, alleging a number of claims including breach of contract. AHP is seeking monetary damages, declaratory judgment and injunctions. On November 16, 1999, PharmaPrint initiated an action against AHP, alleging a number of claims including misappropriation of trade secrets, breach of contract, violation of unfair competition laws and breach of the implied covenant of good faith and fair dealing. PharmaPrint is seeking monetary damages, preliminary and permanent injunctions, punitive damages, restitution and disgorgement and other damages. On July 20, 2000, AHP and the Company entered into a confidential settlement agreement fully and finally resolving the actions of both parties. The Company is in the process of evaluating the financial statement impact of this settlement and is currently seeking new sources of revenue. The Company is currently negotiating settlement and payment arrangements with its significant vendors that include both a reduction in the total amounts owed such vendors and an extended payment plan should the vendors accept a reduced payment. Certain vendors have also independently commenced legal actions against the Company to collect amounts owed them and for various other damages (see Note 7). The Company also intends to issue either common stock or warrants to purchase common stock to the vendors as an incentive for the vendors to accept a 6 7 PHARMAPRINT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) reduced cash payment and the extended payment plan. If the Company is unable to successfully negotiate arrangements with its vendors and/or is unsuccessful in its defense of pending legal matters (see Note 7), the Company will evaluate other options including, but not limited to, seeking protection from the bankruptcy court. The Company has completed negotiations with several significant vendors (see Note 6). On May 4, 2000, the Company was de-listed from the NASDAQ National Market for failure to maintain the net tangible asset requirement of NASDAQ, among other requirements. The shares are currently quoted on the NASD over-the-counter bulletin board. The de-listing may make it more difficult for the Company to raise capital in the public markets in the future. The Company is presently funding its ongoing operations from cash on hand, through the sale of shares of Vicus.com, Inc. (see Note 4) and from a $1 million secured line of credit (see Note 9). The Company is currently seeking to raise additional equity and/or debt capital, sell its technology or locate an appropriate merger candidate in order to pay its current liabilities, to fund current operations and to fund sales and marketing efforts for new revenue distribution channels. The Company's ability to raise sufficient capital and meet future capital requirements will depend on many factors, including but not limited to: the outcome of stockholder and other litigation, the Company's ability to both reduce current amounts owed its significant vendors and pay such amounts over an extended time period, the Company's ability to get its common stock re-listed on the NASDAQ National Market, the Company's ability to obtain new distribution channels to sell its products, cost and availability of key botanical extracts, cost and availability of manufacturing service contractors, ability to obtain and enforce patents, dependence on third parties for collaboration/new distribution channels, and competition. Provided that the Company can successfully raise capital and successfully negotiate settlement and payment arrangements with significant vendors, the Company believes that its capital resources will enable it to maintain reduced operations for the next six months. However, no assurance can be given that additional capital, if needed, will be available when required or upon terms acceptable to the Company or that the Company will be successful in its efforts to negotiate with significant vendors. The accompanying financial statements have been prepared on the basis of a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts (including the realizability of long-lived assets under SFAS No. 121 and of inventories) or the amount and classification of liabilities that might result from the outcome of this uncertainty. NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Revenue Recognition Revenues are recognized when products are shipped to customers. 7 8 PHARMAPRINT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Loss Per Share The Company has adopted SFAS No. 128 "Earnings Per Share." As required pursuant to SFAS No. 128, basic loss per share is computed based on the weighted average number of common shares outstanding for the period. Diluted loss per share is computed assuming dilution from stock options and warrants. The Company excluded all outstanding stock options and warrants from the diluted computation, as their effect is antidilutive. Comprehensive Income The Company has adopted SFAS No. 130, "Reporting Comprehensive Income," which established standards for the reporting and display of comprehensive income and its components in financial statements. Comprehensive income generally represents all changes in stockholders' equity except those resulting from investments by and distributions to owners. There is no effect of SFAS No. 130 in these financial statements as the Company has no items of comprehensive income. Segment Information The Company has adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which established standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report information about operating segments in interim financial reports. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company believes that it currently operates under one segment. Recent Accounting Pronouncements The FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities on the balance sheet at their fair value. This statement, as amended by SFAS 137, is effective for financial statements for all fiscal quarters of all fiscal years beginning after June 15, 2000. The Company does not expect the adoption of this standard to have a material impact on its results of operations, financial position or cash flows as it currently does not engage in any derivative or hedging activities. In March 2000, the Emerging Issues Task Force reached a consensus on Issue No. 00-2, "Accounting for Web Site Development Costs" ("EITF 00-2") to be applicable to all web site development costs incurred for the quarter beginning after June 30, 2000. The consensus states that for specific web site development costs, the accounting for such costs should be accounted for under AICPA Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of Computer 8 9 PHARMAPRINT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Software Developed or Obtained for Internal Use." The Company does not expect the adoption of EITF 00-2 to have a material effect on its financial statements. In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions involving Stock Compensation," an interpretation of APB 25. FIN 44 clarifies the application of APB 25 for (a) the definition of employee for purposes of applying APB 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence for various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 1, 2000, but certain provisions cover specific events that occur after either December 15, 1998, or January 12, 2000. The adoption of certain other provisions of FIN 44 prior to March 31, 2000 did not have a material effect on the financial statements. The Company does not expect that the adoption of the remaining provisions will have a material effect on the financial statements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition," which outlines the basic criteria that must be met to recognize revenue and provides guidance for presentation of revenue and for disclosure related to revenue recognition policies in financial statements filed with the Securities and Exchange Commission. The effective date of this pronouncement is the fourth quarter of the fiscal year beginning after December 15, 1999. The Company believes that adopting SAB 101 will not have a material impact on its financial position and results of operations. NOTE 4 - NON-MARKETABLE EQUITY SECURITIES Non-marketable equity securities consist of shares of Vicus.com, Inc. ("Vicus"). Vicus was formed by the Company and several related parties to the Company, and was for some time operating out of the Company's offices. During the current quarter, the Company sold its remaining 420,000 shares at $1.20 to unrelated parties, of which $221,000 has not yet been collected and is recorded as other receivables in the accompanying condensed consolidated balance sheets. The proceeds of $504,000 from the sales of this stock are recorded as a gain on the sale of non-marketable equity securities as the stock's net book value was $0. NOTE 5 - AGREEMENTS As part of a Settlement Agreement with AHP dated July 20, 2000, all agreements with AHP have been terminated (see Note 1). USC License Agreement In March 1995, the Company entered into a license agreement with USC (the "USC License Agreement") that granted the Company an exclusive, worldwide license to: (i) the PharmaPrint(TM) Process; (ii) use certain therapeutic compounds; and (iii) other related products developed at USC. USC has also agreed to grant the Company the right to sublicense certain products and a right of first refusal to obtain a license for any improvements to certain products 9 10 PHARMAPRINT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) developed by USC. The term of the USC License Agreement began March 1, 1995, and ends on the later of February 28, 2010, or the expiration of the last issued patent under the USC License Agreement. In exchange for the license, the Company agreed to pay USC: (i) royalty payments of 1% of the Company's net sales of pharmaceutical products developed using the PharmaPrint(TM) Process; (ii) after the first patent issues, an annual minimum royalty of $15,000, which shall increase by $5,000 annually for the following two years and be $25,000 annually thereafter; (iii) an annual license fee of $10,000 payable until a patent issues; and (iv) 328,563 shares of the Company's common stock valued at $316,000 at the time of the exchange. During each of the three months ended June 30, 2000, and 1999, total royalty expense under the USC License Agreement was $25,000. As of June 30, 2000, the Company had not remitted the royalty payment according to the terms of the USC License Agreement. As a result, the Company is default on this agreement. It is management's intent to cure such default by remitting payment, however no assurances can be given that such payment will occur. NOTE 6 - VENDOR NEGOTIATIONS Accounts Payable Settlements The Company is currently negotiating settlement and payment arrangements with its significant vendors that include both a reduction in the total amounts owed such vendors and an extended payment plan should the vendors accept a reduced payment. Certain vendors have also independently commenced legal actions against the Company to collect amounts owed them and for various other damages. The Company also intends to issue either common stock or warrants to purchase common stock to the vendors as an incentive for the vendors to accept a reduced cash payment and the extended payment plan. If the Company is unable to successfully negotiate arrangements with its vendors and/or is unsuccessful in its defense of pending legal matters, the Company will evaluate other options including, but not limited to, seeking protection from the bankruptcy court The Company has obtained settlement agreements with certain of its vendors. The settlement agreements require the Company to issue non-interest bearing notes with payments totaling one-half of the amount owed to each of the vendors. Additionally, the Company will transfer 1,000,000 shares of its common stock to these settling creditors on a pro-rata basis. The agreements are contingent on each of the settling creditors signing the agreements; otherwise, all of the agreements will be null and void. As of July 14, 2000, 10 of the 20 settling creditors have signed representing approximately $1,755,000 of the accounts payable at March 31, 2000. If all of these agreements are signed, the Company will reduce its obligations (before considering the present value of these payments at an estimated 12% discount rate) by a total of $3,345,000 in exchange for stock valued at $359,000 (based on the August 15, 2000 closing price), representing a potential extraordinary gain on extinguishment of debt of approximately $2,986,000. 10 11 PHARMAPRINT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 7 - PENDING LITIGATION In July 1999 Applied Analytical Industries, Inc. ("AAI"), a vendor, filed a Demand for Arbitration with the American Arbitration Society, seeking to recover damages for alleged breach of contract related to a Manufacturing Contract. In December 1999 the Company initiated a counterclaim against AAI. The Company filed the suit for claims arising from breach of contract, fraudulent inducement and fraud and negligence arising from various manufacturing and analytical agreements between the companies. The Company is seeking in excess of $6,000,000 in damages, and AAI is seeking in excess of $6,000,000 for payment of unpaid charges, interest and other damages. The Company has reached a tentative settlement with AAI, agreeing to transfer 2.2 million shares of the Company's common stock (valued at approximately $790,000 based on the August 15, 2000 closing price) in exchange for the relief of approximately $5.5 million in accounts payable and a mutual dismissal of all actions, which would result in a potential extraordinary gain on extinguishment of debt of approximately $4,710,000. On February 3, 2000, the Company was served with a class action complaint filed January 5, 2000, as amended January 27, 2000. This action is on behalf of all those who acquired the common stock of PharmaPrint between July 1, 1999 and November 15, 1999. The Company was also served with a class action complaint filed January 20, 2000. This action is on behalf of all persons who purchased the common stock of PharmaPrint from April 1, 1999 through November 17, 1999. The plaintiffs are seeking compensatory damages, and other costs and expenses, including legal fees. The Company and its officers intend to vigorously defend the merits of the lawsuits. On March 31, 2000 the Company settled a suit with International Processing Corporation ("IPC"), a vendor. In the settlement, the Company agreed to issue a promissory note which called for quarterly payments of $25,000 beginning on June 30, 2000, with a balloon payment of $75,000 due on March 30, 2002 and a pro-rata percentage of 1,000,000 shares (as determined by a percentage of the total amount of debt released by IPC over the total amount released by all other vendors - see Note 6) in exchange for a release from all amounts due to IPC prior to the agreement. The Company has discounted the note using a 12% interest rate, and transferred the present value of the payment obligations from accounts payable to notes payable. No gain on extinguishment of debt will be recognized until the number of shares is determined. Based on the Company's closing price on August 15, 2000 and preliminary allocation of shares, this settlement would result in a potential extraordinary gain of approximately $436,000. During the current fiscal year Pennie and Edmonds, LLP ("PEL"), filed a suit against the Company for unpaid legal fees in the amount of $225,000. The Company contends that PEL's estimation of the fees owed to them is based upon excessive and inappropriate charges for services that are unjustified. The Company believes that it has meritorious defenses to these claims and intends to vigorously defend itself. As the outcome or final amount to be paid by the client is undeterminable no accrual for loss relating to this suit is reflected in the accompanying financial statements. 11 12 PHARMAPRINT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) On March 29, 2000 the Company was informed that an action was filed by a former employee Kenneth Gorelick against the Company alleging damages arising out of employment with the Company in excess of $150,000 plus interest and costs. The Company contends that this is not a legitimate claim. The Company believes that it has meritorious defenses to these claims and intends to vigorously defend itself. As the outcome and final amount are not determinable, no accrual for loss relating to this suit is reflected in the accompanying financial statements. In April 2000, the Company initiated an action against Bio Dar, Inc. ("Bio Dar"), a vendor. The Company filed the suit for claims arising from establishment of rights and to verify ownership of intellectual properties. The Company is seeking $2.5 million in damages. Bio Dar has filed an answer to the suit, and has initiated a counter suit for damages not exceeding the amount sought by the Company. As the outcome and final amount are not determinable, no accrual for loss relating to this suit is reflected in the accompanying financial statements. NOTE 8 - STOCKHOLDERS' EQUITY Convertible Series A Preferred Stock The Series A Preferred Stock has a dividend yield of 6%, payable at the time of conversion in shares of the Company's common stock. For the three months ended June 30, 2000, the Company has recorded dividends of $110,996 related to preferred stock dividends that will be due upon conversion. As this amount will not be paid in cash, it is shown as a decrease in the accumulated deficit account and a corresponding increase in the additional paid in capital account in the accompanying consolidated balance sheet. This amount has also been disclosed as an increase to the preferred stock's liquidation preference at June 30, 2000. On July 5, 2000, 105 additional shares of preferred stock were converted into 322,082 shares of common stock. Options Granted to Mr. Steven Bowman On April 14, 1995, the Company adopted the 1995 Stock Option Plan, as amended, (the "Plan") pursuant to which directors, officers, key employees, consultants, scientific advisors and other personnel working directly with the Company are eligible to receive stock options as defined in the 1995 Plan. The Company and its stockholders have approved 5,900,000 shares of common stock available for issuance under the 1995 Plan. The 1995 Plan, unless terminated sooner by the Board of Directors, will terminate on April 14, 2005. On May 15, 2000 the Company granted to Steven Bowman, Chief Executive Officer, non-qualified stock options to purchase 500,000 shares of common stock at the then fair market value of $0.375 per share. Mr. Bowman's right to purchase 125,000 shares of common stock will vest on each of August 15, 2000, November 15, 2000, February 15, 2001 and May 15, 2001. Additionally, Mr. Bowman's right to purchase shares of common stock will vest upon a change in control of ownership of the Company or upon his achieving certain specified goals as defined in the agreement between Mr. Bowman and the Company. 12 13 PHARMAPRINT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 9 - LINE OF CREDIT On May 8, 2000, the Company entered into a line of credit agreement with Montecito Leasing Group, LLC ("Montecito"). Pursuant to the terms of the agreement, the Company obtained a $1,000,000 credit line with a maturity date of November 22, 2000. Outstanding borrowings under this line bear interest at 10% per annum payable monthly and are secured by substantially all of the Company's assets including all of its inventories, fixed assets, patents and pending patents. At June 30, 2000, the Company's balance on this line was $293,000. Concurrent with the line of credit, the Company granted Montecito a warrant to purchase 500,000 shares of the Company's common stock at $0.40 per share (lower than the Company's closing price of $0.65 on the date of grant). 250,000 of these shares are exercisable immediately, with the other 250,000 shares exercisable when and if the Company has borrowed an aggregate of $1,000,000 under the line of credit. The warrant agreement also contains a cashless exercise option, registration rights and anti-dilution provisions as more fully described in the warrant agreement. The warrant expires in May 2005. The fair value of the exercisable portion of this warrant of $67,500 has been recorded as a debt discount and will be amortized beginning July 2000 over the remaining debt term. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We intend to use our PharmaPrint Process technology to develop high quality dietary supplement, functional food and pharmaceutical products from botanical sources. We believe that our PharmaPrint Process Technology represents a new paradigm in the development of therapeutic products from botanical sources. Unlike the traditional drug development process of identifying, isolating and synthesizing single bioactive molecules from plant and other sources, our core technologies were developed based on empirical data suggesting that the health benefits and safe usage of certain plant-derived therapeutics might be the result of the natural combination of multiple molecules found in the plant extract and that single molecules, in isolation, may not replicate the natural plant's effectiveness. The PharmaPrint Process technology enables us to identify, quantify and standardize the bioactives within plant sources that are believed to provide therapeutic benefits and produce products having consistent batch-to-bath quantities of these bioactives. We intend to commercialize development efforts for four distinct product lines derived from botanical sources: 1) single herbal dietary supplement products; 2) herbal dietary supplements in combination with vitamins and minerals; 3) FDA approved pharmaceuticals from plant sources and 4) functional food products based on soy or soy dietary supplements. In September 1999, we launched six combination products that were initially marketed on three websites. In the summer of 1999, we completed analysis of the Phase II study for our initial pharmaceutical product candidate, PPRT-321, a saw palmetto-derived drug that is being 13 14 developed for the treatment of symptoms associated with BPH. The clinical study data demonstrated that the product was safe and appeared to improve symptoms associated with an enlarged prostate gland. We are currently devoting limited resources to our pharmaceutical program to maintain an active Saw-Palmetto Investigational New Drug Application. In the spring of 1999, we began using the PharmaPrint Process technology on soy, a product classified as both a functional food and dietary supplement. Initial results of this work were submitted in a provisional patent application. RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2000 American Home Products Corporation ("AHP") accounted for substantially all of the Company's sales for the three months ended June 30, 1999. The relationship with this customer was terminated during fiscal year 2000 due to significant litigation between the two parties as described below. As a result, the Company has no current distribution channels to market its products and the Company has essentially ceased all revenue-generating activities. Manufacturing revenues of only $420 were realized for the three months ended June 30, 2000 compared to $5,409,618 for the three months ended June 30, 1999. Because of no activity in revenue generation, no costs of sales expense was realized for the three months ended June 30, 2000 compared to $4,769,717 for the three months ended June 30, 1999. Prior to the AHP agreement, the Company engaged primarily in research and development activities and reported as a development stage company. During the term of the AHP agreement, the Company continued research and development activities, but due to lack of revenue and the resulting shortage of funds, the Company has suspended such activities. Research and development expense for the three months ended June 30, 2000 was $32,455 compared to $2,144,722 for the three months ended June 30, 1999. The Company in the course of business incurred general and administrative expense necessary for the operation of the Company. In the Company's current financial condition, senior management made such attempts as reasonable to reduce these expenses. Such expenses were $986,479 for the three months ended June 30, 2000, a $590,777 or 37% decrease compared to $1,577,256 for the three months ended June 30, 1999. Stock compensation decreased to $4,746 for the quarter ended June 30, 2000 from $194,439 for the quarter ended June 30, 1999. This decrease is due to less options and a lower valuation of options and warrants granted to consultants in fiscal year 2000. The Company recorded a gain on sale of non-marketable equity securities of $504,000 during the three months ended June 30, 2000. There were no such sales in the comparable period of 1999. As a result of the above factors, net loss for the three months ended June 30, 2000 was $524,717, a decrease of $2,751,799 or 84% compared to $3,276,516 for the three months ended June 30, 1999. Net loss per share available to common stockholders was three cents for the three months ended June 30, 2000 compared to a net loss per common share of twenty-four cents for the three months ended June 30, 1999. 14 15 LIQUIDITY AND CAPITAL RESOURCES During the three months ended June 30, 2000 the Company sold fixed assets for proceeds of $53,692, borrowed $293,000 on a line of credit and sold non-marketable equity securities for proceeds of $283,000. These transactions partially offset cash used in operating activities of $920,378. Cash and cash equivalents decreased $290,685 for the three months ended June 30, 2000 and were $11,948 at June 30, 2000. For the three months ended June 30, 1999, the Company realized net proceeds of $9,962,232 from issuance of redeemable preferred stock. The proceeds from issued preferred stock were partially offset by net cash used in operating activities of $4,552,340. For the three months ended June 30, 1999, cash and cash equivalents increased $4,847,983 and was $7,147,942 at June 30, 1999. We currently have a negative working capital position and intend to rely on proceeds from a secured line of credit facility to pay day-to-day expenses. This loan allows us to borrow up to $500,000. It may increase to $1,000,000 under certain conditions. As of June 30, 2000, we have borrowed $293,000 of the $500,000 currently available to us. The lender has a security interest on substantially all of our assets securing the repayment of all amounts advanced to us under this line of credit. The lender has rights that effectively allow it to direct how we spend any loan proceeds that we receive and to withhold the advance of funds pursuant to this line of credit for any reason or for no reason at all. The Company's Independent Auditors' qualified their opinion and expressed doubt about the Company's ability to continue as a going concern for the consolidated balance sheets as of March 31, 2000 and the Company's results of operations and cash flows for the year ended March 31, 2000, They stated that "the ability of the Company to continue in existence is dependent primarily upon negotiating acceptable settlement and payment terms with its significant vendors, obtaining additional debt and equity financing to fund its short-term operating expenses and to fund sales and marketing efforts for new revenue channels of distribution, successful resolution of its customer, vendor and stockholder litigation, as well as the generating of income form collaborative relationships, new partners and other new revenue distribution channels." On May 4, 2000, the Company was de-listed from the NASDAQ National Market for failure to maintain the net tangible asset requirement of NASDAQ, among other requirements. The shares are currently quoted on the NASD over-the-counter bulletin board. The de-listing may make it more difficult for the Company to raise capital in the public markets in the future. As of June 30, 2000 7,110 shares of our Series A were issued and outstanding. The Series A Preferred Stock has a dividend rate of six percent, payable at the time of conversion in shares of our common stock. Upon the occurrence of certain liquidation events, the holders of our Series A Preferred Stock are entitled to receive, in preference over the holders of common stock and any preferred stock ranking junior to our Series A Preferred Stock, an amount equal to the stated value plus 6% per year (pro rated for any partial year) of such stated value beginning on June 4, 1999 and ending on the date of final distribution. Our Series A Preferred Stock is also redeemable at the option of the holder if at the time of conversion we fail to issue shares of our common stock to the holders of Preferred Stock or if the registration statement registering the resale of the common stock issuable upon conversion of the Series A Preferred Stock is not effective for specified periods. As discussed in Note 6 to our Condensed Consolidated Financial Statements on page 10 of this report we are currently negotiating settlement and payment arrangements with our significant creditors. If we are unsuccessful in creating these arrangements then we will evaluate other options including but not limited to seeking protection from the bankruptcy court. The Company is currently seeking to raise additional equity and/or debt capital, sell its technology or locate an appropriate merger candidate in order to pay its current liabilities, to fund current operations and to fund sales and marketing efforts for new revenue distribution channels. The Company's ability to raise sufficient capital and meet future capital requirements will depend on many factors, including but not limited to: the outcome of stockholder and other litigation, the Company's ability to both reduce current amounts owed its significant vendors and pay such amounts over an extended time period, the Company's ability to get its common stock re-listed on the NASDAQ National Market, the Company's ability to obtain new distribution channels to sell its products, cost and availability of key botanical extracts, cost and availability of manufacturing service contractors, ability to obtain and enforce patents, dependence on third 15 16 parties for collaboration/new distribution channels, and competition. Provided that the Company can successfully raise capital and successfully negotiate settlement and payment arrangements with significant vendors, the Company believes that its capital resources will enable it to maintain reduced operations for the next six months. However, no assurance can be given that sufficient capital exists for reduced operations and that additional capital, if needed, will be available when required or upon terms acceptable to the Company or that the Company will be successful in its efforts to negotiate with significant vendors. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are not currently directly exposed to market risks related to fluctuations in interest rates in long-term or short-term debt. Currently, and as of June 30, 2000, we have no variable interest rate loans. However, if interest rates do increase from their current levels, we may have more difficulty in obtaining debt financing than we might otherwise, and if we are successful, then the terms under which we would be able to obtain financing would be less favorable to us. PART II -- OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS On November 16, 1999, we initiated an action against American Home Products Corporation ("AHP") in the Orange County, California Superior Court alleging a number of claims including misappropriation of trade secrets, breach of contract, and violation of fair dealing. On November 8, 1999, American Home Products Corporation initiated an action against us in the Superior Court of New Jersey, Morris County Law Division alleging a number 16 17 of claims including breach of contract. On July 20, 2000, we settled with American Home Products Corporation and all actions were dismissed. 17 18 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS We held a special meeting of the stockholders on April 13, 2000. Three matters were voted upon at this meeting. 1. An amendment to the Company's Certificate of Incorporation increasing the number of authorized shares of common stock from 24,000,000 to 50,000,000 shares of common stock was approved. 2. An amendment to the Company's 1995 Stock Option Plan, as amended to increase the number of shares reserved for issuance thereunder from 2,900,000 shares to 5,900,000 shares was approved and; 3. A proposal to allow the Company to issue shares of common stock upon conversion of the Series A Preferred Stock in excess of the Maximum Share Amount as set forth in the Certificate of Designations, Preferences and Rights and certain rules of the NASDQAQ National Market was approved. The shareholders voted on these issues as follows: Shares Cast

ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are included herein: 27.1 Financial Data Schedule (b) We filed the following reports on Form 8-K during the fiscal quarter ended June 30, 2000: 18 19 On April 13, 2000 we reported the resignation of C. Richard Piazza as our Chief Executive Officer and the Chairman of our Board of Directors. On May 19, 2000, we reported the Dismissal of Arthur Andersen LLP and the appointment of Corbin & Wertz as our independent accountants. 19 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PHARMAPRINT INC. By: /s/ Steven A. Bowman ---------------------------------- Steven A. Bowman Chief Executive Officer, Principal Accounting Officer Date: August 21, 2000 20 21 EXHIBIT INDEX Exhibit Number Description 27.1 Financial data schedule

PHARMAPRINT INC 10-Q