10-Q 1 a72396e10-q.txt FORM 10-Q PERIOD ENDED MARCH 31, 2001 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2001 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 0-22669 AURORA BIOSCIENCES CORPORATION ------------------------------ (Exact name of registrant as specified in its charter) Delaware 33-0669859 ---------------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 11010 Torreyana Road, San Diego, CA 92121 ---------------------------------------- ------------------------------------ (Address of principal executive offices) (Zip code) (858) 404-6600 -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Outstanding at Class ~~October~~April 3130, ~~2000~~2001 ----- ---------------- Common Stock, $.001 par value 2022,~~579~~606,~~424~~623

2 AURORA BIOSCIENCES CORPORATION FORM 10-Q INDEX

PAGE NO. -------- PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Balance Sheets - ~~September~~March 3031, ~~2000~~2001 (Unaudited) and December 31, ~~1999~~2000........................................ .............3 Consolidated Statements of Operations (Unaudited) - Three ~~and nine~~ months ended ~~September~~March 3031, ~~2000~~2001 and ~~1999~~2000............... ~~4 Statements of Cash Flows (Unaudited) - Nine months ended September 30, 2000 and 1999~~..........................4 5Consolidated ~~Notes~~Statements toof ~~Financial~~Cash ~~Statements~~Flows (Unaudited) - Three months ended March 31, 2001 and 2000.........................................5 Notes to Consolidated Financial Statements (Unaudited)................~~...........~~ 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................ ~~8 PART II~~...................9 ~~OTHER INFORMATION~~ ITEM 63. ~~Exhibits~~Quantitative and ~~Reports~~Qualitative onDisclosures ~~Form~~about ~~8-K~~Market Risk.................................................................13 PART II. OTHER INFORMATION ITEM 2. 11Changes ~~SIGNATURE~~in Securities and Use of Proceeds....................14 ITEM 6. Exhibits and Reports on Form 8-K.............................14 SIGNATURE..................................................... 12................15

2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. AURORA BIOSCIENCES CORPORATION CONSOLIDATED BALANCE SHEETS

~~September~~March 3031, December 31, 2001 2000 ~~1999~~ ------------- ------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 2510,~~120~~367,~~940~~314 $ 1524,~~934~~568,~~352~~825 Investment securities, available-for-sale 8191,~~424~~946,~~322~~082 2082,~~683~~067,~~696~~909 Accounts receivable 1420,~~522~~681,~~271~~145 521,~~282~~643,~~485~~864 Notes receivable from officers and employees 50,000 50,000 Prepaid expenses 1,~~160~~099,~~143~~081 1,~~443~~169,~~840~~259 Other current assets 46,~~468~~920,~~517~~175 15,~~623~~920,~~301~~445 ------------- ------------- Total current assets ~~126~~131,~~746~~063,~~193~~797 45135,~~017~~420,~~674~~302 Equipment, furniture and leaseholds, net 1220,~~225~~913,~~334~~045 1115,~~892~~811,~~398~~712 Notes receivable from officers and employees ~~227~~262,000 ~~115~~262,000 Restricted cash 2,512,276 4,925,418 Other assets 11,~~968~~169,~~381~~903 611,~~837~~835,~~388~~852 ------------- ------------- Total assets $ ~~151~~165,~~166~~921,~~908~~021 $ 63168,~~862~~255,~~460~~284 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 59,~~758~~542,~~196~~433 $ 36,~~832~~809,~~428~~359 Accrued compensation 32,~~985~~853,~~916~~561 23,~~219~~497,~~172~~976 Other current liabilities 2,~~048~~600,~~900~~755 ~~442~~2,~~200~~428,389 Unearned revenue 712,~~305~~209,~~071~~237 1015,~~214~~756,~~848~~148 Capital lease and loan obligations, current portion 2,~~482~~370,~~933~~308 2,~~497~~375,~~046~~563 Current installments of long-term notes payable 333,147 318,116 ------------- ------------- Total current liabilities 2129,~~581~~909,~~016~~441 1931,~~205~~185,~~694~~551 Capital lease and loan obligations, less current portion 2,809,000 3,~~948~~381,~~681~~484 4Long-term notes payable,~~342~~ less current installments 6,~~726~~484,102 6,574,482 Stockholders' equity: Preferred stock, $.001 par value; 7,500,000 shares authorized and no shares issued and outstanding -- -- Common stock, $.001 par value, 50,000,000 shares authorized, 2022,~~376~~518,~~888~~606 and 1722,~~442~~356,~~741~~542 shares issued and outstanding at ~~September~~March 3031, ~~2000~~2001 and December 31, 202000,~~377~~ 17respectively 22,~~443~~519 ~~1999~~22,357 ~~respectively~~ Additional paid-in capital ~~139~~145,~~435~~353,~~579~~075 62144,~~754~~472,~~348~~938 Accumulated other comprehensive income ~~(loss) 2~~899,~~332,633~~880 ~~(48~~546,~~567)~~274 Deferred compensation (~~235~~20,~~376~~753) (~~830~~113,~~112~~333) Accumulated deficit (1519,~~916~~536,~~002~~243) (2117,~~579~~814,~~072~~469) ------------- ------------- Total stockholders' equity ~~125~~126,~~637~~718,~~211~~478 40127,~~314~~113,~~040~~767 ------------- ------------- Total liabilities and stockholders' equity $ ~~151~~165,~~166~~921,~~908~~021 $ 63168,~~862~~255,~~460~~284 ============= ============= See accompanying notes.

3 4 AURORA BIOSCIENCES CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

Three Months Ended ~~Nine~~March ~~Months Ended September 30~~31, ~~September~~2001 ~~30, ------------------------------- -------------------------------~~ 2000 ~~1999 2000 1999~~ ------------ ------------ ---~~---------~~ ~~------------~~ Revenue $ 1617,~~793~~520,~~549~~683 $ 1015,~~880~~286,~~151~~780 ~~$ 47,122,899 $ 30,440,929~~ Operating expenses: Cost of revenue 89,~~810~~003,~~186~~854 68,~~560~~996,~~914~~352 ~~25,785,642 19,728,053~~ Research and development 45,~~403~~843,~~105~~451 32,~~234~~955,~~796~~522 ~~10,415,533 9,299,210~~ Selling, general and administrative 35,~~612~~738,~~944~~970 24,~~978~~035,~~022~~923 ~~10,715,124 8,543,400~~ ------------ ------------ ~~------------ ------------~~ Total operating expenses 1620,~~826~~586,~~235~~275 1215,~~773~~987,~~732~~797 ~~46,916,299 37,570,663~~ ------------ ------------ ~~------------~~Loss ~~------------ Income (loss)~~ from operations (323,~~686) (1~~065,~~893,581~~592) ~~206,600~~ (7701,~~129,734~~017) Interest and other income 1,~~867~~771,~~679~~119 ~~401,287 6,479,615~~ 1,~~123~~189,~~805~~659 Interest expense (~~161~~228,~~682~~974) (~~175~~277,~~940~~345) ~~(513,145) (519,549)~~ ------------ ------------ ~~------------ ------------~~ Income (loss) before taxes ~~1,673,311~~ (1,~~668~~523,~~234~~447) 6211,~~173,070~~297 ~~(6,525,478)~~Provision ~~Income~~for income taxes (~~270~~198,~~000~~327) -- (~~510~~57,~~000~~379) -- ------------ ------------ ~~------------ ------------~~ Net income (loss) $ ~~1,403,311 $~~ (1,~~668~~721,~~234~~774) $ 5153,~~663,070~~918 ~~$ (6,525,478)~~ ============ ============ ~~============ ============~~ Basic net income (loss) per share $ ~~0.07 $~~ (0.1008) $ 0.2901 ~~$ (0.39)~~ ============ ============ ~~============ ============~~ Diluted net income (loss) per share $ ~~0.06 $~~ (0.1008) $ 0.2601 ~~$ (0.39)~~ ============ ============ ~~============ ============~~ Shares used in computing: Basic net income (loss) per share 2022,~~258~~437,~~485~~008 1720,~~010~~320,~~179~~115 ~~19,614,942 16,881,342~~ ============ ============ ~~============ ============~~ Diluted net income (loss) per share 22,~~597~~437,~~191~~008 1723,~~010~~229,~~179~~929 ~~22,044,946 16,881,342~~ ============ ============ ~~============~~See ~~============~~accompanying notes.

4 5 AURORA BIOSCIENCES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

~~Nine~~Three Months Ended ~~September~~March 3031, ------------------------------- 2001 2000 ~~1999~~ ------------ ------------ OPERATING ACTIVITIES: Net income (loss) $ 5(1,~~663~~721,~~070~~774) $ (6153,~~525,478)~~918 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 2925,~~566,947~~431 2898,~~391,760~~813 Amortization of deferred compensation ~~463~~92,~~756~~580 ~~660~~172,~~834~~471 ~~Gain from sale of investment (1,729,514) -- Revenue earned through barter agreement -- (300,000)~~ Other non-cash items, net ~~243~~69,~~062~~354 --69,354 Changes in operating assets and liabilities: Accounts receivable (9962,~~239,786)~~719 (35,~~084~~627,~~118~~087) Prepaid expenses and other current assets (2929,~~561,519~~552) (21,~~182~~815,~~038~~061) Other assets (1667,~~155,714)~~878 (1102,~~120,061~~404) Accounts payable and accrued compensation 32,~~692~~088,~~512~~659 3331,~~830,509~~824 Other current liabilities 1172,~~606,700~~366 ~~229~~528,~~934~~070 ~~Customer advances -- 875,000~~ Unearned revenue (23,~~909~~546,~~777~~911) 5829,~~493,431~~703 ------------ ------------ Net cash ~~provided by (~~used in) operating activities (31,~~360~~219,~~263~~250) ~~269~~(4,~~773~~560,399) INVESTING ACTIVITIES: Purchases of short-term investments (8025,~~982~~831,~~981~~461) (645,~~922~~847,~~439~~624) Sales and maturities of short-term investments 2016,~~341~~306,~~313~~894 78,~~763~~666,~~169~~145 ~~Capital~~Purchases ~~expenditures~~of ~~(2,308,931)~~property ~~(269,375) Notes receivable from officers~~ and ~~employees~~equipment (~~147~~6,~~000~~008,778) ~~235~~(396,~~000~~724) Restricted cash --2,413,142 ~~355~~46,~~567~~954 Other assets 36(19,~~477~~915) --(24,975) ------------ ------------ Net cash ~~provided by (~~used in) investing activities (6313,~~061~~140,~~122~~118) 1(37,~~161~~556,~~922~~224) FINANCING ACTIVITIES: ~~Private~~Issuance ~~placement~~ of common stock, net 70810,~~940~~945 73,~~179~~372,108 --Principal ~~Other~~payments ~~issuances~~on ofnotes ~~common~~payable ~~stock~~(75,349) ~~net 5~~(72,666~~,904~~) ~~639,426~~ Proceeds from capital lease and loan obligations -- 1,129,887 ~~619,225~~ Principal payments on capital lease and loan obligations (2577,~~128,997~~739) (1747,~~643,983~~176) ------------ ------------ Net cash provided by ~~(used in)~~ financing activities 75157,~~607,973~~857 ~~(385~~73,~~332)~~682,153 ------------ ------------ Net increase (decrease) in cash and cash equivalents 9(14,~~186~~201,~~588~~511) 131,~~046~~565,~~363~~530 Cash and cash equivalents at beginning of period 1524,~~934~~568,~~352~~825 916,~~477~~469,~~916~~321 ------------ ------------ Cash and cash equivalents at end of period $ 2510,~~120~~367,~~940~~314 $ 1048,~~524~~034,~~279~~851 ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ ~~513~~199,~~145~~084 $ ~~519~~351,~~549~~469 ============ ============ ~~SUPPLEMENTAL~~Income ~~SCHEDULE~~taxes OFpaid ~~NONCASH INVESTING AND FINANCING ACTIVITIES: Property and equipment acquired under capital leases and loans~~ $ ~~590~~1,~~952~~350 $ 156,~~415,238~~772 ============ ============ SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Property and equipment acquired under ~~through~~capital ~~barter~~leases ~~agreement~~ $ -- $ ~~300~~39,~~000~~391 ============ ============ See accompanying notes.

5 6 AURORA BIOSCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Aurora Biosciences Corporation ("Aurora" or the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of results for a full year. The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in conjunction with the audited financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000, as filed with the Securities and Exchange Commission. In March 2001, Aurora completed a merger with PanVera Corporation, a biotechnology company based in Madison, Wisconsin, engaged in manufacturing and marketing protein drug targets and drug screening assays for high-throughput screening. Aurora acquired all of PanVera's outstanding common stock in a tax-free, stock-for-stock transaction. The merger was based upon Aurora issuing or reserving for issuance an aggregate of approximately 1.9 million shares of its common stock to PanVera. Each share of PanVera common stock issued and outstanding prior to the merger was exchanged for approximately 1.3422 shares of Aurora common stock. Upon completion of the merger, the outstanding PanVera stock options became options to purchase shares of Aurora's common stock, at the same exchange ratio of 1.3422. The transaction has been accounted for using the pooling-of-interests method. Accordingly, all prior period consolidated financial statements presented have been restated to include the combined results of operations, financial position and cash flows of PanVera Corporation as though the merger had been in effect on the dates indicated. Prior to the merger, PanVera's fiscal year end was September 30. In accordance with Accounting Principles Board Opinion No. 16, PanVera's results of operations for the three month period ended December 31, 2000 have been added directly to PanVera's retained earnings at December 31, 2000, and excluded from reported fiscal 2000 results of operations. The restated combined balance sheet at December 31, 2000 is based on the individual balance sheets of Aurora and PanVera as of December 31, 2000. For purposes of the restatement of prior period combined results of operations for the three months ended March 31, 2000, PanVera's results of operations for the three months ended December 31, 1999 have been combined with Aurora's results of operations for the three months ended March 31, 2000. During the three months ended March 31, 2001, the combined results of operations include merger-related charges of $1.2 million. 6 7 AURORA BIOSCIENCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (UNAUDITED) 2. EFFECT OF NEW ACCOUNTING STANDARD On January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138 (collectively, the "Statement"). The Statement requires all derivatives to be recognized in the statement of financial position at fair value, with changes in the fair value of derivative instruments to be recorded in current earnings or deferred in accumulated other comprehensive loss, depending on whether a derivative is designated as and is effective as a hedge and on the type of hedging transaction. The adoption of the Statement did not have a material impact on the Company's financial position or results of operation. 3. ACCOUNTS RECEIVABLE Included in accounts receivable are unbilled amounts totaling $14,228,853 and $11,665,935 at March 31, 2001 and December 31, 2000, respectively. Unbilled receivables represent amounts due from customers that will be billed at future dates in accordance with contract terms. The unbilled receivables at March 31, 2001 are expected to be billed and collected within one year. 4. INCOME (LOSS) PER SHARE The following table sets forth the computation of basic and diluted income (loss) per share:

Three Months Ended ~~Nine~~March ~~Months Ended September 30~~31, ~~September 30,~~ -------------------------- -----~~---------------------~~ ~~2000~~2001 ~~1999~~ 2000 ~~1999~~ ---------- --~~--------~~ ---------- --~~--------~~ Numerator: Net income (loss) $ (1,721,774) $ 153,918 ============ ============ Denominator: Shares used in basic income (loss) per share computations - weighted average common shares outstanding 2022,~~258~~437,~~485~~008 1720,~~010~~320,~~179~~115 ~~19,614,942 16,881,342~~ Effect of dilutive securities: Nonvested common stock ~~16,802~~ -- 3864,~~719~~779 -- Common stock options ~~2,321,904~~ -- 2,~~391~~845,~~285~~035 -- ---------- ---------- --~~--------~~ ~~---------- Dilutive securities subtotal 2,338,706 -- 2,430,004 -- ---------- ---------- ---------- ----------~~ Shares used in diluted income (loss) per share computations 22,~~597~~437,~~191~~008 1723,~~010~~229,~~179~~929 ~~22,044,946 16,881,342~~ ========== ==~~========~~ ========== ==~~========~~

5. COMPREHENSIVE LOSS Total comprehensive loss was $1,368,168 and $11,038 for the three months ended March 31, 2001 and 2000, respectively. Total comprehensive loss for the three months ended March 31, 2001 and 2000 includes net unrealized gains from investments totaling $353,606 and net unrealized losses from investments totaling $164,956, respectively. 7 8 6. BUSINESS COMBINATION In March 2001, Aurora acquired PanVera Corporation (as described more fully in Note 1 above). The results of operations for the separate companies and the combined amounts presented in the interim consolidated financial statements are as follows. The results of operations presented for PanVera for the three months ended March 31, 2000 represent PanVera's first fiscal quarter of the three month period ended December 31, 1999.

~~Three Months Ended Nine Months Ended September 30, September 30,~~ ------------------------------~~----~~ ~~----------------------------------~~Three ~~2000~~Months ~~1999~~Ended ~~2000~~March ~~1999~~31, 2001 2000 -----------~~---~~ -----------~~---~~ Revenue: Aurora $12,883,821 $12,805,875 PanVera 4,636,862 2,480,905 -----------~~---~~ -----------~~---~~ ~~Revenue~~Combined $ 1617,~~799~~520,~~919~~683 $ 1015,~~886~~286,~~701~~780 $=========== ~~47,287,136~~=========== ~~$ 30,635,309~~ Net income (loss): $Aurora $(1,~~093~~946,~~607~~712) $ (139,~~903,385~~266) $PanVera 5224,~~271~~938 193,~~919~~184 $----------- ----------- Combined $(61,~~738~~721,~~035~~774) $ 153,918 =========== =========== Basic net income (loss) per share $Aurora ~~0.05~~ $ (0.1109) $ 0.2700 PanVera $0.14 ($0.~~40)~~12 Diluted net income (loss) per share $Aurora ~~0.05~~ $ (0.1109) $ 0.2400 PanVera $0.13 ($0.~~40)~~10

7. SUBSEQUENT EVENT On April 30, 2001, Aurora and Vertex Pharmaceuticals Incorporated ("Vertex") announced that they had entered into a definitive agreement whereby Vertex will acquire Aurora in a stock-for-stock transaction. Under terms of the agreement, each share of Aurora common stock will convert into shares of newly issued Vertex common stock at a fixed ratio of 0.62 shares of Vertex common stock for each share of Aurora common stock. Upon completion of the merger, outstanding options to purchase Aurora common stock will become options to purchase shares of Vertex common stock, at the same exchange ratio of 0.62. The transaction is intended to be accounted for as a pooling-of-interests. The merger, which has been unanimously approved by the Boards of Directors of both Vertex and Aurora and is expected to close in the third quarter of 2001, is subject to approval by the shareholders of both Vertex and Aurora, regulatory approval, and other closing conditions. Aurora filed a Form 8-K on April 30, 2001 in connection with this transaction. 8 9 AURORA BIOSCIENCES CORPORATION MARCH 31, 2001 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Form 10-Q contains certain statements of a forward-looking nature relating to future events or our future financial performance. Such statements are only predictions and actual events or results may differ materially. Factors that could cause or contribute to such differences include, without limitation, those discussed in this Item 2 as well as those discussed in our Annual Report on Form 10-K for the year ended December 31, 2000, as filed with the Securities and Exchange Commission. OVERVIEW Aurora Biosciences Corporation is a drug discovery company that develops and commercializes technologies, products and services to accelerate the discovery of new medicines. Our core technologies include a broad portfolio of proprietary fluorescence assays and screening platforms designed to provide an integrated solution for drug discovery. Our fluorescence assay technologies include our GeneBLAzer(TM), GenomeScreen(TM), Vivid(TM) and PhosphoryLIGHT(TM) technologies, as well as a broad collection of fluorescent proteins. Our screening platforms include our ultra-high throughput screening system, the UHTSS(R) Platform, and our automated master compound store, the AMCS Platform, as well as our ion channel screening platform, which includes our proprietary voltage sensor probes and voltage ion probe reader, the VIPR(TM) subsystem. We also provide assay development and screening services as part of our drug discovery collaborations. In addition, as a result of our acquisition of PanVera Corporation in March 2001, we are engaged in manufacturing and marketing protein drug targets and drug screening assays for high-throughput screening and we also distribute biotechnology products for other companies. On April 30, 2001, we announced that we had entered into a definitive agreement with Vertex Pharmaceuticals Incorporated ("Vertex") whereby Vertex will acquire us in a stock-for-stock transaction. Under terms of the agreement, each share of our common stock will convert into shares of newly issued Vertex common stock at a fixed ratio of 0.62 shares of Vertex common stock for each share of our common stock. Upon completion of the merger, outstanding options to purchase our common stock will become options to purchase shares of Vertex common stock, at the same exchange ratio of 0.62. The transaction is intended to be accounted for as a pooling-of-interests. The merger, which has been unanimously approved by our Board of Directors and the Board of Directors of Vertex and is expected to close in the third quarter of 2001, is subject to approval by our shareholders and the shareholders of Vertex, regulatory approval, and other closing conditions. We had an accumulated deficit of $19.5 million as of March 31, 2001. Our objective for 2001 is to continue increasing revenue and to reinvest profits by increasing our research and development budget by over 60% in 2001 as compared to 2000. The increased research and development expenditures will be used to hire additional scientists and acquire and screen drug targets. In light of this reinvestment of profits, Aurora is targeting approximately break-even performance in 2001, although individual quarters may be subject to fluctuations. Revenue is predominately derived from sales of services, technology, instruments, products and intellectual property licenses. Revenue to date has been generated from a limited number of customers in the life sciences industry in the U.S. and Europe. Many of our agreements provide for future milestone payments from drug development achievements and royalties from the sale of products derived from certain of our technologies. However, customers may not ever generate products from technology provided by us and thus we may not ever receive milestone payments or royalties. We may encounter significant fluctuations in our quarterly financial performance depending on factors such as revenue from existing and future contracts and collaborations, timing of the delivery of technologies and systems and the completion of contracted service commitments to our customers. In addition, our research and development expenses may increase significantly as a result of the implementation and future potential expansion of our Big Biology(TM) initiative. We will also continue to invest in new technologies to expand our core drug discovery capabilities. Accordingly, our results of operations for any period may not be comparable to, or predictive of, the results of operations for any other period. 9 10 AURORA BIOSCIENCES CORPORATION MARCH 31, 2001 RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 Revenue increased 15%, to $17.5 million for the three months ended March 31, 2001 as compared to $15.3 million for the three months ended March 31, 2000. The increase in revenue was the result of new product sales in the first quarter 2001 associated with PanVera Corporation. Also included in first quarter 2001 revenue are amounts generated from collaborative research agreements with Organon, Families of Spinal Muscular Atrophy, Senomyx, Inc. and a licensing agreement with Greiner Bio-One. In addition, we recognized revenue under other existing collaborations. Offsetting the revenue increase associated with the aforementioned agreements was the completion during 2000 of discovery programs with GlaxoSmithKline and Becton, Dickinson and Company, both of which had produced revenue in the first quarter 2000. Total operating expenses increased 29% to $20.6 million for the three months ended March 31, 2001 as compared to $16.0 million for three months ended March 31, 2000. The increase in operating expenses was due in part to a 34% increase in the number of full-time employees over the first quarter of 2000, and in part to merger-related charges of $1.0 million. Research and development expenses increased 98% over the prior year first quarter, as much of the recent growth of the company has been focused in this area. Selling, general and administrative expenses increased 42% over the first quarter of 2000 due in part to the $1.0 million of merger-related charges. Net interest and other income increased $0.6 million over the prior first quarter due primarily to a full quarter effect in 2001 of interest income resulting from a $71 million private placement of common stock in February 2000. Also included in net interest and other income for the three months ended March 31, 2001 is a realized gain of $0.4 million associated with the sale of our preferred stock investment in SIDDCO, which was acquired by Discovery Partners International in January 2001. Offsetting this realized gain was a loss of $0.3 million that we recognized in the first quarter 2001 related to a net write-down of our investment in Southern California Edison Company bonds. Provision for income taxes increased $0.1 million in the first quarter of 2001 compared to the same period in 2000 primarily as a result of merger-related deferred tax asset allowance adjustments. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2001, we held cash, cash equivalents and investment securities available-for-sale of $102 million and had working capital of $101 million. We have funded our operations to date primarily through the issuance of equity securities, receipts from corporate collaborations and strategic technology alliances, notes payable, capital equipment lease and loan financing, and interest income. At March 31, 2001, we held restricted cash totaling $2.5 million, consisting of $2.4 million of cash and certificates of deposit restricted by Industrial Revenue Bonds ("IRB"), and a $0.1 million certificate of deposit securing a facility lease agreement letter of credit. The IRB restricted funds will be used over the remainder of 2001 and the letter of credit restricted funds will be reduced on a predetermined schedule. We have entered into certain contractual commitments, subject to satisfactory performance by third parties, which obligate expenditures totaling approximately $7.0 million over the next five years. Our strategy for the development of the UHTSS Platform includes the establishment of a syndicate of collaborators to provide us with funding for development, technology and personnel resources and 10 11 AURORA BIOSCIENCES CORPORATION MARCH 31, 2001 payments for system validation. The UHTSS Platform co-development syndicate currently includes Bristol-Myers, Merck, Pfizer and Warner-Lambert (acquired by Pfizer in June 2000). We have also entered into agreements with Pfizer and Warner-Lambert to develop AMCS systems. In addition, we have entered into collaborations with the Cystic Fibrosis Foundation, Families of Spinal Muscular Atrophy and the Hereditary Disease Foundation to provide screen development and/or screening services, and with Warner-Lambert, Merck, Becton Dickinson, the National Cancer Institute and Pfizer for functional genomics programs. We have entered into ion channel technology agreements with Bristol-Myers, Eli Lilly, GlaxoSmithKline, American Home Products, Merck, N.V. Organon, R.W. Johnson Pharmaceutical Research Institute, Senomyx and Allergan. Other collaborations include a combinatorial chemistry agreement with SIDDCO to synthesize large libraries of chemical compounds for us. Our ability to achieve sustained profitability will be dependent upon our ability to deliver and obtain acceptance of equipment by collaborators, perform contracted screening services, sell or license new products and services, and increase market share of existing discovery services and technologies by agreements with new collaborators and expansion of agreements with existing collaborators. We may not be able to meet our revenue goals or sustain profitability on a quarterly or annual basis. Although we are actively seeking to enter into additional collaborations, we may not be able to negotiate additional collaborative agreements on acceptable terms, if at all. Some of our current collaborative agreements may be terminated by the collaborator without cause upon short notice, which would result in loss of anticipated revenue. Although certain of our collaborators would be required to pay some penalties in the event they terminate their agreements without cause, any of our collaborators may elect to terminate their agreements with us. In addition, collaborators may terminate their agreements for cause if we cannot deliver the technology in accordance with the agreements. Our collaborators may not perform their obligations as expected and we may not derive any additional revenue from the agreements. Current or future collaborative agreements may not be successful and provide us with expected benefits. Termination of our existing or future collaborative agreements, or the failure to enter into a sufficient number of additional collaborative agreements on favorable terms or generate sufficient revenues from our services and technologies could have a material adverse effect on our business, financial condition or results of operations. An important element of our strategy includes entering into strategic transactions and evaluating strategic programs in order to maximize our business opportunities and enhance stockholder value. These transactions and programs could include acquisitions of other companies, joint ventures, collaborations, divestitures, reorganizations and research and development undertakings. We cannot assure you, however, that such transactions or programs will ultimately take place on terms favorable to us or at all, or will ultimately maximize the company's business opportunities or enhance stockholder value. Such transactions and programs could have a number of adverse effects on us, including significant diversions of management resources, substantial write-offs or other accounting charges, requiring us to raise substantial additional capital, dilution to stockholders from the issuance of additional shares, significant variances between analysts projections and actual financial results, and volatility in our stock price. The complexity of both the UHTSS and the AMCS has led to delays in developing these platforms that may lead to contractual disputes regarding the delivery and acceptance of these platforms by our customers. Because we are also dependent in part on the performance of our customers and suppliers in 11 12 AURORA BIOSCIENCES CORPORATION MARCH 31, 2001 order to deliver these platforms, our ability to timely deliver these platforms may be outside of our control. Our agreement with Warner-Lambert provides for a penalty payment up to a maximum of $888,300 if we fail to deliver the completed AMCS according to a specified development schedule. Failing to meet the development schedules under any of our UHTSS and AMCS agreements could have a material adverse effect on our business, financial condition or results of operations. To meet our expected growth needs, we are currently in negotiations for the purchase of a parcel of land adjacent to our current headquarters in San Diego, California, on which we plan to construct a 67,772 square foot engineering and manufacturing facility. Construction is anticipated to commence during the second half of 2001 at a total cost of approximately $20 million. Funding for the construction, which is expected to be approximately $17 million in 2001, will occur through the use of available funds and through construction financing. As a result of our acquisition of PanVera in March 2001, we will also incur building construction activity in Madison, Wisconsin as PanVera completes its site consolidation efforts. Construction of PanVera's new building is expected to conclude in June 2001. PanVera is utilizing the proceeds of a $6.3 million Variable Rate Industrial Revenue Bond issued by the City of Madison to finance construction of the building. Funding in 2001 for the building is expected to be approximately $5.2 million, while funding for the related equipment and furniture of approximately $0.6 million will be obtained through lease financing arrangements. We may be required to raise additional capital over the next several years in order to expand our operations or acquire new technology. This capital may be raised through additional public or private equity financings, borrowings and other available sources. Our business or operations may change in a manner that would consume available resources more rapidly than anticipated and substantial additional funding may be required before we can sustain profitable operations. We may not continue to generate sales from and receive payments under existing collaborative agreements and existing or potential revenue may not be adequate to fund our operations. If additional funding becomes necessary, it may not be available on favorable terms, if at all. If adequate funds are not available, we may be required to curtail operations significantly or to obtain funds by entering into arrangements with others that may have a material adverse effect on our business, financial condition or results of operations. We believe that our available capital resources will be sufficient to satisfy our funding needs for at least the next twelve months. 12 13 AURORA BIOSCIENCES CORPORATION MARCH 31, 2001 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK We invest our excess cash in interest-bearing investment-grade securities that we hold for the duration of the term of the respective instrument. We do not utilize derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments, positions or transactions in any material fashion. Accordingly, we believe that, while the investment-grade securities we hold are subject to changes in the financial standing of the issuer of such securities, we are not subject to any material risks arising from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices or other market changes that affect market risk sensitive instruments. A hypothetical 1% adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of our financial instruments that are exposed to changes in interest rates. At March 31, 2001, we held an investment of $2.0 million face value in bonds issued by Southern California Edison Company ("SCE"). The investment, which is scheduled to mature in June 2001, is included in investment securities, available for sale at a carrying value of $1.7 million. Recently, public rating agencies have downgraded the quality of SCE debt instruments and, as a result, we recognized a loss of $0.3 million during the quarter ended March 31, 2001 related to the net-write down of our investment in SCE to its fair market value at March 31, 2001. We believe that the fair value of this investment has declined since the balance sheet date, however, the ultimate decline and the net realizable value of this investment is not currently practicably determinable. 13 14 AURORA BIOSCIENCES CORPORATION MARCH 31, 2001 PART II - OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS In March 2001, our Board of Directors approved a number of stockholder protection measures as amendments to our Certificate of Incorporation and Bylaws. The stockholder protection measures included the following matters that do not require stockholder approval: - elimination of stockholders' ability to call a special meeting of stockholders; - elimination of stockholders' ability to adjourn a stockholders' meeting; and - granting authority to our board of directors to cancel a special meeting of stockholders. We also submitted a number of additional stockholder protection measures for stockholder approval as described in our 2001 Notice of Annual Meeting and Proxy Statement. In March 2001, our Board of Directors approved the adoption of a Stockholder Rights Plan under which all stockholders of record as of April 17, 2001 received rights to purchase shares of a new series of Preferred Stock. The rights were distributed as a non-taxable dividend and will expire ten years from the date of adoption of the Stockholder Rights Plan. The rights will be exercisable only if a person or group acquires 15 percent or more of our common stock. If a person acquires 15 percent or more of our common stock, all rights holders except the buyer will be entitled to acquire shares of our common stock at a discount. Our proposed merger transaction with Vertex Pharmaceuticals Incorporated will not trigger these rights under the Stockholder Rights Plan. We filed a Form 8-K on April 5, 2001 in connection with the adoption of the Stockholder Rights Plan. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: None. (b) Reports on Form 8-K: Form 8-K filed February 7, 2001 updating our business overview. Form 8-K filed March 7, 2001 disclosing the completion of the acquisition of PanVera Corporation on March 1, 2001. 14 15 AURORA BIOSCIENCES CORPORATION MARCH 31, 2001 SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed in its behalf by the undersigned thereunto duly authorized. Aurora Biosciences Corporation Date: May 11, 2001 By: /s/ John Pashkowsky ---------------------------------- John Pashkowsky Vice President, Finance and Treasurer (on behalf of the Registrant and as Registrant's Principal Financial and Accounting Officer) 15

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