-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Jf5JscnPoaJAvfCoegJsRD5qK2hLFFcwuhzV10QatQGAhe8QiGBiRRckOdV0vkg1 75T1RqteYHTB3mE2FEZqHQ== 0000912057-01-006802.txt : 20010228 0000912057-01-006802.hdr.sgml : 20010228 ACCESSION NUMBER: 0000912057-01-006802 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20001214 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 20010227 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENZYME CORP CENTRAL INDEX KEY: 0000732485 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 061047163 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 000-14680 FILM NUMBER: 1556008 BUSINESS ADDRESS: STREET 1: ONE KENDALL SQ CITY: CAMBRIDGE STATE: MA ZIP: 02139 BUSINESS PHONE: 6172527500 MAIL ADDRESS: STREET 1: ONE KENDALL SQUARE CITY: CAMBRIDGE STATE: MA ZIP: 02139 8-K/A 1 a2039916z8-ka.txt FORM 8-K/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): DECEMBER 14, 2000 GENZYME CORPORATION (Exact name of registrant as specified in its charter) MASSACHUSETTS 0-14680 06-1047163 (State or other jurisdiction of (Commission file number) (IRS employer identification incorporation or organization) number)
ONE KENDALL SQUARE, CAMBRIDGE, MASSACHUSETTS 02139 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (617) 252-7500 ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS. As reported on our current report on Form 8-K dated December 14, 2000 (filed December 15, 2000), effective December 14, 2000, we completed the acquisition of GelTex Pharmaceuticals, Inc. ("GelTex"). The acquisition was structured as a merger of GelTex with and into one of our wholly-owned subsidiaries pursuant to an Agreement and Plan of Merger, dated as of September 11, 2000 among Genzyme Corporation ("Genzyme"), Titan Acquisition Corp. and GelTex, as amended. Pursuant to Item 7(a)(4) of Form 8-K, this Form 8-K/A amends the current report on Form 8-K dated December 14, 2000 to include (1) the financial statements of GelTex required by Item 7(a) of this Form 8-K and (2) the pro forma financial information required by Item 7(b) of this Form 8-K. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. (a) Financial Statements of Businesses Acquired. The audited financial statements of GelTex Pharmaceuticals, Inc. as of December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999, including the report of independent auditors, were previously reported in the Annual Report on Form 10-K of GelTex (the "GelTex 10-K") for the fiscal year ended December 31, 1999 (filed on March 30, 2000), as amended on November 7, 2000, on pages F-1 to F-20 of the GelTex 10-K and are incorporated herein by reference. These audited financial statements as reported on pages F-1 to F-20 of the GelTex 10-K are also filed herewith as Exhibit 99.1. The unaudited financial statements of GelTex as of and for the nine months ended September 30, 2000 and 1999 were previously reported in the Quarterly Report on Form 10-Q of GelTex (the "GelTex 10-Q) for the quarter ended September 30, 2000 (filed on November 14, 2000) on pages 3 to 9 of the GelTex 10-Q and are incorporated herein by reference. These unaudited financial statements as reported on pages 3 to 9 of the GelTex 10-Q are also filed herewith as Exhibit 99.2. (b) PRO FORMA Financial Information. Genzyme hereby files the pro forma financial information beginning on page 5 herein. (c) Exhibits: 2 Agreement and Plan of Merger, dated as of September 11, 2000, among Genzyme, Titan Acquisition Corp. and GelTex, as amended. Previously filed as Exhibit 99.1 to Genzyme's Current Report on Form 8-K dated September 11, 2000 (Commission File No. 000-14680) and incorporated herein by reference. 23.1 Consent of Ernst & Young LLP. Filed herewith. 23.2 Consent of PricewaterhouseCoopers LLP. Filed herewith. 2 99.1 The audited financial statements of GelTex as of December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999, including the report of independent auditors (as reported on pages F-1 to F-20 of the Annual Report on Form 10-K of GelTex for the fiscal year ended December 31, 1999 (filed on March 30, 2000), as amended on November 7, 2000)). Filed herewith. 99.2 The unaudited financial statements of GelTex as of and for the nine months ended September 30, 2000 and 1999 (as reported on pages 3 to 9 of the Quarterly Report on Form 10-Q of GelTex for the quarter ended September 30, 2000 (filed on November 14, 2000)). Filed herewith. 3 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. GENZYME CORPORATION Dated: February 27, 2001 By: /s/ Michael S. Wyzga --------------------------------------- Michael S. Wyzga, Senior Vice President Finance, Chief Financial Officer, Corporate Controller and Chief Accounting Officer 4 UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION On December 14, 2000, Genzyme completed the acquisition of GelTex. The acquisition was structured as a merger of GelTex with and into one of Genzyme's wholly-owned subsidiaries pursuant to an Agreement and Plan of Merger, dated as of September 11, 2000 among Genzyme, Titan Acquisition Corp. and GelTex, as amended. On December 18, 2000, Genzyme completed the acquisition of Biomatrix, Inc. ("Biomatrix"). The acquisition was structured as a merger of Biomatrix with and into one of Genzyme's wholly-owned subsidiaries pursuant to an Agreement and Plan of Merger, dated as of March 6, 2000 among Genzyme, Seagull Merger Corporation and Biomatrix, as amended. Concurrent with the completion of Genzyme's acquisition of Biomatrix, Genzyme amended its charter to create Genzyme Biosurgery Division common stock ("Biosurgery Stock") and eliminate Genzyme Surgical Products Division common stock ("Surgical Products Stock") and Genzyme Tissue Repair Division common stock ("Tissue Repair Stock"). The following unaudited pro forma combined financial information describes the pro forma effect of Genzyme's merger with GelTex and Genzyme's merger with Biomatrix on the - unaudited statements of operations for the nine months ended September 30, 2000 and the year ended December 31, 1999 and - unaudited balance sheet as of September 30, 2000 of both Genzyme and Genzyme General, the division of Genzyme to which the assets and liabilities and operations of GelTex were allocated. In addition, the Genzyme pro forma statement of operations for the year ended December 31, 1999 reflects the change in earnings allocations resulting from the June 1999 distribution of Surgical Products Stock as if it took place on January 1, 1999. The purpose of this pro forma financial information is to demonstrate how the combined financial statements of these businesses might have appeared if each of the mergers had been completed at the beginning of the periods presented. To determine earnings per share, Genzyme allocates its earnings to each series of its common stock based on the earnings attributable to that series of stock. The earnings attributable to each series of stock are defined in Genzyme's charter as the net income or loss of the corresponding division determined in accordance with generally accepted accounting principles and as adjusted for tax benefits allocated to or from the division in accordance with Genzyme's management and accounting policies. Genzyme's charter also requires that all income and expenses of Genzyme be allocated among the divisions in a reasonable and consistent manner. Genzyme's board of directors, however, retains considerable discretion in determining the types, magnitudes and extent of allocations to each series of common stock without shareholder approval. Because the earnings allocated to Genzyme General Division common stock ("Genzyme General Stock") are based on the income or losses attributable to Genzyme General, Genzyme included pro forma financial statements of Genzyme General to aid investors in evaluating its performance. Holders of Genzyme General Stock have no specific rights to the assets allocated to Genzyme General. Genzyme Corporation continues to hold title to all of the assets allocated to Genzyme General and is responsible for all of its liabilities, regardless of what Genzyme deems for financial statement presentation purposes as allocated to any division. Holders of Genzyme General Stock, as common stockholders, are therefore subject to the risks of investing in the businesses, assets and liabilities of Genzyme, as a whole. Genzyme has prepared the pro forma financial information using the purchase method of accounting for both mergers. For the combination of Genzyme Surgical Products and Genzyme Tissue 5 Repair into Genzyme Biosurgery, no adjustments were made to the book values of their net assets because these two divisions are controlled by Genzyme. Genzyme expects to have reorganization and restructuring expenses as well as potential operating efficiencies as a result of combining the companies. The unaudited pro forma information does not reflect these potential expenses and efficiencies. MERGER WITH GELTEX As a result of the merger with GelTex, each share of GelTex common stock was converted into the right to receive either $47.50 in cash or 0.7272 of a share of Genzyme General Stock. GelTex stockholders were entitled to submit an election form on which they indicated their preferred form of merger consideration prior to the closing of the merger. Because under the merger agreement with GelTex not more than 50% of the outstanding shares of GelTex common stock were to be converted into cash or a fraction of a share of Genzyme General Stock, and more than 50% of the GelTex stockholders elected to receive Genzyme General Stock, the merger consideration was prorated. After proration, each share of GelTex common stock for which a valid stock election was submitted was converted into $22.59 in cash and 0.3813 of a share of Genzyme General Stock. All other GelTex stockholders are entitled to receive $47.50 in cash for each share of GelTex common stock that they own. Cash is payable in lieu of any fractional shares of Genzyme General Stock otherwise issuable in the merger for a price equal to the fraction times $95.5625. Cash payments to GelTex stockholders in the merger were approximately $515.2 million. Genzyme funded a portion of this amount through borrowings under senior credit facilities. Genzyme allocated the amounts borrowed and the associated interest expense to Genzyme General. Additionally, each option and warrant to purchase shares of GelTex common stock outstanding immediately before the effective time of the merger was assumed by Genzyme after the merger and became an option or warrant to acquire Genzyme General Stock. The conversion of options to purchase GelTex common stock was accounted for in accordance with Financial Accounting Standards Board Interpretation No. 44 ("FIN 44"). TRACKING STOCK EXCHANGES In connection with the merger with Biomatrix, Genzyme effected an exchange of its tracking stock whereby outstanding shares of Tissue Repair Stock and Surgical Products Stock converted into Biosurgery Stock, the dividend and other provisions of which are designed to track the financial performance of the Genzyme Biosurgery division. Holders of Tissue Repair Stock and Surgical Products Stock, therefore, remain holders of Genzyme common stock, but hold a security whose dividend and other provisions are designed to track a different subset of Genzyme's operations and assets. Additionally, the votes and liquidation units per share of their holdings changed. The earnings attributable to Biosurgery Stock are defined in Genzyme's charter as the net income or loss of Genzyme Biosurgery determined in accordance with generally accepted accounting principles and as adjusted for tax benefits allocated to or from Genzyme Biosurgery in accordance with Genzyme's management and accounting policies. Prior to the tracking stock exchange, the earnings attributable to Surgical Products Stock and Tissue Repair Stock were defined in Genzyme's charter as the net income or loss of Genzyme Surgical Products and Genzyme Tissue Repair, respectively, determined in accordance with generally accepted accounting principles and as adjusted for tax benefits allocated to or from the division. Accordingly, the merger and tracking stock exchanges will involve a change in Genzyme's methodology for allocating its earnings to its series of common stock. 6 MERGER WITH BIOMATRIX Under the Biomatrix merger agreement, Biomatrix stockholders were entitled to submit, on or before December 6, 2000, an election form on which they indicated their preferred form of merger consideration. A stockholder could elect to receive for each share of Biomatrix common stock held either the "standard consideration" of $10.50 and 0.7162 of a share of Biosurgery Stock, the "stock consideration" of one share of Biosurgery Stock, or the "cash consideration" of $37.00. A stockholder failing to submit a valid election would receive the standard consideration. Under the merger agreement, the cash consideration amount of $37.00 per share would be prorated if the final elections would result in more than 28.38% of the outstanding shares of Biomatrix common stock being convertible into cash. A proration was required, and consequently each share of Biomatrix common stock that validly elected the cash consideration converted into a right to receive $11.03 in cash and 0.7169 of a share of Genzyme Biosurgery Stock. In lieu of issuing any fractional shares of Genzyme Biosurgery Stock, Genzyme is paying cash in an amount equal to the share fraction multiplied by $11.79. To ensure that the value of all Biosurgery Stock issued in the merger was at least 45% of the total merger consideration, the number of shares of Biomatrix common stock exchanged for shares of Biosurgery Stock in the merger was to be increased and the number of shares of Biomatrix common stock exchanged for cash was to be decreased if the value of Biosurgery Stock was below approximately $12.00 per share closing. The purpose of this adjustment was to preserve the status of the merger as a reorganization for U.S. federal income tax purposes. The value of Biosurgery Stock at closing was determined by the Genzyme board of directors to be $11.79 per share and, accordingly, such an adjustment occurred. The change in the number of shares exchanged created a new measurement date for the transaction at the closing date. The attached pro forma financial statements reflect the impact of this new measurement date. Upon completion of the tracking stock exchanges, each outstanding share of Surgical Products Stock converted into the right to receive 0.6060 of a share of Biosurgery Stock and each outstanding share of Tissue Repair Stock converted into the right to receive 0.3352 of a share of Biosurgery Stock. Additionally, all outstanding options to purchase Surgical Products Stock, Tissue Repair Stock and Biomatrix common stock converted into options to purchase Biosurgery Stock at the respective conversion rates. The conversion of options to purchase Biomatrix common stock will be accounted for in accordance with FIN 44. These unaudited pro forma balance sheets and statements of operations are for informational purposes only. They do not purport to indicate the results that would have actually been obtained had the mergers been completed on the assumed date or for the periods presented, or which may be obtained in the future. To produce the pro forma financial information, Genzyme allocated the purchase price using its best estimates. The unaudited pro forma balance sheets and statements of operations should be read in conjunction with the historical consolidated financial statements, including the notes thereto, of each of Genzyme, GelTex and Biomatrix. For Genzyme, those financial statements are included in Genzyme's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 (filed on November 14, 2000) and its Annual Report on Form 10-K for the year ended December 31, 1999 (filed on March 30, 2000), as amended on June 28, 2000 and October 17, 2000. For GelTex those financial statements are included in GelTex's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 (filed on November 14, 2000) and its Annual Report on Form 10-K for the year ended December 31, 1999 (filed on March 30, 2000), as amended on November 7, 2000 which are filed as Exhibits 99.2 and 99.1, respectively, to this report on Form 8-K, as amended. For Biomatrix, those financial statements are included in Biomatrix's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 (filed on November 14, 2000) and its Annual Report on Form 10-K for the year ended December 31, 1999 (filed on March 30, 2000), as amended on April 26, 2000 and October 26, 2000. 7 GENZYME CORPORATION AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA GENZYME HISTORICAL CORPORATION GENZYME HISTORICAL PRO FORMA NOTE AND HISTORICAL CORPORATION BIOMATRIX, INC. ADJUSTMENTS REFERENCE BIOMATRIX GELTEX ----------- --------------- ----------- --------- ----------- ---------- Revenues: Net product sales..................... $ 683,482 $ 72,000 $ -- $ 755,482 $ -- Net service sales..................... 79,448 -- -- 79,448 -- Collaborative joint venture project reimbursement....................... -- -- -- -- 5,781 Revenues from research and development contracts: Related parties..................... 2,012 -- -- 2,012 -- Other............................... 7,346 -- -- 7,346 10,668 Income from licenses, royalties, research contracts and grants....... -- 7,700 -- 7,700 -- --------- -------- -------- --------- -------- Total revenues...................... 772,288 79,700 -- 851,988 16,449 --------- -------- -------- --------- -------- Operating costs and expenses: Cost of products sold................. 182,337 21,100 11,330 B7 214,767 -- Cost of services sold................. 49,444 -- -- 49,444 -- Selling, general and administrative... 242,797 18,500 22 B7 (110) B7 261,209 6,935 Collaborative joint venture project costs............................... -- -- -- -- 5,781 Research and development (including research and development relating to contracts).......................... 150,516 9,100 159,616 32,602 Amortization of intangibles........... 24,674 -- 37,080 B6 61,754 -- Purchase of in-process research and development......................... 5,436 -- -- 5,436 9,530 --------- -------- -------- --------- -------- Total operating costs and expenses.......................... 655,204 48,700 48,322 752,226 54,848 --------- -------- -------- --------- -------- Operating income (loss)................. 117,084 31,000 (48,322) 99,762 (38,399) --------- -------- -------- --------- -------- Other income (expenses): Equity in net loss of unconsolidated affiliates.......................... (42,696) -- -- (42,696) (7,937) Gain on affiliate sale of stock....... 6,683 -- -- 6,683 -- Gain on sale of investment in equity securities.......................... 1,963 -- -- 1,963 -- Gain on sale of product line.......... 8,018 -- -- 8,018 -- Minority interest..................... 3,674 -- -- 3,674 -- Charge for impaired investments....... (5,712) -- -- (5,712) -- Other................................. 14,527 -- -- 14,527 -- Investment income..................... 36,158 1,500 (2,857) B11 34,801 4,372 Interest expense...................... (21,771) (1,500) (15,000) B11 (38,271) (485) --------- -------- -------- --------- -------- Total other income (expenses)....... 844 -- (17,857) (17,013) (4,050) --------- -------- -------- --------- -------- Income (loss) before income taxes....... 117,928 31,000 (66,179) 82,749 (42,449) Income tax (provision) benefit.......... (46,947) (12,400) 20,338 B10 (39,009) -- --------- -------- -------- --------- -------- Net income (loss)....................... $ 70,981 $ 18,600 $(45,841) $ 43,740 $(42,449) ========= ======== ======== ========= ======== PRO FORMA GENZYME PRO FORMA NOTE CORPORATION AND ADJUSTMENTS REFERENCE SUBSIDIARIES ----------- --------- --------------- Revenues: Net product sales..................... $ 17,676 G12 $ 773,158 Net service sales..................... -- 79,448 Collaborative joint venture project reimbursement....................... (5,781) G11 -- Revenues from research and development contracts: Related parties..................... 1,557 G12 3,569 Other............................... -- 18,014 Income from licenses, royalties, research contracts and grants....... -- 7,700 --------- --------- Total revenues...................... 13,452 881,889 --------- --------- Operating costs and expenses: Cost of products sold................. 15,003 G8 G12 229,770 Cost of services sold................. -- 49,444 Selling, general and administrative... 18,624 G12 1,743 G8 1,837 G8 290,348 Collaborative joint venture project costs............................... (5,781) G11 Research and development (including research and development relating to contracts).......................... 7,348 G8 11,154 G12 210,720 Amortization of intangibles........... 62,350 G7 124,104 Purchase of in-process research and development......................... -- 14,966 --------- --------- Total operating costs and expenses.......................... 112,278 919,352 --------- --------- Operating income (loss)................. (98,826) (37,463) --------- --------- Other income (expenses): Equity in net loss of unconsolidated affiliates.......................... 7,937 G12 8,107 G12 (34,589) Gain on affiliate sale of stock....... -- 6,683 Gain on sale of investment in equity securities.......................... -- 1,963 Gain on sale of product line.......... -- 8,018 Minority interest..................... -- 3,674 Charge for impaired investments....... -- (5,712) Other................................. -- 14,527 Investment income..................... (19,901) G10 166 G12 19,438 Interest expense...................... (10,981) G10 (49,737) --------- --------- Total other income (expenses)....... (14,672) (35,735) --------- --------- Income (loss) before income taxes....... (113,498) (73,198) Income tax (provision) benefit.......... 45,050 G13 6,041 --------- --------- Net income (loss)....................... $ (68,448) $ (67,157) ========= =========
SEE NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS. 8 GENZYME CORPORATION AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS (CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 1999 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA GENZYME HISTORICAL HISTORICAL CORPORATION GENZYME BIOMATRIX, PRO FORMA NOTE AND HISTORICAL PRO FORMA CORPORATION INC. ADJUSTMENTS REFERENCE BIOMATRIX GELTEX ADJUSTMENTS ----------- ---------- ----------- --------- ----------- ---------- ----------- NET INCOME (LOSS) PER SHARE: ALLOCATED TO GENZYME GENERAL STOCK: Genzyme General net income....... $142,077 $ -- $ 142,077 $(110,897) Genzyme Surgical Products net loss........................... (27,523) 27,523 B13 -- Tax benefit allocated from Genzyme Molecular Oncology..... 7,812 7,812 Tax benefit allocated from Genzyme Surgical Products...... 16,128 (16,128) B12 -- Tax benefit allocated from Genzyme Tissue Repair.......... 10,866 (10,866) B12 -- Tax benefit allocated from Genzyme Biosurgery............. -- 21,023 B12 21,023 -------- --------- --------- --------- Net income allocated to Genzyme General Stock.................. $149,360 $ 21,552 $ 170,912 $(110,897) ======== ========= ========= ========= Net income per share of Genzyme General Stock: Basic.......................... $ 1.80 $ 2.06 ======== ========= Diluted........................ $ 1.71 $ 1.94 ======== ========= Weighted average shares outstanding: Basic.......................... 83,092 83,092 6,182 ======== ========= ========= Diluted........................ 93,228 93,228 (537) ======== ========= ========= ALLOCATED TO MOLECULAR ONCOLOGY STOCK: Net loss......................... $(28,832) $ (28,832) ======== ========= Net loss per share of Molecular Oncology Stock -- basic and diluted........................ $ (2.25) $ (2.25) ======== ========= Weighted average shares outstanding.................... 12,826 12,826 ======== ========= ALLOCATED TO SURGICAL PRODUCTS STOCK: Net loss......................... $(20,514) $ 20,514 B9 $ -- ======== ========= ========= Net loss per share of Surgical Products Stock --basic and diluted........................ $ (1.38) $ 1.38 B9 $ -- ======== ========= ========= Weighted average shares outstanding.................... 14,835 (14,835) B8 -- ======== ========= ========= ALLOCATED TO TISSUE REPAIR STOCK: Net loss......................... $(30,040) $ 30,040 B9 $ -- ======== ========= ========= Net loss per share of Tissue Repair Stock --basic and diluted........................ $ (1.26) $ 1.26 B9 $ -- ======== ========= ========= Weighted average shares outstanding.................... 23,807 (23,807) B8 -- ======== ========= ========= BIOMATRIX, INC.: Net income....................... $18,600 $ (18,600) B9 $ -- ======= ========= ========= Net income per Biomatrix common share-basic.................... $ 0.81 $ (0.81) B9 $ -- ======= ========= ========= Weighted average shares outstanding.................... 22,959 (22,959) B8 -- ======= ========= ========= Net income per Biomatrix common and common equivalent share-diluted.................. $ 0.76 $ (0.76) B9 $ -- ======= ========= ========= Adjusted weighted average shares outstanding.................... 24,350 (24,350) B8 -- ======= ========= ========= ALLOCATED TO BIOSURGERY STOCK: Net loss......................... $ (99,347) B9 $ (99,347) ========= ========= Net loss per share of Biosurgery Stock --basic and diluted...... $ (2.97) B9 $ (2.97) ========= ========= Weighted average shares outstanding.................... 33,494 B9 33,494 ========= ========= GELTEX PHARMACEUTICALS, INC.: Net loss......................... $(42,449) $ 42,449 ======== ========= Net loss per share of GelTex common stock--basic and diluted........................ $ (2.50) $ 2.50 ======== ========= Weighted average shares outstanding.................... 17,003 (17,003) ======== ========= PRO FORMA GENZYME CORPORATION NOTE AND REFERENCE SUBSIDIARIES --------- ------------ NET INCOME (LOSS) PER SHARE: ALLOCATED TO GENZYME GENERAL STOCK: Genzyme General net income....... $ 31,180 Genzyme Surgical Products net loss........................... -- Tax benefit allocated from Genzyme Molecular Oncology..... 7,812 Tax benefit allocated from Genzyme Surgical Products...... -- Tax benefit allocated from Genzyme Tissue Repair.......... -- Tax benefit allocated from Genzyme Biosurgery............. 21,023 --------- Net income allocated to Genzyme General Stock.................. $ 60,015 ========= Net income per share of Genzyme General Stock: Basic.......................... $ 0.67 ========= Diluted........................ $ 0.65 ========= Weighted average shares outstanding: Basic.......................... G9 89,274 ========= Diluted........................ G9 92,691 ========= ALLOCATED TO MOLECULAR ONCOLOGY STOCK: Net loss......................... $ (28,832) ========= Net loss per share of Molecular Oncology Stock -- basic and diluted........................ $ (2.25) ========= Weighted average shares outstanding.................... 12,826 ========= ALLOCATED TO SURGICAL PRODUCTS STOCK: Net loss......................... $ -- ========= Net loss per share of Surgical Products Stock --basic and diluted........................ $ -- ========= Weighted average shares outstanding.................... -- ========= ALLOCATED TO TISSUE REPAIR STOCK: Net loss......................... $ -- ========= Net loss per share of Tissue Repair Stock --basic and diluted........................ $ -- ========= Weighted average shares outstanding.................... -- ========= BIOMATRIX, INC.: Net income....................... $ -- ========= Net income per Biomatrix common share-basic.................... $ -- ========= Weighted average shares outstanding.................... -- ========= Net income per Biomatrix common and common equivalent share-diluted.................. $ -- ========= Adjusted weighted average shares outstanding.................... -- ========= ALLOCATED TO BIOSURGERY STOCK: Net loss......................... $ (99,347) ========= Net loss per share of Biosurgery Stock --basic and diluted...... $ (2.97) ========= Weighted average shares outstanding.................... 33,494 ========= GELTEX PHARMACEUTICALS, INC.: Net loss......................... G14 $ -- ========= Net loss per share of GelTex common stock--basic and diluted........................ G14 $ -- ========= Weighted average shares outstanding.................... G9 -- =========
SEE NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS. 9 GENZYME CORPORATION AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (AMOUNTS IN THOUSANDS)
PRO FORMA GENZYME HISTORICAL CORPORATION GENZYME HISTORICAL PRO FORMA NOTE AND HISTORICAL CORPORATION BIOMATRIX, INC. ADJUSTMENTS REFERENCE BIOMATRIX GELTEX ------------- ---------------- ------------- ---------- ------------- ---------- Revenues: Net product sales............ $ 592,505 $ 57,300 $ -- $ 649,805 $ -- Net service sales............ 62,280 -- -- 62,280 -- Collaborative joint venture project reimbursement...... -- -- -- -- 3,841 Revenues from research and development contracts: Related parties............ 245 245 -- Other...................... 4,372 -- -- 4,372 33,070 Income from licenses, royalties, research contracts and grants....... -- 9,100 -- 9,100 -- --------- -------- -------- --------- -------- Total revenues........... 659,402 66,400 -- 725,802 36,911 --------- -------- -------- --------- -------- Operating costs and expenses: Cost of products sold........ 165,631 17,100 182,731 -- Cost of services sold........ 35,886 -- 35,886 -- Selling, general and administrative............. 195,358 20,800 17 B7 (83) B7 216,092 7,507 Collaborative joint venture project costs.............. -- -- -- -- 3,841 Research and development (including research and development related to contracts)................. 123,954 7,600 131,554 21,587 Amortization of intangibles................ 15,191 27,703 B6 42,894 -- --------- -------- -------- --------- -------- Total operating costs and expenses............... 536,020 45,500 27,637 609,157 32,935 --------- -------- -------- --------- -------- Operating income (loss)........ 123,382 20,900 (27,637) 116,645 3,976 --------- -------- -------- --------- -------- Other income (expenses): Equity in net loss of unconsolidated subsidiaries............... (30,866) -- -- (30,866) 196 Gain on affiliate sale of stock...................... 22,689 -- -- 22,689 -- Minority interest............ 3,185 -- -- 3,185 -- Gain on sale of investment in equity securities.......... 22,709 -- -- 22,709 -- Other........................ 5,185 -- -- 5,185 -- Investment income............ 33,333 2,300 (2,143) B11 33,490 4,331 Interest expense............. (12,785) (700) (11,250) B11 (24,735) -- --------- -------- -------- --------- -------- Total other income (expenses)............. 43,450 1,600 (13,393) 31,657 4,527 --------- -------- -------- --------- -------- Income (loss) before income taxes........................ 166,832 22,500 (41,030) 148,302 8,503 Income tax (provision) benefit...................... (51,101) (9,200) 12,138 B10 (48,163) -- --------- -------- -------- --------- -------- Net income (loss).............. $ 115,731 $ 13,300 $(28,892) $ 100,139 $ 8,503 ========= ======== ======== ========= ======== PRO FORMA GENZYME CORPORATION PRO FORMA NOTE AND ADJUSTMENTS REFERENCE SUBSIDIARIES ------------- ---------- ------------- Revenues: Net product sales............ $ 6,166 G12 $ 655,971 Net service sales............ -- 62,280 Collaborative joint venture project reimbursement...... (3,841) G11 -- Revenues from research and development contracts: Related parties............ -- 245 Other...................... 15 G12 37,457 Income from licenses, royalties, research contracts and grants....... -- 9,100 --------- --------- Total revenues........... 2,340 765,053 --------- --------- Operating costs and expenses: Cost of products sold........ 5,493 G12 188,224 Cost of services sold........ -- 35,886 Selling, general and administrative............. G8 7,177 G12 230,776 Collaborative joint venture project costs.............. (3,841) G11 -- Research and development (including research and development related to contracts)................. 4,568 G12 157,709 Amortization of intangibles................ 46,838 G7 89,732 --------- --------- Total operating costs and expenses............... 60,235 702,327 --------- --------- Operating income (loss)........ (57,895) 62,726 --------- --------- Other income (expenses): Equity in net loss of unconsolidated subsidiaries............... (196) G12 1,812 G11 8,277 G12 (20,777) Gain on affiliate sale of stock...................... -- 22,689 Minority interest............ -- 3,185 Gain on sale of investment in equity securities.......... -- 22,709 Other........................ -- 5,185 Investment income............ (14,777) G10 23,044 Interest expense............. (8,236) G10 (32,971) --------- --------- Total other income (expenses)............. (13,120) 23,064 --------- --------- Income (loss) before income taxes........................ (71,015) 85,790 Income tax (provision) benefit...................... 14,236 G13 (33,927) --------- --------- Net income (loss).............. $ (56,779) $ 51,863 ========= =========
SEE NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS. 10 GENZYME CORPORATION AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS (CONTINUED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (AMOUNTS IN THOUSANDS)
PRO FORMA GENZYME HISTORICAL HISTORICAL CORPORATION GENZYME BIOMATRIX, PRO FORMA NOTE AND HISTORICAL PRO FORMA CORPORATION INC. ADJUSTMENTS REFERENCE BIOMATRIX GELTEX ADJUSTMENTS ----------- ---------- ----------- --------- ----------- ---------- ----------- NET INCOME (LOSS) PER SHARE: ALLOCATED TO GENZYME GENERAL STOCK: Genzyme General net income....... $160,272 $ -- $160,272 $(48,276) Tax benefit allocated from Genzyme Molecular Oncology..... 5,558 -- 5,558 Tax benefit allocated from Genzyme Surgical Products...... 11,080 (11,080) B12 -- Tax benefit allocated from Genzyme Tissue Repair.......... 5,211 (5,211) B12 -- Tax benefit allocated from Genzyme Biosurgery............. -- 11,912 B12 11,912 -------- -------- -------- -------- Net income allocated to Genzyme General Stock.................. $182,121 $ (4,379) $177,742 $(48,276) ======== ======== ======== ======== Net income per share of Genzyme General Stock: Basic.......................... $ 2.14 $ 2.08 ======== ======== Diluted........................ $ 1.99 $ 1.94 ======== ======== Weighted average shares outstanding: Basic.......................... 85,277 85,277 7,225 ======== ======== ======== Diluted........................ 95,614 95,614 7,684 ======== ======== ======== ALLOCATED TO MOLECULAR ONCOLOGY STOCK: Net loss......................... $(17,924) $(17,924) ======== ======== Net loss per share of Molecular Oncology Stock--basic and diluted........................ $ (1.28) $ (1.28) ======== ======== Weighted average shares outstanding.................... 14,002 14,002 ======== ======== ALLOCATED TO SURGICAL PRODUCTS STOCK: Net loss......................... $(34,346) $ 34,346 B9 $ -- ======== ======== ======== Net loss per share of Surgical Products Stock--basic and diluted........................ $ (2.30) $ 2.30 B9 $ -- ======== ======== ======== Weighted average shares outstanding.................... 14,907 (14,907) B8 -- ======== ======== ======== ALLOCATED TO TISSUE REPAIR STOCK: Net loss......................... $(14,590) $ 14,590 B9 $ -- ======== ======== ======== Net loss per share of Tissue Repair Stock--basic and diluted........................ $ (0.51) $ 0.51 B9 $ -- ======== ======== ======== Weighted average shares outstanding.................... 28,664 (28,664) B8 -- ======== ======== ======== BIOMATRIX, INC.: Net income....................... $13,300 $(13,300) B9 $ -- ======= ======== ======== Net income per Biomatrix common share-basic.................... $ 0.57 $ (0.57) B9 $ -- ======= ======== ======== Weighted average shares outstanding.................... 23,401 (23,401) B8 -- ======= ======== ======== Net income per Biomatrix common and common equivalent share-diluted.................. $ 0.55 $ (0.55) B9 $ -- ======= ======== ======== Adjusted weighted average shares outstanding.................... 24,395 (24,395) B8 -- ======= ======== ======== ALLOCATED TO BIOSURGERY STOCK: Net loss......................... $(60,149) B9 $(60,149) ======== ======== Net loss per share of Biosurgery Stock--basic and diluted....... $ (1.70) B9 $ (1.70) ======== ======== Weighted average shares outstanding.................... 35,484 B9 35,484 ======== ======== GELTEX PHARMACEUTICALS, INC.: Net income..................... $ 8,503 $ (8,503) ======= ======== Net income per GelTex common share--basic................. $ 0.43 $ (0.43) ======= ======== Weighted average shares outstanding.................. 19,872 (19,872) ======= ======== Net income per GelTex common and equivalent share-- diluted...................... $ 0.41 $ (0.41) ======= ======== Adjusted weighted average shares outstanding........... 20,502 (20,502) ======= ======== PRO FORMA GENZYME CORPORATION NOTE AND REFERENCE SUBSIDIARIES --------- ------------ NET INCOME (LOSS) PER SHARE: ALLOCATED TO GENZYME GENERAL STOCK: Genzyme General net income....... $111,996 Tax benefit allocated from Genzyme Molecular Oncology..... 5,558 Tax benefit allocated from Genzyme Surgical Products...... -- Tax benefit allocated from Genzyme Tissue Repair.......... -- Tax benefit allocated from Genzyme Biosurgery............. 11,912 -------- Net income allocated to Genzyme General Stock.................. $129,466 ======== Net income per share of Genzyme General Stock: Basic.......................... $ 1.40 ======== Diluted........................ $ 1.33 ======== Weighted average shares outstanding: Basic.......................... G9 92,502 ======== Diluted........................ G9 103,298 ======== ALLOCATED TO MOLECULAR ONCOLOGY STOCK: Net loss......................... $(17,924) ======== Net loss per share of Molecular Oncology Stock--basic and diluted........................ $ (1.28) ======== Weighted average shares outstanding.................... 14,002 ======== ALLOCATED TO SURGICAL PRODUCTS STOCK: Net loss......................... $ -- ======== Net loss per share of Surgical Products Stock--basic and diluted........................ $ -- ======== Weighted average shares outstanding.................... -- ======== ALLOCATED TO TISSUE REPAIR STOCK: Net loss......................... $ -- ======== Net loss per share of Tissue Repair Stock--basic and diluted........................ $ -- ======== Weighted average shares outstanding.................... -- ======== BIOMATRIX, INC.: Net income....................... $ -- ======== Net income per Biomatrix common share-basic.................... $ -- ======== Weighted average shares outstanding.................... -- ======== Net income per Biomatrix common and common equivalent share-diluted.................. $ -- ======== Adjusted weighted average shares outstanding.................... -- ======== ALLOCATED TO BIOSURGERY STOCK: Net loss......................... $(60,149) ======== Net loss per share of Biosurgery Stock--basic and diluted....... $ (1.70) ======== Weighted average shares outstanding.................... 35,484 ======== GELTEX PHARMACEUTICALS, INC.: Net income..................... G14 $ -- ======== Net income per GelTex common share--basic................. G14 $ -- ======== Weighted average shares outstanding.................. G9 -- ======== Net income per GelTex common and equivalent share-- diluted...................... G14 $ -- ======== Adjusted weighted average shares outstanding........... G9 -- ========
SEE NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS. 11 GENZYME CORPORATION AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 2000 (AMOUNTS IN THOUSANDS)
HISTORICAL PRO FORMA GENZYME GENZYME CORPORATION AND HISTORICAL PRO FORMA FOOTNOTE CORPORATION AND HISTORICAL PRO FORMA SUBSIDIARIES BIOMATRIX, INC. ADJUSTMENTS REFERENCE SUBSIDIARIES GELTEX ADJUSTMENTS --------------- --------------- ----------- --------- --------------- ---------- ----------- ASSETS Current assets: Cash and cash equivalents......... $ 215,568 $ 46,700 $ (52,421) B1 $ 209,847 $ 71,179 $(100,000) 4,469 Short-term investments......... 164,927 -- -- 164,927 68,428 (100,000) Accounts receivable, net................. 183,779 12,600 -- 196,379 -- (282) Inventories........... 123,878 8,200 11,330 B5 143,408 -- 8,156 13,461 (329) Prepaid expenses and other current assets.............. 29,169 5,800 -- 34,969 12,575 (295) Deferred tax assets-- current............. 41,441 -- -- 41,441 -- -- ---------- -------- --------- ---------- -------- --------- Total current assets.......... 758,762 73,300 (41,091) 790,971 152,182 (174,820) Property, plant and equipment, net........ 400,630 39,700 (549) B5 439,781 13,538 7,215 4,499 25,000 Long-term receivables, affiliates............ -- -- -- -- 121 (121) Long-term investments... 427,805 -- -- 427,805 -- (165,151) Notes receivable--related party................. 10,175 -- -- 10,175 -- -- Intangibles, net........ 237,343 -- 284,854 B1 111,320 B1 633,517 7,743 916,062 (7,743) Deferred tax assets-- noncurrent............ -- -- 899 B1 899 -- 35,016 Investments in equity securities............ 186,883 -- -- 186,883 -- (4,681) Other noncurrent assets................ 54,948 800 -- 55,748 15,772 (22,865) ---------- -------- --------- ---------- -------- --------- Total assets...... $2,076,546 $113,800 $ 355,433 $2,545,779 $189,356 $ 612,411 ========== ======== ========= ========== ======== ========= PRO FORMA GENZYME NOTE CORPORATION AND REFERENCE SUBSIDIARIES --------- --------------- ASSETS Current assets: Cash and cash equivalents......... G1 $ -- G6 185,495 Short-term investments......... G1 133,355 Accounts receivable, net................. G4 196,097 Inventories........... G1 G6 G4 164,696 Prepaid expenses and other current assets.............. G6 47,249 Deferred tax assets-- current............. 41,441 ---------- Total current assets.......... 768,333 Property, plant and equipment, net........ G6 G1 G1 490,033 Long-term receivables, affiliates............ G4 -- Long-term investments... G1 262,654 Notes receivable--related party................. 10,175 Intangibles, net........ G1 G5 1,549,579 Deferred tax assets-- noncurrent............ G1 35,915 Investments in equity securities............ G1 182,202 Other noncurrent assets................ G4 48,655 ---------- Total assets...... $3,347,546 ==========
SEE NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS. 12 GENZYME CORPORATION AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED BALANCE SHEET (CONTINUED) AS OF SEPTEMBER 30, 2000 (AMOUNTS IN THOUSANDS)
PRO FORMA HISTORICAL GENZYME GENZYME HISTORICAL PRO FORMA NOTE CORPORATION AND HISTORICAL CORPORATION BIOMATRIX, INC. ADJUSTMENTS REFERENCE BIOMATRIX GELTEX ----------- --------------- ----------- --------- --------------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.............. $ 23,262 $ 3,400 $ -- $ 26,662 $ -- Accrued expenses.............. 95,541 7,000 18,803 B2 121,344 5,910 Income taxes payable.......... 51,778 -- -- 51,778 -- Deferred revenue.............. 4,840 -- -- 4,840 -- Current portion of notes payable and long-term debt and capital lease obligations................. 128 900 -- 1,028 1,467 ---------- -------- --------- ---------- ------- Total current liabilities............. 175,549 11,300 18,803 205,652 7,377 Notes payable and long-term debt and capital lease obligations................... 18,272 11,100 200,000 B1 229,372 5,494 Convertible notes and debentures, net............... 273,415 273,415 -- Deferred tax liabilities--noncurrent....... 7,329 107,044 B1 114,373 -- Other noncurrent liabilities.... 2,904 2,904 430 ---------- -------- --------- ---------- ------- Total liabilities......... 477,469 22,400 325,847 825,716 13,301 ---------- -------- --------- ---------- ------- Stockholders' equity: Genzyme General Stock, $.01 par value................... 867 867 -- Molecular Oncology Stock, $.01 par value................... 153 153 -- Surgical Products Stock, $.01 par value................... 150 (150) B4 -- -- Tissue Repair Stock, $.01 par value....................... 289 (289) B4 -- -- Biosurgery Stock, $.01 par value....................... -- 188 B4 -- 175 B1 363 Treasury Stock--at cost....... (901) (901) -- Additional paid-in capital-- Genzyme General Stock....... 524,979 524,979 -- Additional paid-in capital-- Molecular Oncology Stock.... 105,059 105,059 -- Additional paid-in capital-- Surgical Products Stock..... 543,197 (543,197) B4 -- -- Additional paid-in capital-- Tissue Repair Stock......... 228,095 (228,095) B4 -- -- Additional paid-in capital-- Biosurgery Stock............ -- 543,256 B4 228,287 B4 206,347 B1 11,373 B1 (82,143) B1 907,120 Notes receivable--related parties..................... -- (14,700) B3 (14,700) -- PRO FORMA GENZYME CORPORATION PRO FORMA NOTE AND ADJUSTMENTS REFERENCE SUBSIDIARIES ----------- --------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.............. $ -- $ 26,662 Accrued expenses.............. 4,321 G2 1,300 G1 (7,936) G4 11,659 G6 136,598 Income taxes payable.......... -- 51,778 Deferred revenue.............. -- G6 4,840 Current portion of notes payable and long-term debt and capital lease obligations................. -- 2,495 --------- --------- Total current liabilities............. 9,344 222,373 Notes payable and long-term debt and capital lease obligations................... 150,000 G1 25,000 G1 409,866 Convertible notes and debentures, net............... -- 273,415 Deferred tax liabilities--noncurrent....... 175,485 G1 289,858 Other noncurrent liabilities.... (430) G1 1,904 G1 4,808 --------- --------- Total liabilities......... 361,303 1,200,320 --------- --------- Stockholders' equity: Genzyme General Stock, $.01 par value................... 79 G1 946 Molecular Oncology Stock, $.01 par value................... -- 153 Surgical Products Stock, $.01 par value................... -- -- Tissue Repair Stock, $.01 par value....................... -- -- Biosurgery Stock, $.01 par value....................... -- 363 Treasury Stock--at cost....... -- (901) Additional paid-in capital-- Genzyme General Stock....... 491,102 G1 62,882 G1 1,078,963 -- Additional paid-in capital-- Molecular Oncology Stock.... -- 105,059 Additional paid-in capital-- Surgical Products Stock..... -- -- Additional paid-in capital-- Tissue Repair Stock......... -- -- Additional paid-in capital-- Biosurgery Stock............ 907,120 Notes receivable--related parties..................... -- (14,700)
SEE NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS. 13 GENZYME CORPORATION AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED BALANCE SHEET (CONTINUED) AS OF SEPTEMBER 30, 2000 (AMOUNTS IN THOUSANDS)
PRO FORMA HISTORICAL GENZYME GENZYME HISTORICAL PRO FORMA NOTE CORPORATION AND HISTORICAL CORPORATION BIOMATRIX, INC. ADJUSTMENTS REFERENCE BIOMATRIX GELTEX --------------- --------------- ----------- --------- --------------- ---------- Deferred compensation..... (66) B1 (66) -- Retained earnings (accumulated deficit)... 172,933 172,933 -- Biomatrix, Inc. preferred stock, none issued...... -- -- -- -- -- Biomatrix, Inc. common stock, $.0001 par value................... -- -- -- -- -- Biomatrix, Inc. additional paid-in capital......... 84,600 (84,600) B3 -- -- Biomatrix, Inc. notes receivable--related parties................. (14,700) 14,700 B3 -- -- Biomatrix, Inc. treasury stock, at cost.......... (900) 900 B3 -- -- Biomatrix, Inc. retained earnings................ 24,300 (24,300) B3 -- -- GelTex Pharmaceuticals preferred stock, none issued.................. -- GelTex Pharmaceuticals common stock, $.01 par value................... 215 GelTex Pharmaceuticals additional paid-in capital................. 277,025 GelTex Pharmaceuticals deferred compensation... (701) GelTex Pharmaceuticals accumulated deficit..... (100,458) Accumulated other comprehensive income (loss).................. 24,256 (1,900) 1,900 B3 24,256 (26) ---------- -------- -------- ---------- -------- Total stockholders' equity.............. 1,599,077 91,400 29,586 1,720,063 176,055 ---------- -------- -------- ---------- -------- Total liabilities and stockholders' equity.............. $2,076,546 $113,800 $355,433 $2,545,779 $189,356 ========== ======== ======== ========== ======== PRO FORMA GENZYME PRO FORMA NOTE CORPORATION AND ADJUSTMENTS REFERENCE SUBSIDIARIES ----------- --------- --------------- Deferred compensation..... (10,206) G1 (10,272) Retained earnings (accumulated deficit)... (118,048) G1 3,535 G4 58,420 Biomatrix, Inc. preferred stock, none issued...... -- -- Biomatrix, Inc. common stock, $.0001 par value................... -- -- Biomatrix, Inc. additional paid-in capital......... -- -- Biomatrix, Inc. notes receivable--related parties................. -- -- Biomatrix, Inc. treasury stock, at cost.......... -- -- Biomatrix, Inc. retained earnings................ -- -- GelTex Pharmaceuticals preferred stock, none issued.................. -- -- GelTex Pharmaceuticals common stock, $.01 par value................... (215) G3 -- GelTex Pharmaceuticals additional paid-in capital................. (277,025) G3 -- GelTex Pharmaceuticals deferred compensation... 701 G3 -- GelTex Pharmaceuticals accumulated deficit..... 100,458 G3 -- Accumulated other comprehensive income (loss).................. 26 G3 (2,181) G1 22,075 --------- ---------- Total stockholders' equity.............. 251,108 2,147,226 --------- ---------- Total liabilities and stockholders' equity.............. $ 612,411 $3,347,546 ========= ==========
SEE NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS. 14 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 (AMOUNTS IN THOUSANDS)
HISTORICAL PRO FORMA GENZYME HISTORICAL PRO FORMA NOTE GENZYME GENERAL GELTEX ADJUSTMENTS REFERENCE GENERAL ---------- ---------- ----------- --------- ---------- Revenues: Net product sales......................................... $571,531 $ -- $ 17,676 G25 $589,207 Net service sales......................................... 57,223 -- -- 57,223 Collaborative joint venture project reimbursement......... -- 5,781 (5,781) G24 -- Revenues from research and development contracts: Related parties......................................... 1,516 -- 1,557 G25 3,073 Other................................................... 5,096 10,668 -- 15,764 -------- -------- -------- -------- Total revenues............................................ 635,366 16,449 13,452 665,267 -------- -------- -------- -------- Operating costs and expenses: Cost of products sold..................................... 115,125 -- 15,003 G25 130,128 Cost of services sold..................................... 35,637 -- -- 35,637 Selling, general and administrative....................... 149,427 6,935 18,624 G25 1,743 G22 1,837 G22 178,566 Collaborative joint venture project costs................. -- 5,781 (5,781) G24 -- Research and development (including research and development contracts).................................. 97,746 32,602 7,348 G22 11,154 G25 148,850 Amortization of intangibles............................... 8,106 -- 62,350 G21 70,456 Purchase of in-process research and development........... 5,436 9,530 -- 14,966 -------- -------- -------- -------- Total operating costs and expenses...................... 411,477 54,848 112,278 578,603 -------- -------- -------- -------- Operating income (loss)..................................... 223,889 (38,399) (98,826) 86,664 -------- -------- -------- -------- Other income (expenses): Equity in net loss of unconsolidated affiliates........... (37,423) (7,937) 7,937 G25 8,107 G25 (29,316) Gain on affliate sale of stock............................ 6,683 -- -- 6,683 Gain on sale of investment in equity securities........... 1,963 -- -- 1,963 Minority interest......................................... 3,674 -- -- 3,674 Gain on sale of product line.............................. 8,018 -- -- 8,018 Charge for impaired investments........................... (5,712) -- -- (5,712) Other..................................................... 14,389 -- -- 14,389 Investment income......................................... 30,881 4,372 (19,901) G23 166 G25 15,518 Interest expense.......................................... (19,885) (485) (10,981) G23 (31,351) -------- -------- -------- -------- Total other income (expenses)........................... 2,588 (4,050) (14,672) (16,134) -------- -------- -------- -------- Income before income taxes.................................. 226,477 (42,449) (113,498) 70,530 Income tax (provision) benefit.............................. (84,400) -- 45,050 G26 (39,350) -------- -------- -------- -------- Division net income (loss).................................. $142,077 $(42,449) $(68,448) $ 31,180 ======== ======== ======== ========
SEE NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS 15 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (AMOUNTS IN THOUSANDS)
PRO FORMA GENZYME HISTORICAL PRO FORMA NOTE GENZYME GENERAL GELTEX ADJUSTMENTS REFERENCE GENERAL --------- ---------- ----------- --------- -------- Revenues: Net product sales.................................... $503,700 $ -- $ 6,166 G25 $509,866 Net service sales.................................... 45,296 -- -- 45,296 Collaborative joint venture project reimbursement.... -- 3,841 (3,841) G24 -- Revenues from research and development contracts: Related parties.................................... 245 -- -- 245 Other.............................................. 244 33,070 15 G25 33,329 -------- ------- -------- -------- Total revenues..................................... 549,485 36,911 2,340 588,736 -------- ------- -------- -------- Operating costs and expenses: Cost of products sold................................ 114,461 -- 5,493 G25 119,954 Cost of services sold................................ 26,937 -- -- 26,937 Selling, general and administrative.................. 122,974 7,507 7,177 G25 137,658 Collaborative joint venture project costs............ -- 3,841 (3,841) G24 -- Research and development (including research and development related to contracts).................. 83,701 21,587 4,568 G25 109,856 Amortization of intangibles.......................... 5,962 -- 46,838 G21 52,800 -------- ------- -------- -------- Total operating costs and expenses................. 354,035 32,935 60,235 447,205 -------- ------- -------- -------- Operating income (loss)................................ 195,450 3,976 (57,895) 141,531 -------- ------- -------- -------- Other income (expenses): Equity in net loss of unconsolidated subsidiaries.... (30,866) 196 (196) G25 1,812 G24 8,277 G25 (20,777) Gain on affiliate sale of stock...................... 22,689 -- -- 22,689 Gain on sale of investment in equity securities...... 22,709 -- -- 22,709 Minority interest.................................... 3,185 -- -- 3,185 Other................................................ 5,110 -- -- 5,110 Investment income.................................... 27,798 4,331 (14,777) G23 17,352 Interest expense..................................... (11,639) -- (8,236) G23 (19,875) -------- ------- -------- -------- Total other income (expenses)...................... 38,986 4,527 (13,120) 30,393 -------- ------- -------- -------- Income (loss) before income taxes...................... 234,436 8,503 (71,015) 171,924 Income tax (provision) benefits........................ (74,164) -- 14,236 G26 (59,928) -------- ------- -------- -------- Net income (loss)...................................... $160,272 $ 8,503 $(56,779) $111,996 ======== ======= ======== ========
SEE NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS 16 GENZYME GENERAL A DIVISION OF GENZYME CORPORATION UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 2000 (AMOUNTS IN THOUSANDS)
HISTORICAL PRO FORMA GENZYME HISTORICAL PRO FORMA NOTE GENZYME GENERAL GELTEX ADJUSTMENTS REFERENCE GENERAL ---------- ---------- ----------- --------- ---------- ASSETS Current assets: Cash and cash equivalents................................. $ 176,316 $ 71,179 $(100,000) G15 $ -- 4,469 G20 151,964 Short-term investments.................................... 100,288 68,428 (100,000) G15 68,716 Accounts receivable, net.................................. 157,931 -- (282) G18 157,649 Inventories............................................... 83,621 -- 8,156 G15 13,461 G20 (329) G18 104,909 Prepaid and other current assets.......................... 26,728 12,575 (295) G20 39,008 Due from Molecular Oncology............................... 4,088 -- 4,088 Due from Surgical Products................................ 9,226 -- 9,226 Due from Tissue Repair.................................... 1,272 -- 1,272 Deferred tax assets--current.............................. 41,441 -- -- 41,441 ---------- -------- --------- ---------- Total current assets.................................... 600,911 152,182 (174,820) 578,273 ---------- -------- --------- ---------- Property, plant & equipment, net............................ 380,474 13,538 7,215 G20 4,499 G15 25,000 G15 430,726 Long-term receivables, affiliates........................... -- 121 (121) G18 -- Long-term investments....................................... 415,301 -- (165,151) G15 250,150 Notes receivable--related party............................. 10,175 -- -- 10,175 Intangibles, net............................................ 68,938 7,743 916,062 G15 (7,743) G19 985,000 Deferred tax assets--noncurrent............................. -- -- 35,016 G15 35,016 Investments in equity securities............................ 186,883 -- (4,681) G15 182,202 Other noncurrent assets..................................... 46,544 15,772 (22,865) G18 39,451 ---------- -------- --------- ---------- Total assets............................................ $1,709,226 $189,356 $ 612,411 $2,510,993 ========== ======== ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 17,648 $ -- $ -- $ 17,648 Accrued expenses.......................................... 80,406 5,910 4,321 G16 1,300 G15 (7,936) G18 11,659 G20 95,660 Income taxes payable...................................... 51,778 -- -- 51,778 Deferred revenue.......................................... 4,404 -- -- 4,404 Current portion of notes payable and long-term debt and capital lease obligations............................... 23 1,467 -- 1,490 ---------- -------- --------- ---------- Total current liabilities............................... 154,259 7,377 9,344 170,980 ---------- -------- --------- ---------- Notes payable and long-term debt and capital lease obligations................................................. 62 5,494 150,000 G15 25,000 G15 180,556 Convertible notes and debentures, net....................... 273,415 -- -- 273,415 Deferred tax liabilities--noncurrent........................ 8,797 -- 175,485 G15 184,282 Other noncurrent liabilities................................ 2,789 430 (430) G15 1,904 G15 4,693 ---------- -------- --------- ---------- Total liabilities....................................... 439,322 13,301 361,303 813,926 ---------- -------- --------- ---------- Division equity: Division Equity........................................... 1,269,904 -- 79 G15 491,102 G15 62,882 G15 (10,206) G15 (118,048) G15 (2,181) G15 3,535 G18 1,697,067 GelTex Pharmaceuticals preferred stock, none issued....... -- -- -- -- GelTex Pharmaceuticals common stock, $.01 par value....... -- 215 (215) G17 -- GelTex Pharmaceuticals additional paid-in capital......... -- 277,025 (277,025) G17 -- GelTex Pharmaceuticals deferred compensation.............. -- (701) 701 G17 -- GelTex Pharmaceuticals accumulated deficit................ -- (100,458) 100,458 G17 -- Accumulated other comprehensive income (loss)............. -- (26) 26 G17 ---------- -------- --------- ---------- Total division equity................................... 1,269,904 176,055 251,108 1,697,067 ---------- -------- --------- ---------- Total liabilities and division equity................... $1,709,226 $189,356 $ 612,411 $2,510,993 ========== ======== ========= ==========
SEE NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS. 17 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (1) ACCOUNTING POLICIES AND PRO FORMA INFORMATION The unaudited pro forma combined financial statements reflect the pro forma effect of Genzyme's merger with GelTex and Genzyme's merger with Biomatrix on the - unaudited statements of operations for the nine months ended September 30, 2000 and the year ended December 31, 1999 and - unaudited balance sheet as of September 30, 2000 of both Genzyme and Genzyme General, the division of Genzyme to which the assets and liabilities and operations of GelTex will be allocated. The pro forma balance sheets give effect to the mergers of Genzyme with Biomatrix and GelTex and the combination of Genzyme Surgical Products and Genzyme Tissue Repair as if they occurred on September 30, 2000. The pro forma statements of operations have been presented to give effect to the mergers of Genzyme with both Biomatrix and GelTex using the purchase method of accounting and the combination of Genzyme Surgical Products and Genzyme Tissue Repair using the historical accounting basis as if such transactions had occurred January 1, 1999. In addition to giving effect to the mergers with Biomatrix and GelTex, the pro forma statement of operations for the year ended December 31, 1999 shows Genzyme's earnings allocated to Genzyme General Stock and earnings per share of Genzyme General Stock, adjusted to reflect the changes in earnings allocations resulting from the June 1999 creation and distribution of Surgical Products Stock as if such change took place on January 1, 1999. (2) GENZYME'S ACQUISITIONS (A) GENZYME'S ACQUISITION OF BIOMATRIX Genzyme entered into the merger agreement to acquire Biomatrix on March 6, 2000. Upon consummation of the merger Biomatrix merged into a specially formed, wholly-owned subsidiary of Genzyme. Concurrently with the merger: - Genzyme Biosurgery was created as a new division of Genzyme; - the businesses of Genzyme Surgical Products and Genzyme Tissue Repair were reallocated to Genzyme Biosurgery; and - the businesses of Biomatrix was allocated to Genzyme Biosurgery. For the purposes of the unaudited pro forma financial statements, we used the following exchange ratios to determine the number of shares of Biosurgery Stock distributed: - 0.6060 multiplied by the number of shares of Surgical Products Stock outstanding; - 0.3352 multiplied by the number of shares of Tissue Repair Stock outstanding; and - 0.7162 multiplied by the number of Biomatrix shares outstanding (based on a one-for-one exchange ratio for 71.62% of the Biomatrix shares). This resulted in approximately: - 9,092,763 shares of Biosurgery Stock exchanged for 15,004,560 shares of Surgical Products Stock; - 9,679,769 shares of Biosurgery Stock exchanged for 28,877,593 shares of Tissue Repair Stock; and 18 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED) (2) GENZYME'S ACQUISITIONS (CONTINUED) - 17,516,712 shares of Biosurgery Stock and approximately $252.4 million of cash, exchanged for 24,338,908 shares of Biomatrix common stock. In addition, options to purchase: - 3,252,386 shares of Surgical Products Stock under the Genzyme equity plans, - 3,923,281 shares of Tissue Repair Stock under the Genzyme equity plans, and - 1,706,639 shares of Biomatrix common stock under the Biomatrix equity plans converted to options to purchase approximately 1,970,944, 1,315,083, and 1,222,300 shares of Biosurgery Stock, respectively. Using the acquisition price of Biomatrix common stock and certain other assumptions in the Black-Scholes option valuation model, the Biosurgery options issued in exchange for the Biomatrix options have been valued at approximately $11.4 million. In accordance with FIN 44, the intrinsic value of the portion of the unvested options related to the future service period of approximately $66,000 is allocated to deferred compensation in stockholders' equity for Genzyme or division equity for Genzyme Biosurgery, rather than to goodwill. The unvested portion is being amortized to operating expense over the remaining vesting periods of generally less than four years. (B) GENZYME'S ACQUISITION OF GELTEX Genzyme entered into a merger agreement to acquire GelTex on September 11, 2000. Genzyme issued approximately $515.2 million in cash and $491.2 million in Genzyme General Stock for all of the outstanding shares of GelTex common stock, using the stock price of Genzyme General Stock based on the average trading price over three days before and after the September 11, 2000 announcement of the merger. Approximately 7.9 million shares of Genzyme General Stock were issued in exchange for shares of GelTex common stock. In addition, options and warrants to purchase approximately 2.1 million shares of GelTex common stock were exchanged for options and warrants to purchase approximately 1.6 million shares of Genzyme General Stock. The vesting of GelTex options granted to employees of GelTex before the effective date of the merger will be accelerated as of the first anniversary of the effective date of the merger as long as they remain employees of GelTex or Genzyme on the one year anniversary date. Additionally, the vesting of stock options granted to directors and several officers of GelTex were accelerated immediately upon the effective time of the merger. Using the Black-Scholes valuation model, the options and warrants to purchase Genzyme General Stock issued in exchange for the GelTex options and warrants have a value of approximately $62.9 million. In accordance with FIN 44, the intrinsic value of the portion of the unvested options related to the future service period of $10.2 million is allocated to deferred compensation in stockholders' equity for Genzyme. The unvested portion is being amortized to operating expense over the remaining vesting period of approximately one year. 19 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED) (3) PURCHASE PRICE ALLOCATION (A) BIOMATRIX The aggregate purchase price of $482.4 million was allocated to the acquired tangible and intangible assets and liabilities based on their estimated respective fair values as of September 30, 2000 (amounts in thousands): Cash and cash equivalents................................... $ 46,700 Accounts receivable......................................... 12,600 Prepaid expenses and other current assets................... 5,800 Inventory................................................... 19,530 Property, plant & equipment................................. 39,151 Note receivable............................................. 14,700 Other assets................................................ 800 Intangible assets (to be amortized over 1.5 to 11.0 years).................................................... 284,854 Goodwill (to be amortized over 11.0 years).................. 111,320 In-process research and development......................... 82,143 Deferred tax asset.......................................... 899 Deferred compensation....................................... 66 Assumed liabilities......................................... (29,116) Deferred tax liability...................................... (107,044) --------- Aggregate purchase price............................ $ 482,403 =========
The total purchase price, the fair value of assets and liabilities acquired, the allocation of purchase price and the lives of the goodwill and intangible assets will be determined in connection with preparing our December 31, 2000 financial statements and may vary from the amounts presented herein. In connection with the purchase of Biomatrix, Genzyme expects approximately $82.1 million of the purchase price to be allocated to in-process research and development, or IPR&D. Genzyme management assumes responsibility for determining the IPR&D valuation. Genzyme engaged an independent third-party appraisal company to assist in the valuation of the intangible assets acquired. The final valuation will be completed following the closing date of the transaction. The fair value assigned to purchased IPR&D was estimated by discounting, to present value, the cash flows expected to result from each project once it has reached technological feasibility. A discount rate consistent with the risks of each project was used to estimate the present value of cash flows. In estimating future cash flows, management considered other tangible and intangible assets required for successful exploitation of the technology resulting from each purchased IPR&D project and adjusted future cash flows for a charge reflecting the contribution to value of these assets. The estimated future cash flows resulting from purchased IPR&D were adjusted for the contribution of core technology to the value of each IPR&D project. The value assigned to purchased research and development was the amount attributable to the efforts of Biomatrix up to the time of acquisition. This amount was estimated through application of the "stage of completion" calculation by multiplying total estimated revenue for IPR&D by the percentage of completion of each purchased research and development project at the time of acquisition. The nature of the efforts to develop the purchased IPR&D into commercially viable products, principally relates to the completion and/or acceleration of existing development programs, including 20 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED) (3) PURCHASE PRICE ALLOCATION (CONTINUED) the mandatory completion of several phases of clinical trials and the general and administrative costs necessary to manage the projects and trials. Assuming the approval of the product by the FDA, costs related to the wide scale manufacturing, distribution, and marketing of the products are included in the projection. The resulting net cash flows from such projects are based on Genzyme management's estimates of revenues, cost of sales, research and development expenses, sales and marketing expenses, general and administrative expenses, and the anticipated income tax effect. The discounting of net cash flows back to their present value is based on the weighted average cost of capital, or WACC. The WACC calculation produces the average required rate of return of an investment in an operating enterprise, based on various required rates of return from investments in various areas of that enterprise. The discount rate utilized in discounting the net cash flows from purchased IPR&D was 38%. This discount rate is higher than Genzyme's WACC due to the inherent uncertainties surrounding the successful development of the purchased IPR&D. The forecast data employed in the analyses was based upon product level forecast information obtained by Genzyme from numerous internal and external resources. These resources included publicly available databases, external market research consultants and internal experts. Genzyme senior management reviewed and challenged the forecast data and related assumptions and utilized the information in analyzing IPR&D. The forecast data and assumptions are inherently uncertain and unpredictable. However, based upon the information available at this time, Genzyme management believes the forecast data and assumptions to be reasonable. These assumptions may be incomplete or inaccurate, and no assurance can be given that unanticipated events and circumstances will not occur. Accordingly, actual results may vary from the forecasted results. Any such variance may result in a material adverse effect on Genzyme's financial condition and results of operations. In the allocation of purchase price to the IPR&D, the concept of alternative future use was specifically considered for each of the programs under development. The acquired IPR&D consists of Biomatrix' work to complete each of the identified programs. The programs are very specific to the disease and market for which they are intended. There are no alternative uses for the in-process programs in the event that the programs fail in clinical trials or are otherwise not feasible. The development effort for the acquired IPR&D does not possess an alternative future use for Genzyme as defined by generally accepted accounting principles. Below is a brief description of IPR&D projects including an estimation of when management believes Genzyme may realize revenues from the sale of these products in the respective application. VISCOSUPPLEMENTATION. Viscosupplementation is the use of elastoviscous solutions and viscoelastic gels in disease conditions to supplement tissues and body fluids, alleviating pain and restoring normal function. Biomatrix expects to complete clinical studies demonstrating the efficacy of Synvisc as a treatment for chronic hip pain during early 2001, with market approval occurring later in 2001. Prior clinical studies have demonstrated the product's safety. Although clinical results to date are positive, there can be no assurance that statistically significant results will be observed in the current clinical trial. Future costs for this program are estimated to be approximately $9.5 million. A discount rate of 38% was utilized in discounting these estimated cash flows. This product is already marketed for the treatment of osteoarthritis of the knee in the United States and 38 foreign countries. VISCOAUGMENTATION. Viscoaugmentation is the use of viscoelastic gels to provide scaffolding for tissue regeneration or as an inert elastic filler for tissues of the skin and the subcutaneous and intermuscular connective tissues. Hylaform is a viscoelastic Hylan B gel for injection into facial tissue. 21 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED) (3) PURCHASE PRICE ALLOCATION (CONTINUED) Clinical studies in the United States began in 2000. These studies are expected to be completed and analyzed by early 2001. Although clinical results to date are positive, there can be no assurance that statistically significant results will be observed in the current clinical trials. Assuming favorable results in these studies, we expect that approval to market this product will be obtained by mid-to-late 2001 in the United States. Biomatrix currently expects to launch the product in the United States before the end of 2001, although there can be no assurance that the product will be launched or that the launch will occur within this time period. This product is already marketed for the same indication in 21 foreign countries. Hylagel Uro is a viscoelastic Hylan B gel implant for the treatment of urinary stress incontinence. It is injected intramuscularly to augment the soft connective tissue in between the sphincter muscle of the urethra. This product provides an important advancement in the treatment of urinary stress incontinence, a condition that affects over one million people in the United States. Pilot clinical studies conducted in the United States at two clinical centers under FDA approved protocols have been successfully completed. These initial studies demonstrated that the product is safe and has clinical utility. A pivotal one-year study will begin in 2000 at clinical centers in the United States. It is expected that the studies will be completed, evaluated and submitted for FDA approval by the middle of 2002. When this study is completed, the data will also be submitted for approval in Canada and Europe. Although clinical results to date are positive, there can be no assurance that statistically significant results will be observed in the current clinical trial. Assuming favorable results in these studies, Biomatrix currently expects that during 2003 Hylagel Uro will be marketed in the United States and Canada, although there can be no assurance that the product will be launched or that the launch will occur within this time period. The future costs of these programs are estimated to be approximately $6.8 million. A discount rate of 38% was utilized in discounting these estimated cash flows. VISCOSEPARATION (ANTI-ADHESION). Viscoseparation is the use of viscoelastic gels and membranes to separate tissues and to decrease formation of adhesions and excessive scars after surgery. Hylagel Nuro is for spinal surgery and herniated lumbar intervertabral disc surgery. Hylagel Nuro is a combination of Hylan A fluid and Hylan B gel for application directly at the surgical site to reduce post surgical adhesions and scarring which often cause chronic pain. Hylagel Nuro is classified as a device by regulatory authorities. A multicenter clinical study started in the United States in late 1999 and, currently, studies are being initiated in Germany, France, the United Kingdom and Belgium. The completion of this study is expected by the fourth quarter of 2001, and submissions for regulatory approvals in the United States, Canada and Europe will occur shortly thereafter. Although clinical results to date are positive, there can be no assurance that statistically significant results will be observed in the current clinical trial. Assuming favorable results in these studies, Biomatrix believes that Hylagel Nuro can be launched in Europe by the second quarter of 2002 and in the United States by the fourth quarter of the same year, although there can be no assurance that the product will be launched or that the launch will occur within this time period. A discount rate of 38% was utilized in discounting these estimated cash flows. The valuation of these programs assumes that sales of Hylagel Nuro commence in 2002. The estimated aggregate future clinical costs to develop this indication will be approximately $8.3 million. 22 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED) (3) PURCHASE PRICE ALLOCATION (CONTINUED) The Biomatrix research and development programs currently in process were valued as follows (amounts in thousands): Viscosupplementation........................................ $33,850 Viscoaugmentation........................................... 8,604 Viscoseparation............................................. 39,689 ------- $82,143 =======
(B) GELTEX The aggregate purchase price of $1,076.0 million was allocated to the acquired tangible and intangible assets and liabilities based on their estimated respective fair value as of September 30, 2000 (amounts in thousands): Cash and investments........................................ $ 141,841 Prepaid expenses and other current assets................... 12,511 Inventory................................................... 14,722 Property, plant & equipment................................. 46,645 Intangible assets (to be amortized over 5 to 15 years)...... 465,109 Goodwill (to be amortized over 15 years).................... 450,953 In-process research and development......................... 118,048 Deferred tax asset.......................................... 35,016 Deferred compensation....................................... 10,206 Assumed liabilities......................................... (40,327) Forwards.................................................... (1,300) Swaps....................................................... (1,904) Deferred tax liability...................................... (175,485) ---------- Aggregate purchase price.................................... $1,076,035 ==========
The total purchase price, the fair value of assets and liabilities acquired, the allocation of purchase price and the lives of the goodwill and intangible assets will be determined in connection with preparing our December 31, 2000 financial statements and may vary from the amounts presented herein. As part of the acquisition of GelTex, Genzyme acquired all of GelTex's interest in RenaGel LLC, a joint venture between Genzyme and GelTex. Prior to the acquisition of GelTex, Genzyme accounted for its investment in RenaGel LLC under the equity method. The adjustments below also reflect the consolidation of RenaGel LLC into Genzyme's financial statements and accounting for the purchase by Genzyme of GelTex's 50%-interest in the joint venture using the purchase method of accounting. The assets and liabilities of the joint venture are reflected in the amounts above. Because Genzyme already owns a 50% interest in RenaGel LLC, the assets of RenaGel LLC are adjusted to fair value only to the extent of the 50%-interest Genzyme acquired. In connection with the purchase of GelTex, Genzyme expects approximately $118.0 million of the purchase price to be allocated to in-process research and development, or IPR&D. Genzyme management assumes responsibility for determining the IPR&D valuation. Genzyme engaged an 23 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED) (3) PURCHASE PRICE ALLOCATION (CONTINUED) independent third-party appraisal company to assist in the valuation of the intangible assets acquired. The final valuation will be completed following the closing date of the transaction. The fair value assigned to purchased IPR&D was estimated by discounting, to present value, the cash flows expected to result from each project once it has reached technological feasibility. A discount rate consistent with the risks of each project was used to estimate the present value of cash flows. In estimating future cash flows, management considered other tangible and intangible assets required for successful exploitation of the technology resulting from each purchased IPR&D project and adjusted future cash flows for a charge reflecting the contribution to value of these assets. The estimated future cash flows resulting from purchased IPR&D were adjusted for the contribution of core technology to the value of each IPR&D project. The value assigned to purchased research and development was the amount attributable to the efforts of GelTex up to the time of acquisition. This amount was estimated through application of the "stage of completion" calculation by multiplying total estimated revenue for IPR&D by the percentage of completion of each purchased research and development project at the time of acquisition. Below is a brief description of the in-process research and development projects including an estimation of when management believes Genzyme Corporation may realize revenues from the sale of these products in the respective application. RENAGEL. Renagel brand phosphate binder is a non-absorbed polymer for the treatment of hyperphosphatemia. GelTex has undertaken a series of clinical studies that are designed to demonstrate the compound's role in the prevention of cardiac calcification and the mortality and morbidity associated with cardiac calcification. GelTex has also undertaken clinical studies designed to demonstrate the compound's role in limiting the complications of hyperphosphatemia in pre-dialysis patients. Clinical studies are scheduled for completion in 2002, 2003 and 2004 for these various indications. Although clinical results to date have been positive, there can be no assurance that statistically significant results will be observed in ongoing or future clinical trials. Future costs for these programs are estimated at $20.0 million. A discount rate of 35% was utilized in discounting the estimated cash flows associated with these programs. C. DIFFICILE. The goal of the C. DIFFICILE program is to develop a toxin-binding polymer for the treatment and prevention of antibiotic induced C. DIFFICILE colitis. GelTex has completed a phase I study, and expects to initiate a phase II study in 2000. Although clinical results to date have been positive, there can be no assurance that statistically significant results will be observed in ongoing or future clinical trials. Assuming favorable results in future studies, it is expected that approval to market this product will be obtained by 2005 in the U.S., although there can be no assurance that a product will be launched or that the launch will occur within this time period. The future cost of this program is estimated to be approximately $37.0 million. A discount rate of 38% was utilized in discounting these estimated cash flows. ORAL MUCOSITIS. Oral Mucositis is common side effect of radiation therapy and chemotherapy. GelTex has identified a series of compounds that alone and in combination have demonstrated efficacy in animal models of Oral Mucositis. GelTex expects that an IND will be filed in the fourth quarter of 2001 and product launch is expected in 2005, although there can be no assurance that an IND will be filed or a product launched, or that the filing or launch will occur within this time period. 24 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED) (3) PURCHASE PRICE ALLOCATION (CONTINUED) The future cost of this program is estimated to be approximately $25.0 million. A discount rate of 40% was utilized in discounting these estimated cash flows. DENSPM. The DENSPM program is focused on the development of a compound for the treatment of mild to moderate psoriasis. Toxicology studies are underway and GelTex expects to file an IND during the first quarter of 2001. Phase I safety and dose-ranging studies are scheduled for 2001 and product launch is anticipated in 2005, although there can be no assurance that an IND will be filed or a product launched, or that the filing or launch will occur within this time period. The future cost of this program is estimated to be approximately $30.0 million. A discount rate of 40% was utilized in discounting these estimated cash flows. IRON CHELATION. The iron chelator program is focused on the prevention and treatment of transfusional or hereditary iron overload. GelTex has identified small molecule compounds that are highly effective, orally active iron chelators. Compounds to date display an acceptable tolerability profile for further progression. GelTex expects to file an IND in 2001 and hopes to launch the product in 2005, although there can be no assurance that an IND will be filed or a product launched, or that the filing or launch will occur within this time period. The future cost of this program is estimated to be approximately $31.0 million. A discount rate of 40% was utilized in discounting these estimated cash flows. ANTI-OBESITY. The anti-obesity program builds on GelTex's expertise in non-absorbed polymers. The program is focused on the development of a compound that will inhibit lipase and bind fat. GelTex expects to file an IND early in 2002 and hopes to launch a product in 2006, although there can be no assurance that an IND will be filed or a product launched, or that the filing or launch will occur within this time period. The future cost of this program is estimated to be approximately $39.0 million. A discount rate of 40% was utilized in discounting these estimated cash flows. GT102-279. GT102-279 is a second generation lipid-lowering compound that has the attributes of GelTex's WelChol lipid lowering agent, but requires 50% fewer tablets. This ease of use could result in higher compliance and greater efficacy, resulting in broader market penetration. One Phase II study has been completed and a second Phase II study is in progress. GelTex expects to complete clinical studies late in 2003 with product launch in 2004. Although clinical results to date have been positive, there can be no assurance that statistically significant results will be observed in ongoing or future clinical trials, that a product will be launched, or that the launch will occur within this time period. Under the terms of GelTex's collaboration agreement with Sankyo, Sankyo was granted an option to license this compound. To keep this option in place, Sankyo must fund the future development cost of this program. A discount rate of 38% was utilized in discounting these estimated cash flows. 25 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED) (3) PURCHASE PRICE ALLOCATION (CONTINUED) The GelTex research and development programs currently in process were valued as follows (amounts in thousands):
Renagel (Calcification, pre-dialysis and M&M) $ 19,747 C. DIFFICILE 37,386 Iron Chelation 15,715 Anti-Obesity 17,788 DENSPM 3,450 Oral Mucositis 17,769 GT102-279 6,193 -------- $118,048 ========
(4) PRO FORMA ADJUSTMENTS RELATED TO THE ACQUISITION OF BIOMATRIX These adjustments reflect the retirement of all Surgical Products Stock, Tissue Repair Stock and Biomatrix common stock and the issuance of Biosurgery Stock. The value ascribed to the Biosurgery Stock exchanged for Biomatrix common stock for purchase price accounting is $11.79 per share. The aggregate purchase price is comprised of the following (amounts in thousands): Issuance of 17,516,712 shares of Biosurgery Stock........... $206,522 Cash payment................................................ 252,421 -------- Subtotal.................................................. 458,943 Issuance of Biosurgery options to Biomatrix optionholders... 11,373 Acquisition costs........................................... 12,087 -------- Aggregate purchase price............................ $482,403 ========
I. PRO FORMA ADJUSTMENTS TO GENZYME CORPORATION'S CONSOLIDATED BALANCE SHEET (B1) To record the acquisition of the net assets of Biomatrix for an aggregate purchase price of $482.4 million (see Note A). The intangible assets of approximately $396.2 million are as follows:
USEFUL LIFE AMOUNTS DESCRIPTION IN YEARS IN THOUSANDS - ----------- ----------- ------------ Workforce............................................. 5.0 $ 2,017 Non-compete agreements................................ 1.5 640 Distribution agreements............................... 8.0 13,950 Trademark/trade name.................................. 11.0 48,746 Patented core technology.............................. 11.0 59,877 Current products technology........................... 11.0 159,624 Goodwill.............................................. 11.0 111,320 -------- Total............................................. $396,174 ========
The $82.1 million allocated to in-process technology has been charged to accumulated deficit for purposes of pro forma balance sheet presentation only and was charged to expense in 26 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED) (4) PRO FORMA ADJUSTMENTS RELATED TO THE ACQUISITION OF BIOMATRIX (CONTINUED) Genzyme's historical financial statements upon completion of the merger with Biomatrix. The goodwill of $111.3 million consists of the excess of the purchase price over the fair market value of net assets acquired. A deferred tax liability of $107.0 million has been generated from the creation of intangible assets, excluding goodwill. An amount of $200.0 million of debt was obtained by Genzyme in order to finance the cash payment portion of the purchase price, and the remaining approximately $52.4 million was paid from the existing cash balances. The purchase price includes $11.4 million for the estimated fair value of the Genzyme Biosurgery options that were issued in exchange for the Biomatrix options. This estimated fair value was calculated using the Black-Scholes option pricing model based on a stock price of $11.79, which is the value of ascribed to the Biosurgery Stock for purchase price accounting, and other assumptions in the Black-Scholes model. The portion of the intrinsic value of unvested options relating to future service, which is estimated to be $66,000, has been allocated to deferred compensation in the pro forma consolidated balance sheet. In the pro forma consolidated statements of operations, compensation expense has been recorded to reflect the amortization of this deferred compensation over the average remaining vesting period of approximately 3 years. (B2) To record $18.8 million of accrued expenses related to the estimated acquisition costs and liabilities for exit activities that have not been reflected in the historical balances as of September 30, 2000. (B3) To eliminate Biomatrix historical stockholders' equity amounts totaling $91.4 million, except for the Biomatrix notes receivable of $14.7 million, which remained outstanding upon completion of the transaction. Biomatrix received these full recourse notes in exchange for the purchase of Biomatrix common stock at fair market value by certain officers, directors and a consultant in accordance with a restricted stock plan. To the extent the holders receive cash, as consideration for their restricted shares, it must be used to repay the balance of the same quantity of shares under the notes. Therefore, the balance of the notes could change. The quantity of the decrease to the balance of the notes will not be known until the acquisition is effective. (B4) To record the cancellation of Surgical Products Stock and Tissue Repair Stock, by eliminating the par value of common stock of $150,000 and $289,000, respectively; and additional paid-in capital of $543.2 million and $228.1 million, respectively; and to record the issuance of Biosurgery Stock, with par value of $188,000 and additional paid-in capital transferred from Surgical Products Stock and Tissue Repair Stock of $771.5 million. (B5) To record inventory and fixed assets of Biomatrix at fair value, by increasing the inventory by $11.3 million and decreasing the fixed assets by $0.5 million. The increased basis for the inventory valuation will result in a $11.3 million decrease in gross margin as the units are sold, after the acquisition. 27 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED) (4) PRO FORMA ADJUSTMENTS RELATED TO THE ACQUISITION OF BIOMATRIX (CONTINUED) II. PRO FORMA ADJUSTMENTS TO GENZYME CORPORATION'S CONSOLIDATED STATEMENTS OF OPERATIONS (B6) To record the amortization of acquired intangible assets and goodwill (amounts in thousands):
ASSIGNED ANNUAL VALUE AMORTIZATION -------- ------------ INTANGIBLE ASSETS: Workforce (5 years)................................. $ 2,017 $ 404 Non-compete agreements (1.5 years).................. 640 427 Distribution agreements (8 years)................... 13,950 1,744 Trademark/trade name (11 years)..................... 48,746 4,431 Patented core technology (11 years)................. 59,877 5,443 Current products technology (11 years).............. 159,624 14,511 Goodwill (11 years)................................. 111,320 10,120 -------- ------- Pro forma adjustment for amortization of intangibles................................... $396,174 $37,080 ======== =======
(B7) To record the following: - Amortization of deferred compensation associated with Genzyme Biosurgery options that were issued in exchange for Biomatrix options; - Impact of the additional expense associated with the increased basis for the Biomatrix inventory; - Impact of the additional depreciation expense related to the increased basis of Biomatrix's fixed assets. (B8) To eliminate Biomatrix' weighted average shares outstanding, and to record the cancellation of Surgical Products Stock and Tissue Repair Stock. (B9) To record the creation of Biosurgery Stock. Net losses for Genzyme Surgical Products and Genzyme Tissue Repair and net income for Biomatrix have been transferred to the calculation of loss per share allocated to Biosurgery Stock. The net income amount for Biomatrix of $22.5 million for the nine months ended September 30, 2000 and $31.0 million for the year ended December 31, 1999 reflects the elimination of the $9.2 million and $12.4 million tax provision, respectively because Genzyme Biosurgery incurred a pro forma net loss for each period. (B10) To adjust the tax provision for the impact of the amortization of acquired intangibles, the reduction in investment income, the additional interest expense and the amortization of the deferred tax liability established in purchase accounting. Income taxes are allocated to Genzyme Biosurgery based upon the financial statement income, taxable income, credits and other amounts properly allocable to each division under generally accepted accounting principles as if it were a separate taxpayer. The realizability of deferred tax assets is assessed at the division level. (B11) To record interest expense that would have been incurred on the $200.0 million of debt, at a rate of 7.5% per annum; and to reduce the investment income balance to reflect the payment of $52.4 million of cash at a rate of return of 5.45% per annum. 28 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED) (4) PRO FORMA ADJUSTMENTS RELATED TO THE ACQUISITION OF BIOMATRIX (CONTINUED) (B12) To eliminate the tax benefits of Genzyme Surgical Products and Genzyme Tissue Repair that had been allocated to Genzyme General and to allocate the pro forma tax benefits of Genzyme Biosurgery to Genzyme General. Genzyme's management and accounting policies provide that, if as of the end of any fiscal quarter, a division can not use any projected annual tax benefit attributable to it to offset or reduce its current or deferred income tax expense, Genzyme may allocate the tax benefit to other divisions in proportion to their taxable income without any compensating payments or allocation to the division generating the benefit. The tax benefits allocated to Genzyme General from Genzyme Surgical Products and Genzyme Tissue Repair totaled $27.0 million for the year ended December 31, 1999 and $16.3 million in the nine months ended September 30, 2000. On a pro forma basis, the tax benefits allocated to Genzyme General from Genzyme Biosurgery would have been $21.0 million for the year ended December 31, 1999 and $11.9 million for the nine months ended September 30, 2000. The tax benefits generated by Genzyme Biosurgery and allocated to Genzyme General are lower on a pro forma basis due to Biomatrix' profitability offsetting losses incurred by Genzyme Surgical Products and Genzyme Tissue Repair. (B13) To eliminate Genzyme Surgical Products' loss from earnings allocated to Genzyme General Stock to reflect the change in Genzyme's earnings allocation resulting from the creation and distribution of Surgical Products Stock in June 1999. (5) PRO FORMA ADJUSTMENTS RELATED TO THE ACQUISITION OF GELTEX The following adjustments reflect the acquisition of GelTex by Genzyme for a combination of cash and stock and the replacement of GelTex options and warrants with options and warrants to purchase Genzyme General Stock. As part of the acquisition of GelTex, Genzyme acquired all of GelTex's interest in RenaGel LLC, a joint venture between Genzyme and GelTex. Prior to the acquisition of GelTex, Genzyme accounted for its investment in RenaGel LLC under the equity method. The adjustments below reflect the consolidation of RenaGel LLC into Genzyme's financial statements and accounting for Genzyme's purchase of GelTex' interest in the joint venture using the purchase method of accounting. I. PRO FORMA ADJUSTMENTS TO GENZYME CORPORATION'S CONSOLIDATED BALANCE SHEET (G1) To record the acquisition of the net assets of GelTex for an aggregate purchase price of $1,076.0 million. The aggregate purchase price is comprised of the following (amounts in thousands): Issuance of 7,886,404 shares of Genzyme General Stock....... $ 491,181 Cash payment................................................ 515,151 ---------- Subtotal.................................................... 1,006,332 Basis of GelTex investment.................................. 2,500 Issuance of Genzyme General options and warrants to GelTex option and warrant holders................................ 62,882 Acquisition costs........................................... 4,321 ---------- Aggregate purchase price.................................... $1,076,035 ==========
29 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED) (5) PRO FORMA ADJUSTMENTS RELATED TO THE ACQUISITION OF GELTEX (CONTINUED) The aggregate purchase price of $1,076.0 million was allocated to the acquired tangible and intangible assets and liabilities based on their estimated respective fair value as of September 30, 2000 (amounts in thousands): Cash and investments........................................ $ 141,841 Prepaid expenses and other current assets................... 12,511 Inventory................................................... 14,722 Property, plant & equipment................................. 46,645 Intangible assets (to be amortized over 5 to 15 years)...... 465,109 Goodwill (to be amortized over 15 years).................... 450,953 In-process research and development......................... 118,048 Deferred tax asset.......................................... 35,016 Deferred compensation....................................... 10,206 Assumed liabilities......................................... (40,327) Forwards.................................................... (1,300) Swaps....................................................... (1,904) Deferred tax liability...................................... (175,485) ---------- Aggregate purchase price.................................... $1,076,035 ==========
The $118.0 million allocated to in-process technology has been charged to retained earnings for purposes of pro forma balance sheet presentation only and was charged to expense in Genzyme's historical financial statements upon completion of the merger with GelTex. The goodwill of $451.0 million consists of the excess of the purchase price over the fair market value of net assets acquired. A deferred tax liability of $175.5 million has been generated from the creation of intangible assets, excluding goodwill. An amount of $150.0 million of debt was obtained by Genzyme in order to finance the cash payment portion of the purchase price, and the remaining approximately $365.2 million was paid from the existing cash and investment balances. The purchase price includes $62.9 million for the estimated fair value of the Genzyme General options and warrants that were issued in exchange for the GelTex options and warrants. This estimated fair value was calculated using the Black-Scholes valuation model. The portion of the intrinsic value of unvested options relating to future service, which is estimated to be $10.2 million, has been allocated to deferred compensation in the pro forma consolidated balance sheet. In the pro forma consolidated statements of operations, compensation expense has been recorded to reflect the amortization of this deferred compensation over the average remaining vesting period of approximately one year. This amortization expense of approximately $10.2 million has been recorded to the appropriate expense category based on the payroll classification of the grantee. The remaining vesting period of approximately one year is the result of a consent granted by Genzyme to GelTex pursuant to the merger agreement which allows GelTex to amend GelTex options granted to employees before the effective date of the merger to provide that vesting will be accelerated as of the first anniversary of the effective date of the merger as long as they remain employees of GelTex or Genzyme on the one year anniversary date. (G2) To record $4.3 million of accrued expenses related to the estimated acquisition costs that have not been reflected in the historical balances as of September 30, 2000. (G3) To eliminate GelTex's historical stockholders' equity amounts totaling $176.1 million. (G4) To eliminate intercompany balances between Genzyme, GelTex and RenaGel LLC. (G5) To eliminate GelTex's intangible assets. 30 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED) (5) PRO FORMA ADJUSTMENTS RELATED TO THE ACQUISITION OF GELTEX (CONTINUED) (G6) To eliminate Genzyme's and GelTex's investment in RenaGel LLC and to consolidate RenaGel LLC with Genzyme. The assets of the joint venture have been adjusted to fair value to the extent of the percentage ownership of RenaGel LLC acquired by Genzyme in this transaction (i.e., 50%). Assets of RenaGel LLC for which book value does not approximate fair value are as follows (amounts in thousands):
DESCRIPTION BOOK VALUE FAIR VALUE RECORDED VALUE - ----------- ---------- ---------- -------------- Inventory................................. $13,461 $ 29,773 $ 21,617 Renagel Technology........................ 0 232,540 116,270
The inventory and Renagel technology are reflected in adjustment (G1) above. The increased basis for the inventory will result in a $8.2 million decrease to Genzyme's gross margin as the units are sold after the acquisition. II. PRO FORMA ADJUSTMENTS TO GENZYME CORPORATION'S CONSOLIDATED STATEMENTS OF OPERATIONS (G7) To record the amortization of acquired intangible assets and goodwill (amounts in thousands):
INTANGIBLE ASSETS: ASSIGNED VALUE ANNUAL AMORTIZATION - ------------------ -------------- ------------------- Workforce (5 years)......................................... $ 2,327 $ 465 Patents (15 years).......................................... 115,772 7,718 Trademarks/trade name (15 years)............................ 6,526 435 Core technology (15 years).................................. 65,313 4,354 Current products technology (5 to 15 years)................. 275,171 19,948 Goodwill (15 years)......................................... 450,953 30,065 -------- ------- Pro forma adjustment for amortization of intangibles........ $916,062 $62,985 ======== =======
(G8) To record the following: - Amortization of deferred compensation associated with Genzyme General options that were issued in exchange for GelTex options; - Impact of the additional expense associated with the increased basis for the Renagel LLC inventory of $8.2 million; - Impact of the additional depreciation expense related to the increased basis of GelTex's fixed assets. (G9) To eliminate GelTex's weighted average shares outstanding, to reflect the issuance of 7,886,404 shares of Genzyme General Stock and to reflect the dilutive effect of the issuance of options to purchase Genzyme General Stock to holders of GelTex options. (G10) To record interest expense that would have been incurred on the $150.0 million of debt, at a rate of 7.5% per annum; and to reduce the investment income balance to reflect the payment of $365.2 million of cash at a rate of return of 5.45% per annum. (G11) To eliminate intercompany transactions between Genzyme, GelTex and RenaGel LLC. 31 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED) (5) PRO FORMA ADJUSTMENTS RELATED TO THE ACQUISITION OF GELTEX (CONTINUED) (G12) To eliminate Genzyme's and GelTex's equity in the net loss of RenaGel LLC and to consolidate RenaGel LLC with Genzyme. (G13) To adjust the tax provision for the impact of the reduction in investment income, the additional interest expense and the amortization of the deferred tax liability established in purchase accounting. These adjustments plus the impact of including GelTex's loss in determining Genzyme's tax provision and the effects of the Biomatrix merger would increase Genzyme's effective tax rate from 29.9% to 44.5% for the nine months ended September 30, 2000 and would decrease Genzyme's effective tax rate from 39.8% to (4.3)% for the year ended December 31, 1999. (G14) The net loss of GelTex has been transferred to the calculation of net income per share allocated to Genzyme General Stock. III. PRO FORMA ADJUSTMENTS TO GENZYME GENERAL'S COMBINED BALANCE SHEET (G15) To record the acquisition of the net assets of GelTex for an aggregate purchase price of $1,076.0 million. The aggregate purchase price is comprised of the following (amounts in thousands): Issuance of 7,886,404 shares of Genzyme General Stock....... $ 491,181 Cash payment................................................ 515,151 ---------- Subtotal.................................................... 1,006,332 Basis of GelTex investment.................................. 2,500 Issuance of Genzyme General options and warrants to GelTex option and warrant holders................................ 62,882 Acquisition costs........................................... 4,321 ---------- Aggregate purchase price.................................... $1,076,035 ==========
The aggregate purchase price of $1,076.0 million was allocated to the acquired tangible and intangible assets and liabilities based on their estimated respective fair value as of September 30, 2000 (amounts in thousands): Cash and investments........................................ $ 141,841 Prepaid expenses and other current assets................... 12,511 Inventory................................................... 14,722 Property, plant & equipment................................. 46,645 Intangible assets (to be amortized over 5 to 15 years)...... 465,109 Goodwill (to be amortized over 15 years).................... 450,953 In-process research and development......................... 118,048 Deferred tax asset.......................................... 35,016 Deferred compensation....................................... 10,206 Assumed liabilities......................................... (40,327) Forwards.................................................... (1,300) Swaps....................................................... (1,904) Deferred tax liability...................................... (175,485) ---------- Aggregate purchase price.................................... $1,076,035 ==========
The $118.0 million allocated to in-process technology has been charged to division equity for purposes of pro forma balance sheet presentation only and was allocated to expense in Genzyme 32 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED) (5) PRO FORMA ADJUSTMENTS RELATED TO THE ACQUISITION OF GELTEX (CONTINUED) General's historical financial statements upon completion of the merger with GelTex. The goodwill of $451.0 million consists of the excess of the purchase price over the fair market value of net assets acquired. A deferred tax liability of $175.5 million has been generated from the creation of intangible assets, excluding goodwill. An amount of $150.0 million of debt was obtained by Genzyme and allocated to Genzyme General in order to finance the cash payment portion of the purchase price, and the remaining approximately $365.2 million was paid from Genzyme General's existing cash and investment balances. The purchase price includes $62.9 million for the estimated fair value of the Genzyme General options and warrants that were issued in exchange for the GelTex options and warrants. This estimated fair value was calculated using the Black-Scholes valuation model. The portion of the intrinsic value of unvested options relating to future service, which is estimated to be $10.2 million, has been allocated to deferred compensation, included in division equity in the pro forma combined balance sheet. In the pro forma combined statements of operations, compensation expense has been recorded to reflect the amortization of this deferred compensation over the average remaining vesting period of approximately one year. This amortization expense of approximately $10.2 million has been recorded to the appropriate expense category based on the payroll classification of the grantee. The remaining vesting period of approximately one year is the result of a consent granted by Genzyme to GelTex pursuant to the merger agreement which allows GelTex to amend GelTex options granted to employees before the effective date of the merger to provide that vesting will be accelerated as of the first anniversary of the effective date of the merger as long as they remain employees of GelTex or Genzyme on the one year anniversary date. (G16) To record $4.3 million of accrued expenses related to the estimated acquisition costs that have not been reflected in the historical balances as of September 30, 2000. (G17) To eliminate GelTex's historical stockholders' equity amounts totaling $176.1 million. (G18) To eliminate intercompany balances between Genzyme General, GelTex and RenaGel LLC. (G19) To eliminate GelTex's intangible assets. (G20) To eliminate Genzyme General's and GelTex's investment in RenaGel LLC and to consolidate RenaGel LLC with Genzyme General. The assets of the joint venture have been adjusted to fair value to the extent of the percentage ownership of RenaGel LLC acquired by Genzyme and allocated to Genzyme General in this transaction (i.e., 50%). Assets of RenaGel LLC for which book value does not approximate fair value are as follows (amounts in thousands):
DESCRIPTION BOOK VALUE FAIR VALUE RECORDED VALUE - ----------- ---------- ---------- -------------- Inventory................................. $13,461 $ 29,773 $ 21,617 Renagel Technology........................ 0 232,540 116,270
The inventory and Renagel technology are reflected in adjustment (G15) above. The increased basis for the inventory will result in a $8.2 million decrease to Genzyme General's gross margin as the units are sold after the acquisition. 33 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED) (5) PRO FORMA ADJUSTMENTS RELATED TO THE ACQUISITION OF GELTEX (CONTINUED) IV. PRO FORMA ADJUSTMENTS TO GENZYME GENERAL'S COMBINED STATEMENTS OF OPERATIONS (G21) To record the amortization of acquired intangible assets and goodwill (amounts in thousands):
INTANGIBLE ASSETS: ASSIGNED VALUE ANNUAL AMORTIZATION - ------------------ -------------- ------------------- Workforce (5 years)......................................... $ 2,327 $ 465 Patents (15 years).......................................... 115,772 7,718 Trademarks/trade name (15 years)............................ 6,526 435 Core technology (15 years).................................. 65,313 4,354 Current products technology (5 to 15 years)................. 275,171 19,948 Goodwill (15 years)......................................... 450,953 30,065 -------- ------- Pro forma adjustment for amortization of intangibles........ $916,062 $62,985 ======== =======
(G22) To record the following: - Amortization of deferred compensation associated with Genzyme General options that were issued in exchange for GelTex options; - Impact of the additional expense associated with the increased basis for the Renagel LLC inventory of $8.2 million; - Impact of the additional depreciation expense related to the increased basis of GelTex's fixed assets. (G23) To record interest expense that would have been incurred on the $150.0 million of debt allocated to Genzyme General, at a rate of 7.5% per annum; and to reduce the investment income balance to reflect the payment of $365.2 million of cash at a rate of return of 5.45% per annum. (G24) To eliminate intercompany transactions between Genzyme General, GelTex and RenaGel LLC. (G25) To eliminate Genzyme General's and GelTex's equity in the net loss of RenaGel LLC and to consolidate RenaGel LLC with Genzyme General. (G26) To adjust the tax provision for the impact of the reduction in investment income, the additional interest expense and the amortization of the deferred tax liability established in purchase accounting. 34 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION 2.1 Agreement and Plan of Merger, dated as of September 11, 2000, among Genzyme, Titan Acquisition Corp. and GelTex, as amended. Previously filed as Exhibit 99.1 to Genzyme's Current Report on Form 8-K dated September 11, 2000 (Commission File No. 000-14680) and incorporated herein by reference. 23.1 Consent of Ernst & Young LLP. Filed herewith. 23.2 Consent of PricewaterhouseCoopers LLP. Filed herewith. 99.1 The audited financial statements of GelTex as of December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999, including the report of independent auditors (as reported on pages F-1 to F-20 of the Annual Report on Form 10-K of GelTex for the fiscal year ended December 31, 1999 (filed on March 30, 2000), as amended on November 7, 2000)). Filed herewith. 99.2 The unaudited financial statements of GelTex as of and for the nine months ended September 30, 2000 and 1999 (as reported on pages 3 to 9 of the Quarterly Report on Form 10-Q of GelTex for the quarter ended September 30, 2000 (filed November 14, 2000)). Filed herewith. 35 EX-23.1 2 a2039916zex-23_1.txt EXHIBIT 23.1 Exhibit 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements of Genzyme Corporation on Form S-3 (Nos. 33-61853, 333-31548 and 333-87449) and Form S-8 (Nos. 33-8881, 33-15616, 33-26329, 33-29918, 33-35067, 33-37236, 33-41933, 33-55656, 33-68188, 33-58359, 33-60437, 333-10003, 333-33249, 333-83677, 33-30007, 33-68208, 33-58351, 333-33265, 333-10005, 333-33251, 333-83669, 33-22464, 33-29440, 33-51416, 333-51872, 333-51906, 333-52202, 333-55126, 33-68186, 33-58353, 33-58355, 33-60435, 333-33291, 333-64095, 33-21241, 333-42371, 333-64103, 333-81275, 333-87967, 333-81277, 333-83673 and 333-83681) of our report dated February 22, 2000, with respect to the consolidated financial statements of GelTex Pharmaceuticals, Inc. included in the amendment on Form 8-K/A to the Current Report on Form 8-K of Genzyme Corporation dated December 14, 2000. /s/ Ernst & Young LLP Boston, Massachusetts February 23, 2001 EX-23.2 3 a2039916zex-23_2.txt EXHIBIT 23.2 Exhibit 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the registration statements of Genzyme Corporation on Form S-8 (File Nos. 33-8881, 33-15616, 33-26329, 33-29918, 33-35067, 33-37236, 33-41933, 33-55656, 33-68188, 33-58359, 33-60437, 333-10003, 333-33249, 333-83677, 33-30007, 33-68208, 33-58351, 333-33265, 333-10005, 333-33251, 333-83669, 33-22464, 33-29440, 33-51416, 333-51872, 333-51906, 333-52202, 333-55126, 33-68186, 33-58353, 33-58355, 33-60435, 333-33291, 333-64095, 33-21241, 333-42371, 333-64103, 333-81275, 333-87967, 333-81277, 333-83673 and 333-83681) and on Form S-3 (File Nos. 33-61853, 333-31548 and 333-87449) of our report dated February 22, 2000, relating to the financial statements of RenaGel LLC, which appears in GelTex Pharmaceuticals, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1999. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts February 26, 2001 EX-99.1 4 a2039916zex-99_1.txt EXHIBIT 99.1 Exhibit 99.1 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE ---- Report of Independent Auditors...................................... F-2 Consolidated Balance Sheets as of December 31, 1999 and 1998........ F-3 Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997................................. F-4 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997..................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997................................. F-6 Notes to Consolidated Financial Statements.......................... F-7 F-1 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders GelTex Pharmaceuticals, Inc. We have audited the accompanying consolidated balance sheets of GelTex Pharmaceuticals, Inc. as of December 31, 1999 and 1998, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of RenaGel LLC (a limited liability company in which the Company has a 50% interest), as of December 31, 1999 and 1998, and for the years then ended, have been audited by other auditors whose report has been furnished to us; insofar as our opinion on the consolidated financial statements relates to data included for RenaGel LLC, as of, and for the years ended, December 31, 1999 and 1998, it is based solely on their report. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of GelTex Pharmaceuticals, Inc. at December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Boston, Massachusetts February 22, 2000 F-2 GELTEX PHARMACEUTICALS, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, -------------------------------- 1999 1998 --------------- ------------- ASSETS Current assets: Cash and cash equivalents....................................... $ 20,178,391 $ 30,874,900 Marketable securities........................................... 52,250,534 74,077,436 Prepaid expenses and other current assets....................... 1,763,400 2,708,487 Due from affiliates............................................. 411,250 10,251,100 Due from Joint Venture.......................................... 664,741 1,128,124 --------------- ------------- Total current assets................................................. 75,268,316 119,040,047 Long-term receivables, affiliates.................................... 371,750 470,000 Long-term receivables................................................ -- 32,725 Property and equipment, net.......................................... 11,117,725 7,899,470 Purchased goodwill, net.............................................. 6,753,729 -- Intangible assets, net............................................... 1,282,490 818,963 Investment in Joint Venture.......................................... 11,295,056 5,183,580 --------------- ------------- $ 106,089,066 $ 133,444,785 =============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses........................... $ 5,175,756 $ 4,848,728 Due to Joint Venture............................................ -- 1,349,400 Current portion of long-term obligations........................ 1,646,296 2,020,614 --------------- ------------- Total current liabilities............................................ 6,822,052 8,218,742 Other, long-term liabilities......................................... 5,390 -- Long-term obligations, less current portion.......................... 6,559,884 5,206,180 Commitments and contingencies........................................ -- -- Stockholders' equity: Preferred Stock, $.01 par value, 5,000,000 shares authorized, none issued or outstanding............... -- -- Common Stock, $.01 par value, 50,000,000 shares authorized; 18,063,122 and 16,792,444 shares issued and outstanding at December 31, 1999 and 1998, respectively.................... 180,631 167,924 Additional paid-in capital...................................... 202,210,089 186,762,715 Deferred compensation........................................... (483,019) (663,722) Accumulated other comprehensive income.......................... (245,099) 264,388 Accumulated deficit............................................. (108,960,862) (66,511,442) --------------- ------------- Total stockholders' equity........................................... 92,701,740 120,019,863 --------------- ------------- $ 106,089,066 $ 133,444,785 =============== =============
The accompanying notes are an integral part of the consolidated financial statements. F-3 GELTEX PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 1999 1998 1997 --------------- --------------- ---------- REVENUE: License fee and research revenue............... $ 10,667,708 $ 25,000,000 $ 1,000,010 Collaborative Joint Venture project Reimbursement................................. 5,781,169 7,658,232 9,195,727 Research grant................................. -- -- 289,254 -------------- -------------- -------------- Total revenue....................................... 16,448,877 32,658,232 10,484,991 COSTS AND EXPENSES: Research and development....................... 32,601,593 27,904,064 22,251,062 Collaborative Joint Venture project costs...... 5,781,169 7,658,232 9,195,727 -------------- -------------- -------------- Total research and development............ 38,382,762 35,562,296 31,446,789 General and administrative..................... 6,934,674 5,583,361 4,089,467 Acquired in-process research and development... 9,530,000 -- -- -------------- -------------- -------------- Total costs and expenses............................ 54,847,436 41,145,657 35,536,256 -------------- -------------- -------------- Loss from operations................................ (38,398,559) (8,487,425) (25,051,265) Equity in loss of Joint Venture..................... (7,937,041) (7,535,630) (2,310,345) Interest income..................................... 4,371,831 5,069,250 3,094,874 Interest expense.................................... (485,651) (613,513) (217,142) -------------- -------------- -------------- Net loss............................................ $ (42,449,420) $ (11,567,318) $ (24,483,878) ============== ============== ============== Net loss per common share and common share assuming dilution.................................. $ (2.50) $ (0.72) $ (1.80) ============== ============== ============== Shares used in computing net loss per common share and common share assuming dilution................. 17,003,000 16,023,000 13,592,000
The accompanying notes are an integral part of the consolidated financial statements. F-4 GELTEX PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
ACCUMULATED ADDITIONAL OTHER TOTAL STOCK- COMMON STOCK PAID-IN- DEFERRED ACCUMULATED COMPREHENSIVE HOLDERS' SHARES AMOUNTS CAPITAL COMPENSATION DEFICIT INCOME EQUITY ------ ------- ---------- ------------ ----------- ------------- ----------- Balance at January 1, 1997..................... 13,521,302 $135,213 $105,407,670 $ (46,129) $ (30,460,246) $ 19,967 $ 75,056,475 Comprehensive income: Net loss..................................... (24,483,878) (24,483,878) Other comprehensive income, unrealized 57,435 57,435 gain on available for sale securities........ ------------ Comprehensive income........................... (24,426,443) Issuance of common stock under stock option plan and exercise of warrants ............... 16,758 168 89,265 89,433 Issuance of stock to Joint Venture partner..... 100,000 1,000 2,495,678 2,496,678 Issuance of stock under employee stock Purchase plan................................ 4,204 42 71,426 71,468 Deferred compensation associated with stock Option grants................................ 594,200 (594,200) -- Amortization of deferred compensation.......... -- -- -- 130,697 -- -- 130,697 ---------- -------- ------------ ---------- ------------- --------- ------------ Balance at December 31, 1997................... 13,642,264 136,423 108,658,239 (509,632) (54,944,124) 77,402 53,418,308 Comprehensive income: Net loss..................................... (11,567,318) (11,567,318) Other comprehensive income, unrealized 186,986 186,986 gain on available for sale securities........ ------------ Comprehensive income........................... (11,380,332) Issuance of common stock under stock Option plan and exercise of warrants......... 130,549 1,305 1,033,150 1,034,455 Issuance of common stock under employee stock purchase plan.......................... 19,631 196 317,527 317,723 Deferred compensation associated with stock Option grants................................ 1,024,190 (1,024,190) -- Amortization of deferred compensation 870,100 870,100 Issuance of common stock through a follow- on Public Offering, net of offering costs of $5,240,391................................... 3,000,000 30,000 75,729,609 -- -- -- 75,759,609 ---------- -------- ------------ ---------- ------------- --------- ------------ Balance of December 31, 1998................... 16,792,444 $167,924 $186,762,715 $ (663,722) $ (66,511,442) $ 264,388 $120,019,863 Comprehensive income: Net loss (42,449,420) (42,449,420) Other comprehensive loss, unrealized loss on available for sales securities..... (509,487) (509,487) ------------ Comprehensive income (42,958,907) Issuance of common stock under stock option plan and exercise of warrants................ 76,737 767 107,116 107,883 Issuance of common stock under employee stock purchase plan.......................... 18,745 187 245,787 245,974 Deferred compensation associated with stock option grants................................ 377,035 (377,035) -- Amortization of deferred compensation.......... 557,738 557,738 Issuance of common stock for acquisition....... 1,175,196 11,752 14,717,436 -- -- -- 14,729,188 ---------- -------- ------------ ---------- ------------- --------- ------------ Balance at December 31, 1999................... 18,063,122 $180,631 $202,210,089 $ (483,019) $(108,960,862) $(245,099) $ 92,701,740 ========== ======== ============ ========== ============= ========= ============
The accompanying notes are an integral part of the consolidated financial statements. F-5 GELTEX PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, -------------------------------------------------------- 1999 1998 1997 ------------- ------------- ------------ OPERATING ACTIVITIES Net loss....................................................... $ (42,449,420) $ (11,567,318) $(24,483,878) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization .............................. 2,124,833 1,536,564 1,193,394 Equity in net loss of Joint Venture ........................ 7,937,041 7,535,630 2,310,345 Acquired in-process research and development ............... 9,530,000 -- -- Compensation from issuance of stock options ................ 557,738 870,100 130,697 Changes in operating assets and liabilities: Prepaid expenses and other current assets ........... 945,088 (1,279,694) 495,085 Due from affiliates ................................. 9,839,850 (10,251,100) -- Due from Joint Venture .............................. 463,383 695,753 (1,823,877) Long term receivables, affiliates ................... 98,250 (470,000) -- Long term receivables ............................... 32,725 (5,725) (7,000) Accounts payable and accrued expenses ............... (616,333) 20,976 2,331,883 Amount due to Joint Venture ......................... (1,349,400) 1,349,400 -- ------------- ------------- ------------ Net cash used in operating activities ......................... (12,886,245) (11,565,414) (19,853,351) INVESTING ACTIVITIES Purchase of marketable securities ............................. (106,049,917) (212,710,698) (26,388,812) Proceeds from sale and maturities of marketable securities .... 126,633,355 165,624,065 53,135,619 Investment in Joint Venture ................................... (14,048,517) (9,630,014) (5,399,541) Purchase of intangible assets ................................. (797,382) (592,790) (259,904) Purchase of property and equipment ............................ (4,886,436) (1,536,206) (6,228,763) ------------- ------------- ------------ Net cash provided by (used in) investing activities ........... 851,103 (58,845,643) 14,858,599 FINANCING ACTIVITIES Sale of Common Stock and warrants, net of issuance costs ...... 107,883 76,794,069 2,586,111 Proceeds from employee stock purchase plan .................... 245,974 317,723 71,468 Proceeds from financing of assets ............................. 3,000,000 -- 8,782,495 Payments on notes payable ..................................... (2,015,224) (1,644,925) (426,900) ------------- ------------- ------------ Net cash provided by financing activities ..................... 1,338,633 75,466,867 11,013,174 Increase (decrease) in cash and cash equivalents .............. (10,696,509) 4,185,710 5,887,725 Cash and cash equivalents at beginning of year ................ 30,874,900 26,689,190 20,801,465 ------------- ------------- ------------ Cash and cash equivalents at end of year ...................... $ 20,178,391 $ 30,874,900 $ 26,689,190 ============= ============= ============ Supplemental disclosures of cash flow information: Acquisition of SunPharm Corporation ...................... Interest paid ............................................ $ 485,651 $ 613,513 $ 217,142
The accompanying notes are an integral part of the consolidated financial statements. F-6 GELTEX PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 1. BUSINESS GelTex Pharmaceuticals, Inc. has historically focused its efforts on the development of non-absorbed, polymer-based pharmaceuticals that selectively bind to and eliminate target substances from the intestinal tract. With its acquisition of SunPharm Corporation in November 1999, the Company acquired expertise in two chemically related classes of molecules, polyamines and iron chelators. In October 1998 and February 2000, the Company received approval from the United States Food and Drug Administration, or the FDA, and the European Commission, respectively, for its lead product Renagel Capsules (sevelamer hydrochloride), and in July 1999, the Company filed a New Drug Application, or NDA, with the FDA seeking approval for its second compound, Cholestagel (colesevelam hydrochloride). Throughout 1999, GelTex continued its product development efforts focused on therapeutic agents for the treatment of obesity and infectious diseases. 2. SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The accompanying financial statements include the accounts of GelTex Pharmaceuticals, Inc. and its wholly-owned subsidiaries ("the Company"). All significant intercompany balances and transactions have been eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The more significant areas requiring the use of management estimates relate to future cash flows associated with assets and useful lives for depreciation and amortization. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS The Company considers all highly liquid debt instruments with an initial maturity of three months or less and money market funds to be cash equivalents. These cash equivalents are classified as "available-for-sale" and are carried at fair value, with unrealized gains and losses reported in Accumulated Other Comprehensive Income. MARKETABLE SECURITIES Marketable securities consist of U.S. government obligations and high-grade commercial instruments maturing within one to two years and are classified as available-for-sale. The Company considers these investments, which represent funds available for current operations, as an integral part of their cash management activities. Realized gains and losses and declines in value which are judged to be other than temporary on available-for-sale securities are included in investment income. The cost of securities sold is based on the specific identification method. Interest and dividends and amortization of premiums and accretion of discounts on available-for-sale securities are included in interest income. The Company purchases only high grade securities, typically with short maturities. Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation on an ongoing basis. As of December 31, 1999, the Company pledged $3.0 million of marketable securities as collateral to secure $3.2 million of financing for the purchase of a building and land adjacent to the Company's headquarters. F-7 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost. Expenditures for additions, major renewals and betterments are capitalized and expenditures for maintenance and repairs are charged to income as incurred. Interest is capitalized as part of the acquisition cost of major construction projects. Depreciation is completed by the straight-line method over estimated useful lives which are generally as follows: Buildings............................ 30 years Leasehold improvements............... Life of building lease Furniture, fixtures and equipment.... 5 years The Company reviews the value of its property, plant and equipment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. INTANGIBLE ASSETS Intangible assets represent the excess of cost of acquired businesses over the fair value of identifiable net assets and the cost of technology and patents. Intangible assets are amortized on a straight-line basis over periods of five to seven years. The Company reviews the value of its goodwill and other intangible assets whenever events or changes in circumstances indicate that the carrying value may not be fully recoverable. STOCK BASED COMPENSATION The Company accounts for stock based compensation plans in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25). Accordingly, deferred compensation is recorded to the extent that the current market price of the underlying stock exceeds the exercise price on the date of grant. Such deferred compensation is amortized over the respective vesting periods of such option grants. The Company adopted the disclosure requirements of Financial Accounting Standards Board Statement No. 123, "Accounting for Stock Based Compensation" (SFAS No. 123), and provides pro forma net loss and pro forma loss per share note disclosures for employee stock option grants made after 1994 as if the fair-value based method defined in SFAS No. 123 had been applied. Transactions with non-employees, in which goods or services are the consideration received for the issuance of equity instruments, are accounted for using the fair market value method defined in SFAS No. 123 (see Note 10). FINANCIAL INSTRUMENTS The Company utilizes foreign exchange forward contracts as hedges against exposure to fluctuations in exchange rates associated with certain commitments denominated in foreign currencies (see Note 15). Gains and losses are deferred and recognized as adjustments of carrying amounts when the hedged transaction occurs. As of December 31, 1999, the Company had $7.6 million of foreign exchange contracts outstanding. Deferred gains or losses at December 31, 1999 are not material as the contracts' fair market value approximates its notional value. In order to mitigate the impact of fluctuations in U.S. interest rates, the Company has entered into interest rate swaps on an outstanding long-term obligation (see Note 12) and on an outstanding long-term commitment (see Note 15). Net interest payable or receivable is determined on a quarterly basis and is insignificant at December 31, 1999. The Company does not hold or issue derivative financial instruments for trading purposes. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, short-term instruments and financial instruments used in hedging activities. F-8 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CONCENTRATION OF CREDIT RISK (CONTINUED) The Company places its temporary cash investments with high credit quality financial institutions and in high quality commercial paper and, by policy, limits the amount of credit exposure with any one financial institution. The counterparty to the agreements relating to the Company's foreign exchange commitments is a high credit quality financial institution. The Company does not believe that there is a significant risk of nonperformance by this counterparty. EARNINGS PER COMMON AND POTENTIAL COMMON SHARE The Company accounts for earnings per share in accordance with the provisions of the Financial Accounting Standards Board Statement No. 128, "Earnings Per Share." Basic earnings per share excludes any dilutive effect of options, warrants or convertible securities. Due to its loss position, diluted earnings per share is the same amount as basic earnings per share. REVENUE RECOGNITION The Company recognizes grant revenue and collaborative Joint Venture revenue as reimbursable expenses are incurred and license fee revenue when performance obligations, if any, are satisfied. RECLASSIFICATION Certain amounts from the prior years have been reclassified to conform to current year presentation. ACCOUNTING PRONOUNCEMENTS Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and interim financial reports. The Statement also establishes standards for related disclosures about products and services, geographic areas, and major customers. Under this Statement, the Company's operations are treated as one operating segment. The adoption of the Statement did not affect the Company's results of operations or its financial position. In June 1999, the Financial Accounting Standards Board issued Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133--an amendment of FASB Statement 133" which is required to be adopted by the Company in fiscal year 2001. The Statement provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities in which the Company engages. Management of the Company anticipates that, due to its limited use of derivative instruments, the adoption of this Statement will not have a significant effect on the Company's results of operations or its financial position. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB 101") which provides guidance related to revenue recognition based on interpretations and practices followed by the SEC. SAB 101 is effective the first fiscal quarter of fiscal years beginning after December 15, 1999 and requires companies to report any changes in revenue recognition as a cumulative change in accounting principle at the time of implementation in accordance with APB Opinion No. 20, "Accounting Changes." The Company has concluded that SAB 101 will not have a material impact on the financial position or results of operations of the Company. 3. ACQUISITION In November 1999, the Company completed the purchase of SunPharm Corporation, a life sciences firm that developed proprietary pharmaceuticals based on polyamine and iron chelator technologies. The total purchase price, including transaction costs and liabilities assumed, was $16.4 million. The acquisition was accounted for under the purchase accounting method and resulted in the recording of approximately $6.9 million of purchased goodwill and a one-time charge of $9.5 million for in-process research and development. The Company is amortizing the purchased goodwill on a straight-line basis over a seven year life. The Company financed the acquisition through the issuance of approximately 1.2 million of its Common Shares. The value of the Common Stock issued in connection with the acquisition was calculated using a fair value of $12.31 per share. This per share fair value represents the average closing price of the Company's Common Stock on the date the acquisition was completed. Common Stock issuable upon exercise of SunPharm Corporation options and warrants was assigned a fair value using the Black-Scholes method. The consolidated financial statements include SunPharm Corporation's operating results from the date of acquisition. Acquired in-process research and development for the merger was evaluated utilizing the present value of the estimated after-tax cash flows expected to be generated by the purchased technology, which, at the effective time of the merger, had not reached technological feasibility. The cash flow projections for revenues are based on estimates of growth rates and the aggregate size of the respective market for each product; probability of technical success given the stage of development at the time of acquisition; royalty rates based on prior licensing agreements; product's sales cycles; and the estimated life of a product's underlying technology. Estimated operating expenses and income taxes are deducted from revenue projections to arrive at estimated after-tax cash flows. Projected operating expenses include general and administrative expenses and research and development costs. The rates utilized to discount projected cash flows range from 40% to 50%, depending upon the relative risk of the project and the weighted average cost of capital for GelTex at the time of the merger. F-9 3. ACQUISITION (CONTINUED) The acquired in-process research and development of approximately $9.5 million represents the value determined by the Company's management to be attributable to the acquired in-process research and development assets associated with the technology acquired in the SunPharm acquisition. Of this amount, approximately $8.7 million is related to the DENSPM for solid tumor cancer project and approximately $0.8 million is related to the DEHOP for AIDS-related diarrhea project. The values associated with these programs represent GelTex's management ascribed values, based on the discounted cash flows currently expected from the technologies acquired. If these projects are not successfully developed, the business, operating results, and financial condition of GelTex may be adversely affected. As of the date the merger agreement was signed, GelTex concluded that once completed, the technologies under development can only be economically used for their specific and intended purposes and that the acquired in-process research and development technology has no alternative future uses after taking into consideration the overall objectives of the projects, progress toward the objectives, and uniqueness of developments to these objectives. The major risks associated with the timely completion and commercialization of these products is the ability to confirm the safety and efficacy of the technology based on the data of long-term clinical trials. If these projects are not successfully developed, future results of operations of the Company may be adversely affected. Additionally, the value of the other intangible assets acquired may become impaired. The Company believes that the assumptions used to value the acquired intangibles were reasonable at the time of the acquisition. No assurance can be given, however, that the underlying assumptions used to estimate expected project revenues, development costs, or profitability, or the events associated with such projects, will transpire as estimated. For these reasons, among others, actual results may vary from the projected results. The following unaudited pro forma information presents the results of operations of the Company as if the acquisition had taken place on January 1, 1998, and excludes the write-off of in-process research and development of $9.5 million: (IN THOUSANDS, EXCEPT YEAR-ENDED YEAR-ENDED PER SHARE AMOUNTS) DECEMBER 31, 1999 DECEMBER 31, 1998 ----------------- ----------------- Revenue $ 17,074 $ 32,889 Net loss $ (37,958) $ (16,317) Net loss per share $ (2.09) $ (0.95) These pro forma results of operations have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the acquisition occurred on the date indicated, or which may result in the future. 4. JOINT VENTURE AGREEMENT Formation of the Joint Venture In June 1997, the Company entered into a joint venture with Genzyme Corporation for the final development and commercialization of Renagel(R) Capsules (the "Joint Venture"). Under the agreement, Genzyme paid the Company a $15.0 million non-refundable payment in 1998 upon receipt of marketing approval from the FDA, and made an additional $10.0 million non-refundable payment one year after FDA approval in October 1999. The terms of the Joint Venture require the Company and Genzyme to each make capital contributions to the Joint Venture in an amount equal to 50% of all costs and expenses associated with the development and commercialization of Renagel, including costs and expenses incurred by either party in performing under the agreement, and the Company and Genzyme will share equally in the profits generated from sales of the product. Capital Contributions to the Joint Venture Under the terms of the joint venture agreement, GelTex and Genzyme each make equal capital contributions to the Joint Venture which are accounted for by the parties as investments in the Joint Venture. The amount of the periodic capital contributions are based upon the costs incurred for product development and commercialization ("Project Costs") which are approved by both parties. To the extent that either party fails to make all or any portion of a required periodic capital contribution to the Joint Venture and the other party does not exercise its right to terminate the agreement, each party's percentage ownership interest in the Joint Venture will be immediately adjusted to correspond to the cumulative amount of capital contributions made by each party as of such date. Thereafter, each party's monthly capital contribution will be made in proportion to each party's adjusted percentage ownership interest in the Joint Venture. At December 31, 1999, each party had contributed approximately $29.1 million to the Joint Venture through periodic contributions, representing each party's 50% share of a total of approximately $58.2 million in periodic capital contributions to the Joint Venture. As of December 31, 1998, $1,349,400 was owed to the Joint Venture by the Company. The Company recorded this amount as a current liability. The Joint Venture recorded this amount as a contra equity account. This amount was subsequently paid in January 1999. F-10 4. JOINT VENTURE AGREEMENT (CONTINUED) Reimbursement of Project Costs The Company and Genzyme have agreed to undertake product development and commercialization activities on behalf of the Joint Venture. Project Costs include certain costs associated with the design and development of the product manufacturing process, receipt of regulatory approval, product distribution and marketing and selling the product, and such other costs necessary to manufacture and sell the product commercially. The Project Costs incurred by GelTex and Genzyme under the development and commercialization plans, either as internal operating costs or as third party obligations, are fully reimbursed to the parties by the Joint Venture, without regard to the percentage ownership interest of the parties. In the accompanying statement of operations, Collaborative Joint Venture project reimbursement represents project costs incurred by the Company and billed to the Joint Venture. In the accompanying balance sheet, Due from Joint Venture represents Project Costs billed to the Joint Venture but not yet reimbursed. Accounting for the Joint Venture The Company accounts for its investment in the Joint Venture using the equity method of accounting. Accordingly, the Company recognizes its 50% ownership interest in the net income or net loss of the Joint Venture in the accompanying statement of operations as Equity in loss of Joint Venture. Termination of the Joint Venture The Joint Venture can be terminated for certain material breaches which remain uncured after a stated period of time has lapsed; upon the bankruptcy or change of control of either party; or for any reason with one year prior written notice at any time after receipt of FDA approval to market Renagel which occurred in October 1998. Depending upon the reason for termination, each party has certain rights to purchase the other's interest in the Joint Venture and proceed with the development and commercialization of Renagel on its own. Summarized financial information regarding the Joint Venture as of, and for year ended, December 31, 1999 is as follows: Revenues....................................... $ 19,543,000 Other income................................... 1,557,000 Cost of products sold.......................... 7,362,000 Selling, general and administrative expenses... 18,624,000 Research and development expenses.............. 11,154,000 Interest income................................ 166,000 ------------- Net loss....................................... $ (15,874,000) Current assets................................. $ 22,720,000 Non-current assets............................. $ 7,965,000 Current liabilities............................ $ 8,093,000 Non-current liabilities........................ $ -
Summarized financial information regarding the Joint Venture as of, and for the year ended, December 31, 1998 is as follows: Revenues....................................... $ 266,000 Cost of products sold.......................... 113,000 Selling, general and administrative expenses... 6,493,000 Research and development expenses.............. 8,778,000 Interest income................................ 22,000 ------------- Net loss....................................... $ (15,096,000) Current assets................................. $ 9,930,000 Non-current assets............................. $ 7,209,000 Current liabilities............................ $ 8,147,000 Non-current liabilities........................ $ -
Summarized financial information regarding the Joint Venture as of, and for the period June 6, 1997 (date of inception) through December 31, 1997 is as follows: Selling, general and administrative expenses... $ 35,000 Research and development expenses.............. 4,588,000 Interest income................................ 3,000 ------------ Net loss....................................... $ (4,620,000)
F-11 5. AVAILABLE-FOR-SALE SECURITIES The following is a summary of available-for-sale securities: DECEMBER 31, 1999:
GROSS GROSS UNREALIZED UNREALIZED ESTIMATED COST GAINS GAINS FAIR VALUE ------------ -------------- -------------- ------------- U.S. Corporate Securities..... $ 33,744,199 $ 1,733 $ (79,347) $ 33,666,585 U.S. Government Obligations... 16,252,291 -- (168,342) 16,083,949 Money Market Accounts......... 18,574,249 857 -- 18,575,106 ------------ -------------- -------------- ------------- Total......................... $ 68,570,739 $ 2,590 $ (247,689) $ 68,325,640 ============ ============== =============== =============
DECEMBER 31, 1998:
GROSS GROSS UNREALIZED UNREALIZED ESTIMATED COST GAINS GAINS FAIR VALUE ------------ -------------- -------------- ------------- U.S. Corporate Securities..... $ 70,372,614 $ 238,388 $ (13,923) $ 70,597,079 U.S. Government Obligations... 16,967,112 39,922 -- 17,007,034 Money Market Accounts......... 12,417,649 -- -- 12,417,649 ------------ --------------- -------------- ------------ Total......................... $ 99,757,375 $ 278,310 $ (13,923) $ 100,021,762 ============ =============== =============== =============
The fair value of available-for-sale securities is determined using the published closing prices of these securities as of December 31, 1999 and 1998. These securities are classified at their estimated fair value in the accompanying balance sheet as follows:
DECEMBER 31, ----------------------------- 1999 1998 ------------ -------------- Cash equivalents........... $ 16,075,106 $ 25,944,326 Marketable securities...... 52,250,534 74,077,436 ------------ ------------- $ 68,325,640 $ 100,021,762 ============ =============
The cost and estimated fair value of available-for-sale debt securities, which excludes money market accounts, at December 31, 1999, by contractual maturity, are shown below.
ESTIMATED COST FAIR VALUE ------------ ------------ Due in one year or less.................. $ 37,745,724 $ 37,665,756 Due after one year through two years..... 12,250,766 12,084,778 ------------ ------------ $ 49,996,490 $ 49,750,534 ============ ============
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following at December 31:
1999 1998 ------------- ------------ Accounts payable........... $ 3,392,854 $ 3,698,102 Accrued compensation....... 643,531 604,729 Accrued other.............. 1,139,371 545,897 ------------ ------------ $ 5,175,756 $ 4,848,728 ============ ============
7. PROPERTY, PLANT AND EQUIPMENT, NET At December 31, property, plant and equipment consisted of the following:
1999 1998 ------------ ------------ Leasehold improvements............................ $ 7,114,246 $ 7,011,258 Equipment......................................... 5,747,963 4,308,627 Property and plant................................ 3,344,111 -- ------------ ------------ 16,206,320 11,319,885 Less accumulated depreciation and amortization.... 5,088,595 3,420,415 ------------ ------------ Property, plant and equipment, net................ $ 11,117,725 $ 7,899,470 ============ ============
F-12 7. PROPERTY, PLANT AND EQUIPMENT, NET (CONTINUED) Depreciation expense for the years ended December 31, 1999, 1998 and 1997 was approximately $1,668,000, $1,296,000 and $816,000, respectively. Leasehold improvements of $1,718,986, with accumulated amortization of $1,232,522, were subject to a sublease arrangement (see Note 14). 8. INTANGIBLE ASSETS At December 31, intangible assets consisted of the following:
1999 1998 ------------ ------------ Purchased goodwill................ $ 6,876,524 $ -- Less accumulated amortization..... 122,795 -- ------------ ------------ Purchased goodwill, net........... 6,753,729 -- Patents and technology............ 2,390,375 1,592,990 Less accumulated amortization..... 1,107,885 774,027 ------------ ------------ Patents and technology, net....... 1,282,490 818,963 Intangible assets, net............ $ 8,036,219 $ 818,963 ============ ============
9. STOCKHOLDERS' EQUITY In November 1999, the Company completed the acquisition of SunPharm Corporation by issuing 1,175,196 shares of common stock. The Company has a Shareholder Rights Plan (the "Rights Plan") designed to protect shareholders from unsolicited attempts to acquire the Company on terms that do not maximize stockholder value. In connection with the Rights Plan, the Board of Directors designated 500,000 shares of the Company's preferred stock as Series A Junior Participating Preferred Stock. Under the Rights Plan, a right to purchase one one-hundredth of one share of the Series A Junior Participating Stock (the "Rights") was distributed as a dividend for each share of Common Stock. The terms of the Rights Plan provide that the Rights will become exercisable upon the earlier of the tenth day after any person or group (other than a person or group eligible to file statements on Schedule 13G who or which the Board of Directors determines shall not be an Acquiring Person, as defined in the Rights Plan) acquires 20% or more of the Company's outstanding Common Stock or the tenth business day after any person or group commences a tender or exchange offer which would, if completed, result in the offeror owning 20% or more of the Company's outstanding Common Stock. The Rights may generally be redeemed by action of the Board of Directors at $0.001 per Right at any time prior to the tenth day following the public announcement that any person or group (other than a person or group eligible to file statements on schedule 13G who or which the Board of Directors determines shall not be an Acquiring person, as defined in the Rights Plan) has acquired 20% or more of the outstanding Common Stock of the Company. The Rights expire on March 11, 2006. The Rights have certain anti-takeover effects in that they would cause substantial dilution to the party attempting to acquire the Company. In certain circumstances, the Rights allow the Company's stockholders to purchase the number of shares of the Company's Common Stock having a market value at the time of the transaction equal to twice the exercise price of the Rights, or in certain circumstances, the stockholders would be able to acquire that number of shares of the acquirer's common stock having a market value, at the time of the transaction, equal to twice the exercise price of the Rights. The Company will continue to issue Rights with future issuances of common stock. 10. EQUITY INCENTIVE PLANS, STOCK OPTIONS AND STOCK WARRANTS Under the Company's 1992 Equity Incentive Plan (the "Plan"), employees and directors of and consultants to the Company are eligible for awards. At December 31, 1999, the Company has reserved 3,350,000 shares of its Common Stock for awards. Awards can consist of incentive and nonstatutory stock options, stock appreciation rights, restricted stock awards and other stock-based awards. Certain incentive and nonstatutory options granted under the Plan may be exercised upon grant and vest over five years and certain others are exercisable over a four-year vesting period. The Company maintains the right to repurchase any unvested shares of Common Stock upon termination of such stockholder's employment with the Company. Incentive stock options are granted with an option price of not less than the fair market value of the Common Stock at the award date. Nonstatutory options may be granted at prices as determined by the Board of Directors. Stock appreciation rights may be awarded in tandem with stock options or alone. Stock appreciation rights granted alone may be granted at prices as determined by the Board. The Board may also award performance shares, restricted stock and stock units subject to such terms, restrictions, performance criteria, vesting requirements and other conditions deemed appropriate. F-13 10. EQUITY INCENTIVE PLANS, STOCK OPTIONS AND STOCK WARRANTS (CONTINUED) The Company has a 1995 Employee Stock Purchase Plan (the "ESPP") which provides for the grant of rights to eligible employees to purchase up to 250,000 shares of the Company's Common Stock at the lesser of 85% of the fair market value at the beginning or the end of the established offering period. There were 18,745 shares issued under the ESPP at an average price of $13.00 per share in 1999, 19,631 shares at an average price of $16 per share in 1998, and 4,204 shares at an average price of $17 per share in 1997. All directors who are not employees of the Company are currently eligible to participate in the Company's 1995 Director Stock Option Plan ("Directors Plan"). At December 31, 1999, the Company had reserved 150,000 shares of its Common Stock for awards. The Directors Plan provides for the granting of options with a term of 10 years to purchase up to 110,000 shares of Common Stock at an exercise price equal to the fair market value of Common Stock at the date of grant. Generally, upon election or re-election at each annual meeting, each eligible director shall be granted options to purchase 4,000 shares of Common Stock for each year of the term of office to be served. The options granted vest in annual installments of 4,000 shares over the term served. The Company applies APB 25 and related interpretations in accounting for its stock-based compensation plans, including its 1992 Equity Incentive Plan, its 1995 Employee Stock Purchase Plan, and prior to December 15, 1998, its 1995 Director Stock Option Plan. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. Had compensation expense for the Company's stock-based compensation plans been determined based upon the fair market value at the grant date for stock option awards ("stock options") and at the end of the plan period for stock purchased under its Employee Stock Purchase Plan ("stock purchase shares"), consistent with the methodology prescribed under SFAS 123, the Company's net loss and net loss per share would have been $48,634,898, or $2.86 per share, $16,242,487, or $1.01 per share, and $25,947,119 or $1.91 per share, in 1999, 1998 and 1997, respectively. The fair value of stock options granted and stock purchase shares issued during 1999, 1998 and 1997 was estimated at the date of the grant and the end of the plan period, respectively, using the Black-Scholes option-pricing model with the following weighted average assumptions for 1999, 1998 and 1997: volatility of 67%, 67% and 48%, respectively, risk-free interest rate of 6%, weighted average expected life (years) of four, and no dividends. The effects on fiscal 1999, 1998 and 1997 pro forma net loss and net loss per share of expensing the estimated fair value of stock options and stock purchase shares are not necessarily representative of the effects on reported net loss for future years due to such things as the vesting period of the stock options and the potential for issuance of additional stock options and stock purchase shares in future years. Options Issued Under the Plan and the Directors Plan The weighted average per share exercise price of stock options granted, exercised and canceled during 1999 was $14.51, $1.39 and $20.85, respectively. The weighted average fair value of stock options granted during 1999 was $8.05 per share. The weighted average fair value of stock purchase shares issued during 1999 was $4.50 per share. The weighted average per share exercise price of stock options granted, exercised and canceled during 1998 was $22.80, $8.17 and $16.17, respectively. The weighted average fair value of stock options granted during 1998 was $12.47 per share. The weighted average fair value of stock purchase shares issued during 1998 was $4.95 per share. The weighted average exercise price of the 1,864,021 and 781,811 options outstanding and exercisable as of December 31, 1998, was $17.29 and $12.71, respectively. The weighted average per share exercise price of stock options granted, exercised and canceled during 1997 was $23.25, $2.80 and $7.97, respectively. The weighted average fair value of stock options granted during 1996 was $9.61 per share. The weighted average fair value of stock purchase shares issued during 1997 was $5.49 per share. The weighted average exercise price of the 1,433,579 and 470,375 options outstanding and exercisable as of December 31, 1997, was $13.99 and $9.61, respectively. F-14 10. EQUITY INCENTIVE PLANS, STOCK OPTIONS AND STOCK WARRANTS (CONTINUED) A summary of activity in the Plan and the Directors Plan through December 31, 1999 follows:
OPTIONS AVAILABLE PRICE FOR AWARD OUTSTANDING PER SHARE --------- ----------- --------- Balance at January 1, 1997 . 261,085 1,010,466 $ .125--$24.25 Authorized ................. 310,000 -- -- Awarded .................... (555,300) 555,300 $17.25 --$30.75 Exercised .................. -- (54,192) $ .125--$20.50 Canceled or repurchased .... 100,679 (77,995) $ .32 --$25.00 ------- --------- --------------- Balance at December 31, 1997 116,464 1,433,579 $ .125--$30.75 Authorized ................. 750,000 -- -- Awarded .................... (637,690) 637,690 $15.375--$29.25 Exercised .................. -- (124,339) $ .125--$24.75 Canceled or repurchased .... 86,409 (82,909) $ .25 --$30.75 ------- --------- --------------- Balance at December 31, 1998 315,183 1,864,021 $ .125--$30.75 Authorized ................. 640,000 -- -- Awarded .................... (757,253) 757,253 $10.00 -- 28.00 Exercised .................. -- (77,987) $ .125--$18.25 Canceled or repurchased .... 162,933 (161,683) $ .30 --$30.75 ------- --------- --------------- Balance at December 31, 1999 360,863 2,381,604 $ .125--$30.50
Deferred compensation of $377,035 recorded in 1999 represents the fair value of options to purchase common stock granted to certain non-employees in return for consulting services and is included in the table above. The related compensation expense is being amortized ratably over the periods of service. A summary of the weighted-average exercise price and remaining contractual life of options outstanding and the weighted average exercise price of options exercisable under the Plan and the Directors Plan as of December 31, 1999 follows:
WEIGHTED- AVERAGE WEIGHTED- REMAINING WEIGHTED- AVERAGE CONTRACTUAL AVERAGE PRICE PER OPTIONS EXERCISE LIFE OPTIONS EXERCISE SHARE OUTSTANDING PRICE (YEARS) EXERCISABLE PRICE ----- ----------- ----- ------- ----------- ----- $ .125--$ .32 285,172 $ .29 4.66 276,004 $ .29 $ .33 --$ 9.00 7,000 $ 9.00 5.70 5,950 $ 9.00 $ 9.01 --$15.00 631,386 $12.58 8.86 175,349 $12.11 $15.01 --$24.25 966,653 $19.37 7.78 490,576 $19.73 $24.26 --$30.50 491,393 $26.32 8.06 215,033 $26.64 --------- ------ ---- --------- ------ 2,381,604 $16.69 1,162,912 $15.19
Options issued outside of the Plan and the Directors Plan In 1997, the Company issued options to employees and consultants outside of the Plan and the Directors Plan. The weighted average per share exercise price of stock options canceled during 1999 was $25.58. No options were granted outside the Plan or the Directors Plan in 1999. The weighted average per share exercise price of stock options granted and canceled during 1998 was $26.22 and $23.67, respectively. The weighted average fair value of stock options granted during 1998 was $14.56 per share. The weighted average exercise price of the 159,985 and 42,709 options outstanding and exercisable as of December 31, 1998, was $26.56 and $26.74, respectively. The weighted average per share exercise price of stock options granted during 1997 was $27.06. The weighted average fair value of stock options granted during 1997 was $8.49 per share. The weighted average exercise price of the 38,500 options outstanding as of December 31, 1997, was $27.06. There were no options exercisable as of December 31, 1997. F-15 10. EQUITY INCENTIVE PLANS, STOCK OPTIONS AND STOCK WARRANTS (CONTINUED) A summary of activity for options issued outside of the Plan and the Directors Plan through December 31, 1999 follows:
OPTIONS AVAILABLE PRICE FOR AWARD OUTSTANDING PER SHARE --------- ----------- -------------- Balance at January 1, 1997...... - - - Authorized...................... 175,000 - - Awarded......................... (38,500) 38,500 $27.00--$27.06 Exercised....................... - - - Canceled or repurchased - - - -------- ------- -------------- Balance at December 31, 1997.... 136,500 38,500 $27.00--$27.06 Authorized...................... - - - Awarded......................... (145,500) 130,485 $23.25--$27.00 Exercised....................... - - - Expired......................... - - - Canceled or repurchased......... 9,000 (9,000) $23.25--$27.00 -------- ------- -------------- Balance at December 31, 1998.... - 159,985 $23.25--$27.06 Authorized...................... - - - Awarded......................... - - - Exercised....................... - - - Expired......................... (12,209) - $23.37--$26.37 Canceled or repurchased......... 12,209 (12,209) $23.37--$26.37 -------- ------- -------------- Balance at December 31, 1999.... - 147,776 $23.25--$27.06
A summary of the weighted-average exercise price and remaining contractual life of options outstanding and the weighted average exercise price of options exercisable outside of the Plan and the Directors Plan as of December 31, 1999 follows:
WEIGHTED- AVERAGE WEIGHTED- REMAINING WEIGHTED- AVERAGE CONTRACTUAL AVERAGE PRICE PER OPTIONS EXERCISE LIFE OPTIONS EXERCISE SHARE OUTSTANDING PRICE (YEARS) EXERCISABLE PRICE -------------- ------------ --------- ----------- ----------- --------- $23.25--$27.06 147,776 $ 26.65 8.16 79,841 $ 26.72
Options and Warrants granted through the acquisition of SunPharm Corporation In November 1999, in conjunction with the acquisition of SunPharm Corporation, the Company granted 72,089 options to purchase GelTex Common Stock at exercise prices of between $2.20 and $54.25 and 206,253 warrants to purchase GelTex Common Stock at exercise prices of between $13.22 and $51.63. The fair value of these options and warrants was included in the calculation of the total purchase price of the SunPharm acquisition. The weighted average per share exercise price of stock options and warrants granted during 1999 was $27.46 and $26.98, respectively. A summary of activity for options issued outside of the Plan and the Directors Plan through December 31, 1999 follows:
OPTIONS AVAILABLE PRICE FOR AWARD OUTSTANDING PER SHARE ---------------- ----------- --------- Balance at January 1, 1999...... - - - Authorized...................... 72,089 - $2.20--$54.25 Awarded or expired.............. (72,089) 72,089 $2.20--$54.25 Exercised....................... - - - Canceled or repurchased......... - - - ------ ------ ------------- Balance at December 31, 1999.... - 72,089 $2.20--$54.25
F-16 10. EQUITY INCENTIVE PLANS, STOCK OPTIONS AND STOCK WARRANTS (CONTINUED) A summary of the weighted-average exercise price and remaining contractual life of options outstanding and the weighted average exercise price of options exercisable outside of the Plan and the Directors Plan as of December 31, 1999 follows:
WEIGHTED- AVERAGE WEIGHTED- REMAINING WEIGHTED- AVERAGE CONTRACTUAL AVERAGE PRICE PER OPTIONS EXERCISE LIFE OPTIONS EXERCISE SHARE OUTSTANDING PRICE (YEARS) EXERCISABLE PRICE ------------- ----------- --------- ----------- ----------- --------- $2.20--$54.25 72,089 $27.46 6.96 51,271 $27.46
11. INCOME TAXES At December 31, 1999, the Company had net operating loss carryforwards of approximately $97,094,000 and research and development tax credit carryforwards of approximately $5,120,000, which expire through 2019. Since the Company has incurred only losses since its inception and due to the degree of uncertainty related to the ultimate use of the loss carryforwards and tax credits, the Company has fully reserved this tax benefit. Additionally, the future utilization of net operating loss carryforwards and tax credits may be subject to limitations under the change in stock ownership rules of the Internal Revenue Service. The difference between the Company's expected tax provision (benefit), as computed by applying the U.S. Federal Corporate Tax Rate of 34% to income (loss) before provision for income taxes and the actual tax is attributable to tax losses for which the Company has not recognized any tax benefit. Significant components of the Company's deferred tax assets as of December 31 are as follows:
1999 1998 ------------ ------------ Deferred tax assets: Net operating loss carryforwards....... $ 38,666,000 $ 26,166,000 Research and development tax credits... 5,120,000 5,529,000 Other.................................. 1,263,000 661,000 ------------ ------------ Total deferred tax assets................... 45,049,000 32,356,000 Valuation allowance............... (44,529,000) (32,029,000) ------------ ------------ Net deferred tax assets..................... 520,000 327,000 Deferred tax liabilities: Intangible assets and other....... (520,000) (327,000) ------------ ------------ Total deferred tax liabilities.... (520,000) (327,000) ------------ ------------ Net deferred tax asset (liability).......... $ - $ - ============ ============
The valuation allowance increased by $12,500,000 and $6,200,000 during 1999 and 1998, respectively, due primarily to the increase in tax credits and net operating loss carryforwards. 12. LONG TERM OBLIGATIONS Long term obligations consist of:
DECEMBER 31, ------------------------------ 1999 1998 ------------- -------------- Note payable to a bank bearing interest at LIBOR plus 1.55% (7.73% at December 31, 1999) payable in quarterly installments commencing June 30, 1998 through June 30, 2002 with a final payment of $1,178,571 due on September 30, 2002......................... $ 4,981,836 $ 6,725,206 Note payable to a bank bearing interest at prime (8.50% at December 31, 1999) payable in monthly installments through December 2000........................................... 224,344 501,588 Note payable to a bank bearing interest at LIBOR (6.18% at December 31, 1999) due on September 30, 2002................................................................ 3,000,000 -- ------------- -------------- 8,206,180 7,226,794 ------------- -------------- Less current portion............................................................... (1,646,296) (2,020,614) ------------- -------------- $ 6,559,884 $ 5,206,180 ============= =============
F-17 12. LONG TERM OBLIGATIONS (CONTINUED) In order to mitigate the impact of fluctuations in U.S. interest rates, the Company entered into an interest rate swap in June 1998 on its principal note payable to a bank. The Company swapped its variable rate of interest, LIBOR plus 1.55%, for a fixed rate of interest of 7.49%. Net interest payable or receivable is determined on a quarterly basis and is insignificant at December 31, 1999. The bank loan proceeds have been used to finance the build-out of facilities, the acquisition of certain equipment, and the purchase of a building and land. Under the terms of the loan agreements, the Company is required to comply with certain financial covenants. At December 31, 1999 the Company was in compliance with such covenants. Substantially all of the Company's equipment and $3.0 million of its marketable securities is pledged as collateral under the loan agreements. At December 31, 1999, the maturities of long term obligations are as follows: 2000.............................. 1,646,296 2001.............................. 1,421,952 2002.............................. 5,137,932 2003.............................. -
Management believes that the carrying value of notes payable approximates fair value at December 31, 1999, given that the interest rates on the Company's bank debt are based on incremental borrowing rates currently available on loans with similar terms and maturities. 13. COLLABORATION AGREEMENTS In December 1999, the Company entered into a Collaboration Agreement with Sankyo Pharma Inc., which granted Sankyo exclusive rights to market Cholestagel in the United States in exchange for certain initial, milestone and royalty payments from Sankyo. At the same time, the Company entered into another Collaboration Agreement with Sankyo under which the Company sold Sankyo an option to obtain the exclusive right to develop and market a second-generation cholesterol-lowering compound in the United States, Europe and Japan. Sankyo has agreed to pay for all development costs for the second-generation compound for so long as their option to license the compound remains in effect, as well as milestone payments and royalty payments. In December 1994, the Company entered into a license agreement (the "Agreement") with a different Japanese pharmaceutical company (the "Partner") whereby the Company granted to the Partner a license to make, use, and sell certain of the Company's products in certain areas of the world, as defined by the Agreement (the "Territories"). The Agreement requires the Partner to bear all costs to develop and commercialize the licensed products in the respective Territories. In consideration of this Agreement, the Company received a non-refundable license fee in 1994 and milestone payments in 1996 and 1997. The Agreement calls for additional milestone payments to be paid to the Company through the commercialization of the product licensed under the Agreement and royalties based on certain percentages of sales, as defined in the Agreement. 14. EMPLOYEE BENEFIT PLAN The Company maintains an Employment Retirement Plan ("401(k) Plan") under section 401(k) of the Internal Revenue Code covering all full-time employees. Employee contributions may be made to the 401(k) Plan up to limits established by the Internal Revenue Service. Company matching contributions may be made at the discretion of the Board of Directors. The Company did not make a contribution to the 401(k) Plan for the years ended December 31, 1999, 1998 and 1997. 15. COMMITMENTS Synthetic Lease In October 1999, the Company completed the build-out of a new corporate headquarters. The purchase and construction of the facility was approximately $25.0 million and was financed through a synthetic lease transaction. The synthetic lease is asset-based financing structured to be treated as an operating lease for accounting purposes. The lease term commenced on October 21, 1998 and continues for seven years, thereafter. Upon the completion of the construction phase in October 1999, the Company began to pay rent on a monthly basis of approximately $187,000, which is based on a fixed rate of 8.99% on the outstanding balance. F-18 15. COMMITMENTS (CONTINUED) During the term of the lease, the Company has the option to purchase the building and the improvements for a purchase price equal to the total amount funded by the lessor, plus any accrued and unpaid rent and certain other costs outlined in the agreements (the "Purchase Price"). At the end of the lease term, the Company has the option to (i) purchase the building and the improvements for the Purchase Price, (ii) arrange for the facility to be purchased by a third party, or (iii) return the building and improvements to the lessor; provided, however, in the case of options (ii) and (iii), the Company is contingently liable to the extent the lessor is not able to realize 85% of the Purchase Price upon the sale or other disposition of the property. Under the terms of the synthetic lease, the Company is required to comply with certain financial covenants which, among other things, require the maintenance of minimum levels of cash, tangible net worth, liquidity and debt service coverage and prohibits the payment of dividends. The Company was in compliance with these terms at December 31, 1999. Manufacturing Agreements In September 1999, the Company entered into an agreement with its contract manufacturer for the initial commercial production of bulk inventory for Cholestagel. The Company is obligated under the terms of the agreement to pay approximately 352.1 million Austrian schillings (approximately $27.3 million as of December 31, 1999) through 2000. Under the terms of the Collaboration Agreement with Sankyo Pharma Inc. (see Note 13), Sankyo has agreed to purchase this initial production of inventory for approximately $21.4 million. The difference was charged to operations in 1999. In November 1999, the Company entered into an agreement with its manufacturer of the raw material for Cholestagel and Renagel. Under the terms of the agreement, the Company will be obligated to purchase certain minimum quantities of material beginning in 2000. The Company estimates that its minimum purchase obligations during 2000 will be approximately $3.0 million, and that its minimum purchase obligations during each of the remaining six years of the term of the agreement will be approximately $2.7 million. In August 1999, the Company entered into a Letter of Intent with a manufacturer to provide certain tableting, packaging and labeling services to the Company with respect to Renagel. Under the terms of the letter of intent, GelTex has made minimum purchase commitments, which are expected to commence in 2000 and will be in the amount of approximately $4.0 million a year. The minimum purchase costs are costs associated with the Renagel Joint Venture with Genzyme Corporation and will be borne equally by the Company and Genzyme. The Letter of Intent is expected to be superseded by a definitive Manufacturing Agreement to be entered into between the manufacturer and the Renagel Joint Venture in the second quarter of 2000. Subleases The Company leased its former offices and research laboratories under an operating lease with an initial ten-year term and a provision for a five-year extension. The Company is currently negotiating a sublease for this facility. The Company has entered into a sublease arrangement for its prior facility with another company for an initial three-year term with an option to extend for one year. The original lease agreement between the Company and landlord remains in effect. Total annual future minimum lease payments and minimum sublease payments under these agreements are as follows:
LEASE SUBLEASE PAYMENTS PAYMENTS ---------- ---------- 2000................. 456,297 316,800 2001................. 457,875 316,800 2002................. 497,284 316,800 2003................. 481,450 316,800 2004................. 390,300 158,400 Thereafter........... 793,800 -- ---------- ---------- Total................ $3,077,006 $1,425,600 ========== ==========
The future minimum lease payments relating to the synthetic lease, which are not included in the table above, are approximately $2.2 million per year beginning in October 1999 and will continue for approximately six years, thereafter. F-19 15. COMMITMENTS (CONTINUED) Rental expense charged to operations was approximately $633,993 in 1999, $441,850 in 1998 and $279,600 in 1997. Operating Lease In September 1999, the Company negotiated a $4.0 million operating lease line to finance the cost of equipment purchases. The Company will draw down the line over the next 18 months and will repay the line in 60 equal monthly installments commencing in March 2001. As of December 31, 1999, the Company had drawn down $600,000 of the line and was obligated for minimum lease payments of approximately $142,000 per year for the next five years. Under the terms of the lease, the Company is required to comply with certain financial covenants which, among other things, require the maintenance of minimum levels of cash, tangible net worth, liquidity and debt service coverage and prohibits the payment of dividends. The Company was in compliance with these terms at December 31, 1999. Research Contracts The Company routinely contracts with universities, medical centers, contract research organizations, and other institutions for the conduct of research and clinical studies on the Company's behalf. These agreements are generally for the duration of the contracted study and contain provisions that allow the Company to terminate the study prior to its completion. 17. SUBSEQUENT EVENT On February 7, 2000, the Company filed a registration statement with the Securities and Exchange Commission for the issuance of up to 3.5 million shares of Common Stock. F-20 EX-99.2 5 a2039916zex-99_2.txt EXHIBIT 99.2 Exhibit 99.2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GELTEX PHARMACEUTICALS, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, DECEMBER 31, 2000 1999 ------------- ------------ ASSETS Current assets: Cash and cash equivalents ................................... $ 71,178,825 $ 20,178,391 Marketable securities ....................................... 68,427,498 52,250,534 Prepaid expenses and other current assets ................... 11,323,030 1,763,400 Due from affiliates ......................................... 416,250 411,250 Due from Joint Venture ...................................... 836,075 664,741 ------------- ------------- Total current assets ............................................. 152,181,678 75,268,316 Long-term receivables, affiliates ................................ 120,500 371,750 Property and equipment, net ...................................... 13,538,260 11,117,725 Purchased goodwill, net .......................................... 6,017,054 6,753,729 Intangible assets, net ........................................... 1,726,378 1,282,490 Investment in Joint Venture ...................................... 15,771,774 11,295,056 ------------- ------------- $ 189,355,644 $ 106,089,066 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses ....................... $ 5,909,836 $ 5,175,756 Current portion of long-term obligations .................... 1,467,498 1,646,296 ------------- ------------- Total current liabilities ........................................ 7,377,334 6,822,052 Deferred revenue ................................................. 430,011 5,390 Long-term obligations, less current portion ...................... 5,493,420 6,559,884 Commitments and contingencies .................................... -- -- Stockholders' equity: Preferred Stock, $0.01 par value, 5,000,000 shares authorized, none issued or outstanding .................................. -- -- Common Stock, $.01 par value, 50,000,000 shares authorized, 21,548,506 and 18,063,122 shares issued and outstanding at September 30, 2000 and December 31, 1999, respectively ... 215,485 180,631 Additional paid-in capital .................................. 277,025,257 202,210,089 Deferred compensation ....................................... (701,432) (483,019) Unrealized loss on available-for-sale securities ............ (26,133) (245,099) Accumulated deficit ......................................... (100,458,298) (108,960,862) ------------- ------------- Total stockholders' equity ....................................... 176,054,879 92,701,740 ------------- ------------- $ 189,355,644 $ 106,089,066 ============= =============
The accompanying notes are an integral part of the financial statements. -3- GELTEX PHARMACEUTICALS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, 2000 1999 2000 1999 ---- ---- ---- ---- Revenue: Collaborative Joint Venture project reimbursement .......... $ 1,400,306 $ 1,473,053 $ 3,841,161 $ 4,434,648 Contract revenue ........................................... 3,765,845 -- 33,069,629 1,751,669 ------------ ------------ ------------ ------------ Total revenue ................................................. 5,166,151 1,473,053 36,910,790 6,186,317 Costs and expenses: Research and development ................................... 6,942,512 7,277,507 21,587,414 21,705,489 Collaborative Joint Venture project costs .................. 1,400,306 1,473,053 3,841,161 4,434,648 ------------ ------------ ------------ ------------ Total research and development .......................... 8,342,818 8,750,560 25,428,575 26,140,137 General and administrative ................................. 4,158,937 1,258,088 7,506,507 3,868,360 ------------ ------------ ------------ ------------ Total costs and expenses ...................................... 12,501,755 10,008,648 32,935,082 30,008,497 Income (loss) from operations ................................. (7,335,604) (8,535,595) 3,975,708 (23,822,180) Interest income, net .......................................... 2,004,813 834,741 4,331,137 3,023,078 Equity in gain (loss) of Joint Venture ........................ 800,001 (1,726,267) 195,718 (5,785,378) ------------ ------------ ------------ ------------ Net income (loss) ............................................. $ (4,530,790) $ (9,427,121) $ 8,502,563 $(26,584,480) ============ ============ ============ ============ Basic net income (loss) per share ............................. $ (0.22) $ (0.56) $ 0.43 $ (1.58) Shares used in computing basic net income (loss) per share .... 20,947,000 16,871,000 19,872,000 16,853,000 Diluted net income (loss) per share ........................... $ (0.22) $ (0.56) $ 0.41 $ (1.58) Shares used in computing diluted net income (loss) per share... 20,947,000 16,871,000 20,502,000 16,853,000
The accompanying notes are an integral part of the financial statements. -4- GELTEX PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, 2000 1999 2000 1999 ---- ---- ---- ---- Net income (loss) ............................................... $ (4,530,790) $ (9,427,121) $ 8,502,563 $(26,584,480) Other comprehensive income (loss): Unrealized gain (loss) on securities held during the period.. 175,718 (70,019) 218,966 (494,226) ------------ ------------ ------------ ------------ Comprehensive income (loss) .................................... $ (4,355,072) $ (9,497,140) $ 8,721,529 $(27,078,706) ============ ============ ============ ============
The accompanying notes are an integral part of the financial statements. -5- GELTEX PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 1999 ---- ---- OPERATING ACTIVITIES Net income (loss) .................................................................... $ 8,502,563 $ (26,584,480) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization ..................................................... 2,461,924 1,518,263 Equity in net loss of Joint Venture ............................................... (195,718) 5,785,378 Compensation from issuance of stock options ....................................... 809,303 472,715 Changes in operating assets and liabilities: Prepaid expenses and other current assets ..................................... (9,328,147) (1,498,680) Due from Joint Venture ........................................................ (171,334) 706,076 Long-term receivables ......................................................... 28,170 32,725 Accounts payable and accrued expenses ......................................... 1,652,520 (4,009,457) Other long-term obligations ............................................... (493,817) -- Amount due to Joint Venture ................................................... -- (129,600) Inventory ..................................................................... -- (4,035,022) ------------- ------------- Net cash provided by (used in) operating activities .................................. 3,265,464 (27,742,082) INVESTING ACTIVITIES Purchase of marketable securities .................................................... (457,369,739) (13,285,855) Proceeds from sale and maturities of marketable securities ........................... 441,234,182 30,572,302 Investment in Joint Venture .......................................................... (4,281,000) (11,608,917) Purchase of intangible assets ........................................................ (797,263) (512,177) Purchase of property and equipment, net .............................................. (3,792,409) (1,017,968) ------------- ------------- Net cash used in investing activities ................................................ (25,006,229) 4,147,385 FINANCING ACTIVITIES Sale of Common Stock and warrants, net of issuance costs ............................. 73,986,462 343,268 Payments on long-term obligations .................................................... (1,245,262) (1,594,894) ------------- ------------- Net cash provided by (used in) financing activities .................................. 72,741,200 (1,251,626) Increase (decrease) in cash and cash equivalents ..................................... 51,000,434 (24,846,323) Cash and cash equivalents at beginning of period ..................................... 20,178,391 30,874,900 ------------- ------------- Cash and cash equivalents at end of period ........................................... $ 71,178,825 $ 6,028,577 ============= ============= Interest paid ........................................................................ $ 546,292 $ 259,720
The accompanying notes are an integral part of the financial statements. -6- GELTEX PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. NATURE OF BUSINESS GelTex Pharmaceuticals, Inc. develops and markets non-absorbed polymer drugs that bind and eliminate targeted substances within the gastrointestinal tract. In addition, GelTex is developing small-molecule pharmaceuticals consisting of novel polyamine analogues and metal chelators. Therapeutic areas of interest include hyperphosphatemia, hypercholesterolemia, cancer, iron overload and infectious diseases. 2. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of GelTex Pharmaceuticals, Inc. and its wholly owned subsidiaries (the "Company") for the three and nine months ended September 30, 2000 and 1999, 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 the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial condition, results of operations and cash flows for the periods presented. The results of operations for the interim period ended September 30, 2000, are not necessarily indicative of the results to be expected for the year ended December 31, 2000. These financial statements should be read in conjunction with the audited financial statements and notes thereto for the fiscal year ended December 31, 1999, included in the Company's Annual Report on Form 10-K (File Number 0-26872) as filed with the Securities and Exchange Commission. 3. BUSINESS CHANGES On September 11, 2000, the Company announced that it had entered into a definitive Merger Agreement (the "Merger Agreement") with Genzyme Corporation ("Genzyme"). Under the terms of the Merger Agreement, which was approved by each Company's board of directors, each outstanding share of GelTex Common Stock will be converted, at the option of the holder, into either (i) $47.50 in cash, or (ii) 0.7272 (the "Exchange Ratio") of a share of Genzyme General Common Stock (the "Merger Consideration"). Under the Merger Agreement, 50% of the shares of GelTex Common Stock outstanding at the time of the Merger will be exchanged for Genzyme General Common Stock. The cash to be issued in the Merger is subject to proration to maintain the cash portion of the Merger Consideration at 50% in order to preserve the status of the Merger as a reorganization under the Internal Revenue Code. Based on Genzyme General's closing stock price of $65.3125 on September 8, 2000, and on the Company's 21.4 million shares outstanding on September 11, 2000, the transaction would be valued at approximately $1 billion. The transaction is subject to approval by the Company's shareholders and customary closing conditions. The transaction is expected to be completed in December 2000, and will be accounted for using the "purchase accounting" method. In July 2000, the Company was granted approval by the U.S. Food and Drug Administration ("FDA") to market its Renagel(1) brand phosphate binder (sevelamer hydrochloride) in a tablet formulation of 800 mg and 400 mg dosages for the reduction of serum phosphorus in hemodialysis patients with end-stage renal disease. In June 2000, the Company filed an Investigational New Drug ("IND") application for a non-absorbed toxin binding polymer, GT160-246, for the treatment of Clostridium difficile ("C. difficile") colitis. The FDA has given approval for human testing of GT160-246, and a Phase 1 trial was completed in August 2000. In May 2000, the Company was granted marketing approval by the FDA for a cholesterol-lowering product which the Company's collaboration partner began marketing in the United States in September 2000 under the trade name, WelChol(2) (formerly Cholestagel(3); colesevelam hydrochloride) for the treatment of hypercholesterolemia, a condition characterized by undesirably high cholesterol levels. - - -------------------------------- (1) Renagel(R)is a registered trademark of the Company. (2) WelChol(TM)is a trademark of Sankyo Pharma Inc., the Company's partner for commercializing WelChol(TM). (3) Cholestagel(R)is a registered trademark of the Company. -7- In April 2000, as part of a corporate evaluation of its research pipeline, Warner-Lambert Company informed the Company of its intention to return all rights to diethylnorspermine ("DENSPM"), which is in Phase 1/2 trials for solid tumors. The Company acquired the alliance with Warner-Lambert as part of its acquisition of SunPharm Corporation in November 1999. The Company will evaluate its development plan for DENSPM within the context of the Company's ongoing research on second-generation polyamine analogues as anti-cancer agents. The Company received approval to market its Renagel brand capsules, for the control of hyperphosphatemia, in the European Union and Canada during the first quarter of 2000. 4. EQUITY FINANCINGS In March 2000, the Company sold 1,750,000 newly issued shares of Common Stock to certain institutional investors for net proceeds of $35.0 million. In addition, the Company entered into an agreement with Acqua Wellington North American Equities Fund, Ltd. ("Acqua Wellington") for a financing facility covering the sale of up to 1,750,000 shares of Common Stock over the next twelve months. These shares may be sold, at the Company's discretion, at a small discount to the market price. The total amount of the investment is dependent, in part, on the Company's stock price, with the Company to control the amount and timing of the stock sold. These transactions were entered into pursuant to an effective shelf registration statement previously filed by the Company with the Securities and Exchange Commission, covering the sale of up to 3.5 million shares of its Common Stock. The following table summarizes the shares sold to Acqua Wellington and the proceeds received by the Company under this financing facility to date: SCHEDULE OF EQUITY FINANCINGS
# OF SHARES DATE PROCEEDS SOLD ---- ------------ ----------- April 3, 2000 ................. $ 4,300,000 230,179 June 16, 2000 ................. $ 6,000,000 323,099 August 8, 2000 ................ $13,000,000 467,498 September 11, 2000............. $10,000,000 291,073
The Merger Agreement between the Company and Genzyme prohibits the Company from selling any additional shares of common stock under this financing facility. 5. RECLASSIFICATION Certain amounts from the prior year have been reclassified to conform to the current year presentation. 6. JOINT VENTURE AGREEMENT Effective April 1, 2000, the Company and Genzyme modified the terms of their joint venture (the "Joint Venture") for the final development and commercialization of the Company's Renagel brand product. Previous to this modification, the Joint Venture sold product directly to customers. Under the revised terms, the Joint Venture sells Renagel product directly to Genzyme at a discount. Genzyme, in turn, re-sells Renagel product to customers. Additionally, Genzyme is obligated to purchase finished goods ordered by Genzyme when such goods have been bottled. To the extent Genzyme earns a profit on sales of Renagel product to customers, GelTex's share of the Joint Venture's net income or loss is adjusted to maintain a net 50/50 split between the two venturers. Accordingly, GelTex's share of the Joint Venture's operations for the three months ended September 30, 2000, was a gain of $0.8 million and GelTex's share of the Joint Venture's operations for the nine months ended September 30, 2000, was a gain of $0.2 million. Summarized financial information regarding the Joint Venture for the three and nine months ended September 30, 2000 and September 30, 1999 is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2000 1999 2000 1999 ---- ---- ---- ---- Net sales ........................ $ 13,180,000 $ 4,481,000 $ 33,287,000 $ 12,148,000 Costs and expenses ............... $ 9,047,000 $ 1,438,000 $ 24,943,000 $ 4,516,000 Loss from operations.............. $ (3,264,000) $ (3,492,000) $ (8,265,000) $(13,122,000) Net loss ......................... $ (3,230,000) $ (3,453,000) $ (8,116,000) $(11,571,000)
-8- 7. ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition in Financial Statements," which provides guidance related to revenue recognition based on interpretations and practices followed by the SEC. SAB 101A was released on March 24, 2000, and deferred the effective date of SAB 101 to no later than the second fiscal quarter beginning after December 15, 1999. In June 2000, The SEC issued SAB 101B which delays the implementation date of SAB 101 until no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999. SAB 101 requires companies to report any changes in revenue recognition as a cumulative change in accounting principle at the time of implementation in accordance with Accounting Principles Board Opinion No.20, "Accounting Changes." The Company believes that this Interpretation will not have a significant effect on its financial statements. In March 2000, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB No. 25." The Interpretation will be applied prospectively to new awards, modifications to outstanding awards, and changes in employee status on or after July 1, 2000, as necessary. The Company has concluded that this Interpretation will not have a material impact on the financial position or results of operations of the Company. 8. ACCOUNTING PRINCIPLES Net Income (Loss) Per Common Share Basic net income (loss) per common share is based on the weighted-average number of common shares outstanding. For the three months ended September 30, 2000, diluted net loss per common share is the same as basic net loss per common share as the inclusion of weighted-average shares of common stock issuable upon exercise of stock options and warrants would be antidilutive. For the nine months ended September 30, 2000, the difference between basic and diluted shares used in the computation of earnings per share is 0.6 million weighted-average common equivalent shares, resulting from the inclusion of outstanding common stock options and warrants. For the three and nine month periods ended September 30, 1999, diluted net loss per common share is the same as basic net loss per common share as the inclusion of weighted-average shares of common stock issuable upon exercise of stock options and warrants would be antidilutive. -9- -----END PRIVACY-ENHANCED MESSAGE-----