-----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, A2vQps95qlMMSM4rwvNiwss3UqUhy3E8xO7T5txXZlnqRgRpUKb1C+uDmpDAd6vh +T9B15Mbd4isc3TUOTsHVQ== 0000912057-01-007168.txt : 20010307 0000912057-01-007168.hdr.sgml : 20010307 ACCESSION NUMBER: 0000912057-01-007168 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001218 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 20010302 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: 1560702 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 18, 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 18, 2000 (filed January 2, 2001), effective December 18, 2000, we completed the acquisition of Biomatrix, Inc. ("Biomatrix"). The acquisition was structured as a merger of Biomatrix with and into one of our wholly-owned subsidiaries pursuant to an Agreement and Plan of Merger, dated as of March 6, 2000 among Genzyme Corporation ("Genzyme"), Seagull Merger Corporation and Biomatrix, 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 18, 2000 to include (1) the financial statements of Biomatrix 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 Biomatrix 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 Biomatrix (the "Biomatrix 10-K") for the fiscal year ended December 31, 1999 (filed on March 30, 2000), as amended on April 26, 2000 and October 26, 2000, on pages F-1 to F-21 of the Biomatrix 10-K and are incorporated herein by reference. These audited financial statements as reported on pages F-1 to F-21 of the Biomatrix 10-K are also filed herewith as Exhibit 99.1. The unaudited financial statements of Biomatrix 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 Biomatrix (the "Biomatrix 10-Q") for the quarter ended September 30, 2000 (filed on November 14, 2000) on pages 3 to 14 of the Biomatrix 10-Q and are incorporated herein by reference. These unaudited financial statements as reported on pages 3 to 14 of the Biomatrix 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 March 6, 2000, among Genzyme, Seagull Merger Corporation and Biomatrix, as amended. Previously filed as Annex A to Amendment No. 2 to Genzyme's Registration Statement on Form S-4 (Commission File No. 333-34972) filed with the SEC on October 27, 2000 and incorporated herein by reference. 23 Consent of PricewaterhouseCoopers LLP. Filed herewith. 2 99.1 The audited financial statements of Biomatrix 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-21 of the Annual Report on Form 10-K of Biomatrix for the fiscal year ended December 31, 1999 (filed on March 30, 2000), as amended on April 26, 2000 and October 26, 2000)). Filed herewith. 99.2 The unaudited financial statements of Biomatrix as of and for the nine months ended September 30, 2000 and 1999 (as reported on pages 3 to 14 of the Quarterly Report on Form 10-Q of Biomatrix 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: March 2, 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 Pharmaceuticals, Inc. ("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. 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 Biosurgery, the division of Genzyme to which the assets and liabilities and operations of Biomatrix 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 Biosurgery Stock are based on the income or losses attributable to Genzyme Biosurgery, Genzyme included pro forma financial statements of Genzyme Biosurgery to aid investors in evaluating its performance. Holders of Genzyme Biosurgery Stock have no specific rights to the assets allocated to Genzyme Biosurgery. Genzyme Corporation continues to hold title to all of the assets allocated to Genzyme Biosurgery 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 Biosurgery 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. 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 which are filed as Exhibits 99.2 and 99.1, respectively, to this report on Form 8-K, as amended. 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................. 8,156 G8 6,847 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, G12 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............. 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, G12 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.............. -- 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 BIOSURGERY A DIVISION OF GENZYME CORPORATION UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 (AMOUNTS IN THOUSANDS)
HISTORICAL HISTORICAL GENZYME GENZYME PRO FORMA SURGICAL TISSUE HISTORICAL PRO FORMA FOOTNOTE GENZYME PRODUCTS REPAIR BIOMATRIX, INC. ADJUSTMENTS REFERENCE BIOSURGERY ---------- ---------- --------------- ----------- --------- ---------- Revenues: Net product sales................. $111,981 $ -- $ 72,000 $ -- $183,981 Net service sales................. -- 20,402 -- -- 20,402 Income from licenses, royalties, research contracts and grants... -- -- 7,700 -- 7,700 -------- -------- -------- -------- -------- Total revenues.................. 111,981 20,402 79,700 -- 212,083 Operating costs and expenses: Cost of products sold............. 67,242 -- 21,100 11,330 B20 99,672 Cost of services sold............. -- 13,237 -- -- 13,237 Selling, general and administrative.................. 63,237 24,604 18,500 22 B20 (110) B20 106,253 Research and development.......... 28,056 8,019 9,100 -- 45,175 Amortization of intangibles....... 5,750 -- -- 37,080 B19 42,830 -------- -------- -------- -------- -------- Total operating costs and expenses...................... 164,285 45,860 48,700 48,322 307,167 -------- -------- -------- -------- -------- Operating income (loss)............. (52,304) (25,458) 31,000 (48,322) (95,084) Other income and (expenses): Equity in net loss of unconsolidated affiliates and joint venture................... (35) (3,368) -- -- (3,403) Other............................. 138 -- -- -- 138 Investment income................. 4,199 609 1,500 (2,857) B23 3,451 Interest expense.................. (35) (1,823) (1,500) (15,000) B23 (18,358) -------- -------- -------- -------- -------- Total other income and (expenses).................... 4,267 (4,582) -- (17,857) (18,172) -------- -------- -------- -------- -------- Income (loss) before income taxes... (48,037) (30,040) 31,000 (66,179) (113,256) Provision for income taxes.......... -- -- (12,400) 26,309 B22 13,909 -------- -------- -------- -------- -------- Division net income (loss).......... $(48,037) $(30,040) $ 18,600 $(39,870) $(99,347) ======== ======== ======== ======== ========
SEE NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS 15 GENZYME BIOSURGERY A DIVISION OF GENZYME CORPORATION UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (AMOUNTS IN THOUSANDS)
HISTORICAL HISTORICAL GENZYME GENZYME PRO FORMA SURGICAL TISSUE HISTORICAL PRO FORMA FOOTNOTE GENZYME PRODUCTS REPAIR BIOMATRIX, INC. ADJUSTMENTS REFERENCE BIOSURGERY ---------- ---------- --------------- ----------- --------- ---------- Revenues: Net product sales................. $ 88,805 $ -- $57,300 $ -- $146,105 Net service sales................. -- 17,007 -- -- 17,007 Income from licenses, royalties, research contracts and grants... -- -- 9,100 -- 9,100 -------- -------- ------- -------- -------- Total revenues.................. 88,805 17,007 66,400 -- 172,212 Operating costs and expenses: Cost of products sold............. 51,170 -- 17,100 -- 68,270 Cost of services sold............. -- 8,949 -- -- 8,949 Selling, general and administrative.................. 51,214 16,881 20,800 17 B20 (83) B20 88,829 Research and development.......... 21,187 5,043 7,600 -- 33,830 Amortization of intangibles....... 4,279 -- -- 27,703 B19 31,982 -------- -------- ------- -------- -------- Total operating costs and expenses...................... 127,850 30,873 45,500 27,637 231,860 -------- -------- ------- -------- -------- Operating income (loss)............. (39,045) (13,866) 20,900 (27,637) (59,648) Other income (expense): Investment income................. 4,619 254 2,300 (2,143) B23 5,030 Interest expense.................. (1) (972) (700) (11,250) B23 (12,923) Other............................. 81 (6) -- -- 75 -------- -------- ------- -------- -------- Total other income (expense).... 4,699 (724) 1,600 (13,393) (7,818) -------- -------- ------- -------- -------- Income (loss) before income taxes... (34,346) (14,590) 22,500 (41,030) (67,466) Provision for income taxes.......... -- (9,200) 16,517 B22 7,317 -------- -------- ------- -------- -------- Division net income (loss).......... $(34,346) $(14,590) $13,300 $(24,513) $(60,149) ======== ======== ======= ======== ========
SEE NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS 16 GENZYME BIOSURGERY A DIVISION OF GENZYME CORPORATION UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 2000 (AMOUNTS IN THOUSANDS)
HISTORICAL HISTORICAL GENZYME GENZYME PRO FORMA SURGICAL TISSUE HISTORICAL PRO FORMA FOOTNOTE GENZYME PRODUCTS REPAIR BIOMATRIX, INC. ADJUSTMENTS REFERENCE BIOSURGERY ---------- ---------- --------------- ----------- --------- ---------- ASSETS Current assets: Cash and cash equivalents................. $ 25,898 $ 5,591 $ 46,700 $ (52,421) B14 $ 25,768 Short-term investments.................... 48,787 -- -- -- 48,787 Accounts receivable, net.................. 20,892 4,814 12,600 -- 38,306 Inventories............................... 37,990 2,267 8,200 11,330 B18 59,787 Prepaid expenses and other current assets.................................. 1,853 317 5,800 7,970 -------- ------- -------- --------- -------- Total current assets.................... 135,420 12,989 73,300 (41,091) 180,618 Property, plant and equipment, net.......... 17,621 1,868 39,700 (549) B18 58,640 Long-term investments....................... 12,504 -- -- -- 12,504 Intangibles, net............................ 168,405 -- -- 284,854 B14 111,320 B14 564,579 Deferred tax assets-noncurrent.............. 899 B14 899 Investment in equity securities............. 3,651 -- -- -- 3,651 Other....................................... 4,650 103 800 -- 5,553 -------- ------- -------- --------- -------- Total assets............................ $342,251 $14,960 $113,800 $ 355,433 $826,444 ======== ======= ======== ========= ======== LIABILITIES AND DIVISION EQUITY Current liabilities: Accounts payable.......................... $ 5,145 $ 469 $ 3,400 $ -- $ 9,014 Accrued expenses.......................... 11,409 2,137 7,000 18,803 B15 39,349 Current portion of notes payable.......... -- -- 900 -- 900 Due to Genzyme General.................... 9,226 1,272 -- -- 10,498 -------- ------- -------- --------- -------- Total current liabilities............... 25,780 3,878 11,300 18,803 59,761 Notes payable and long-term debt............ -- 18,000 11,100 200,000 B14 229,100 Deferred tax liabilities--non-current....... -- -- -- 107,044 B14 107,044 Other....................................... -- 115 -- -- 115 -------- ------- -------- --------- -------- Total liabilities....................... 25,780 21,993 22,400 325,847 396,020 Division equity (deficit): Division equity (deficit)................. 316,471 (7,033) (316,471) B17 7,033 B17 309,438 B17 175 B14 206,347 B14 11,373 B14 (82,143) B14 (66) B14 (14,700) B16 430,424 Biomatrix, Inc. common stock.............. -- -- -- -- -- Biomatrix, Inc. additional-paid in capital................................. -- -- 84,600 (84,600) B16 -- Biomatrix, Inc. notes receivable--related parties................................. (14,700) 14,700 B16 -- Biomatrix, Inc. treasury stock, at cost... (900) 900 B16 -- Biomatrix, Inc. retained earnings......... -- -- 24,300 (24,300) B16 -- Biomatrix, Inc. other comprehensive loss.................................... -- -- (1,900) 1,900 B16 -- -------- ------- -------- --------- -------- Total division equity..................... 316,471 (7,033) 91,400 29,586 430,424 -------- ------- -------- --------- -------- Total liabilities and division equity... $342,251 $14,960 $113,800 $ 355,433 $826,444 ======== ======= ======== ========= ========
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 Biosurgery, the division of Genzyme to which the assets and liabilities and operations of Biomatrix 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 approximately three 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) Forward contracts........................................... (1,300) Interest rate 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 COMBINED BALANCE SHEET (B1) To record the acquisition of the net assets of Biomatrix for an aggregate purchase price of $482.4 million (see Note 2A). 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 ========
26 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED) (4) PRO FORMA ADJUSTMENTS RELATED TO THE ACQUISITION OF BIOMATRIX (CONTINUED) 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 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 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 COMBINED 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 reduced depreciation expense related to the decreased 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 $13.3 million for the nine months ended September 30, 2000 and $18.6 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. III. PRO FORMA ADJUSTMENTS TO GENZYME BIOSURGERY'S COMBINED BALANCE SHEET (B14) To record the acquisition of the net assets of Biomatrix for an aggregate purchase price of $482.4 million (see Note 2A). 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 Genzyme Biosurgery'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 and allocated to Genzyme Biosurgery 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. 29 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED) (4) PRO FORMA ADJUSTMENTS RELATED TO THE ACQUISITION OF BIOMATRIX (CONTINUED) 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 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. (B15) 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. (B16) 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. (B17) To record the reallocation of Genzyme Surgical Products and Genzyme Tissue Repair to Genzyme Biosurgery. (B18) 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. IV. PRO FORMA ADJUSTMENTS TO GENZYME BIOSURGERY'S COMBINED STATEMENTS OF OPERATIONS (B19) 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 ======== =======
30 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED) (4) PRO FORMA ADJUSTMENTS RELATED TO THE ACQUISITION OF BIOMATRIX (CONTINUED) (B20) 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 reduced depreciation expense related to the decreased basis of Biomatrix's fixed assets. (B21) To eliminate Biomatrix' weighted average shares outstanding, and to record the cancellation of Surgical Products Stock and Tissue Repair Stock. (B22) 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. (B23) 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. (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. 31 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED) (5) PRO FORMA ADJUSTMENTS RELATED TO THE ACQUISITION OF GELTEX (CONTINUED) I. PRO FORMA ADJUSTMENTS TO GENZYME CORPORATIONS' COMBINED BALANCE SHEETS (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 ==========
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) Forward contracts........................................... (1,300) Interest rate 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 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 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 32 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED) (5) PRO FORMA ADJUSTMENTS RELATED TO THE ACQUISITION OF GELTEX (CONTINUED) 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. (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........................ -- 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 COMBINED 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 ======== =======
33 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED) (5) PRO FORMA ADJUSTMENTS RELATED TO THE ACQUISITION OF GELTEX (CONTINUED) (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. (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. (G14) The net income (loss) of GelTex has been transferred to the calculation of net income per share allocated to Genzyme General Stock. 34 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION 2 Agreement and Plan of Merger, dated as of March 6, 2000, among Genzyme, Seagull Merger Corporation and Biomatrix, as amended. Previously filed as Annex A to Amendment No. 2 to Genzyme's Registration Statement on Form S-4 (Commission File No. 333-34972) filed with the SEC on October 27, 2000 and incorporated herein by reference. 23 Consent of PricewaterhouseCoopers LLP. Filed herewith. 99.1 The audited financial statements of Biomatrix 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-21 of the Annual Report on Form 10-K of Biomatrix for the fiscal year ended December 31, 1999 (filed on March 30, 2000), as amended on April 26, 2000 and October 26, 2000)). Filed herewith. 99.2 The unaudited financial statements of Biomatrix as of and for the nine months ended September 30, 2000 and 1999 (as reported on pages 3 to 14 of the Quarterly Report on Form 10-Q of Biomatrix for the quarter ended September 30, 2000 (filed November 14, 2000)). Filed herewith. 35 EX-23 2 a2040253zex-23.txt EXHIBIT 23 Exhibit 23 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 January 28, 2000, except for Note 18, as to which the date is March 7, 2000 and Note 19, as to which the date is October 23, 2000, relating to the consolidated financial statements of Biomatrix, Inc., which appears in Biomatrix, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1999, as amended. /s/ PricewaterhouseCoopers LLP New York, New York March 2, 2001 EX-99.1 3 a2039916zex-99_1.txt EXHIBIT 99.1 BIOMATRIX, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Report of Independent Accountants..................................................... 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 Shareholders' 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 to F-22
Financial statement schedules are omitted for the reason that they are not applicable or the required information is included in the consolidated financial statements or notes thereto. F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of Biomatrix, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, shareholders' equity and cash flows present fairly, in all material respects, the consolidated financial position of Biomatrix, Inc. and its subsidiaries at December 31, 1999 and 1998, and the 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. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP New York, New York January 28, 2000, except for Note 18, as to which the date is March 7, 2000 and Note 19, as to which the date is October 23, 2000 F-2 BIOMATRIX, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in millions, except share amounts)
December 31, ------------ 1999 1998 ---- ---- ASSETS Current assets: Cash and cash equivalents..................................... $ 35.0 $ 16.5 Accounts receivable, less allowance for doubtful accounts..... 10.1 8.9 Inventory, at lower of cost or market......................... 8.5 6.8 License fees receivable....................................... - 7.6 Prepaid expenses and other current assets..................... 3.2 1.5 --- --- Total current assets.......................................... 56.8 41.3 Property, plant and equipment, net................................ 41.3 37.7 Other assets...................................................... 0.9 4.3 --- --- Total assets........................................ $ 99.0 $ 83.3 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.............................................. $ 1.3 $ 3.5 Accrued expenses.............................................. 8.0 5.6 Current portion of notes payable.............................. 0.6 0.6 Current portion of capital lease obligations.................. - 4.6 ---- --- Total current liabilities..................................... 9.9 14.3 Notes payable..................................................... 11.9 17.6 ---- ---- Total liabilities................................... 21.8 31.9 ---- ---- Commitments and contingent liabilities Shareholders' equity: Preferred stock, 3,000 shares authorized; none issued......... - - Common stock, $.0001 par value: 60,000,000 authorized; 23,374,366 and 22,848,358 issued and 23,282,072 22,756,064 outstanding in 1999 and 1998, respectively....... 0.0 0.0 Additional paid-in capital........................................ 82.7 72.8 Notes receivable - related parties................................ (14.0) (10.6) Retained earnings (accumulated deficit)........................... 10.9 (7.7) Accumulated other comprehensive loss.............................. (1.5) (2.2) Treasury stock, 92,294 shares of common stock, at cost............ (0.9) (0.9) ---- ---- Total shareholders' equity ......................... 77.2 51.4 ---- ---- Total liabilities and shareholders' equity.......... $ 99.0 $ 83.3 ====== ======
See notes to consolidated financial statements. F-3 BIOMATRIX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in millions, except share and per share data)
Years ended December 31, ------------------------ 1999 1998 1997 ---- ---- ---- Net product sales................................ $ 72.0 $ 37.8 $ 11.7 Income from licenses, royalties and research contracts...................... 7.7 9.8 20.8 --- --- ---- Total revenues.............................. 79.7 47.6 32.5 ---- ---- ---- Costs and expenses: Cost of goods sold.......................... 21.1 9.1 3.6 Research and development expenses........... 9.1 10.3 5.9 Selling, general and administrative expenses 18.5 14.5 7.8 ---- ---- --- Total costs and expenses......................... 48.7 33.9 17.3 ---- ---- ---- Income from operations........................... 31.0 13.7 15.2 Interest expense................................. (1.5) (1.0) (0.1) Interest and miscellaneous income................ 1.5 1.4 1.2 --- --- --- Income before taxes.............................. 31.0 14.1 16.3 Provision for income taxes....................... 12.4 2.0 0.6 ---- --- --- Net income ...................................... $ 18.6 $ 12.1 $ 15.7 ====== ====== ====== Net income per share: Basic...................................... $ 0.81 $ 0.54 $ 0.72 ====== ====== ====== Weighted average shares outstanding........ 22,959,394 22,450,398 21,789,538 ========== ========== ========== Diluted.................................... $ 0.76 $ 0.51 $ 0.69 ====== ====== ====== Diluted shares outstanding................. 24,349,952 23,703,758 22,654,412 ========== ========== ==========
See notes to consolidated financial statements. F-4 BIOMATRIX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (in millions, except shares, per share amounts and par value)
Capital stock $.0001 Par Value Comprehensive Income ------------------------------ ----------------------------------------- Common-voting Notes (Accumulated Accumulated -------------- Additional Receivable Deficit)/ Other Total Treasury Stock Shares Par Paid-in Related Retained Comprehensive Comprehensive -------------- Issued Value Capital Parties Earnings Loss Income Shares Cost ---------- ------ ----------- ----------- ------------ --------------- ------------- ------ ----- Balance at December 31, 1996 10,587,615 $1,059 $56.7 ($ 2.6) ($35.5) ($1.0) 2,814 - Sale of common stock to related parties 133,000 13 2.3 (0.4) Interest on related party notes (0.2) Purchase of treasury stock 43,333 ($0.9) Options exercised 292,420 29 0.8 Adjustments resulting from translation adjustments (0.6) Net income - 1997 15.7 $15.1 ---------- ------ ----------- ----------- ------------ --------------- ------ ----- Balance at December 31, 1997 11,013,035 1,101 59.8 (3.2) (19.8) (1.6) 46,147 (0.9) Sale of common stock to related parties 303,000 30 9.8 (9.8) Interest on related party (0.4) notes Repayment of note and interest from a related party 2.8 Issuance of common stock in conversion for subsidiary stock 38,462 4 - Compensatory stock options 0.8 Unearned stock option Compensation (0.6) Options exercised 69,682 7 0.4 Adjustments resulting from translation adjustments (0.6) Tax benefit from stock 2.6 options Net income - 1998 12.1 $11.5 ---------- ------ ----------- ----------- ------------ --------------- ------ ----- Balance at December 31, 1998 11,424,179 1,142 72.8 (10.6) (7.7) (2.2) 46,147 (0.9) Sale of common stock to related parties - pre-split 36,000 4 2.4 (2.4) Options exercised - pre-split 43,229 4 0.4 Two for one stock split in the form of a 100% dividend 11,503,408 1,150 46,147 Issuance of common stock in conversion of debt 250,000 25 4.9 Compensatory stock options 0.2 Options exercised - post split 107,550 11 0.6 Sale of common stock to a related party - post-split 10,000 1 0.2 (0.2) Interest on related party notes (0.8) Adjustments resulting from translation adjustments 0.7 Tax benefit from stock 1.2 options Net income - 1999 18.6 $19.3 ---------- ------ ----------- ----------- ------------ --------------- ------ ----- Balance at December 31, 1999 23,374,366 $2,337 $ 82.7 ($14.0) $10.9 ($1.5) 92,294 ($0.9) ========== ====== =========== =========== ============ =============== ====== ======
See notes to consolidated financial statements. F-5 BIOMATRIX, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions)
December 31, ------------ 1999 1998 1997 ---- ---- ---- Cash flows from operating activities: Net income............................................... $ 18.6 $ 12.1 $ 15.7 ------ ------ ------ Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization......................... 3.7 1.6 0.7 Stock option compensation............................. 0.2 0.2 0.1 Amortization of debt fees.............................. 0.1 0.1 - Change in assets and liabilities: Accounts receivable.................................... (1.1) (5.5) (2.4) Inventory.............................................. (1.5) (3.9) (2.4) Prepaid expenses and other current assets.............. 6.0 (7.3) (1.2) Other assets........................................... 2.7 (4.2) (0.4) Accounts payable and accrued expenses.................. 2.2 3.0 1.2 --- --- --- Total adjustments..................................... 12.3 (16.0) (4.4) ---- ---- --- Net cash provided by (used in) operating activities........... 30.9 (3.9) 11.3 ---- --- ---- Cash flows from investing activities: Capital expenditures..................................... (9.2) (19.5) (9.1) Maturity of held-to-maturity investments................. - - 10.6 ----- ----- ---- Net cash (used in) provided by investing activities........... (9.2) (19.5) 1.5 --- ---- --- Cash flows from financing activities: Payments of notes payable and capital leases............. (5.3) (0.2) (0.1) Proceeds from issuance of debt........................... - 17.3 - Repayment of note by a related party..................... - 2.5 - Stock options exercised.................................. 1.0 0.3 0.7 Income tax benefit related to stock options.............. 1.2 2.6 - Repurchase of common stock............................... - - (0.9) Sale of common stock ................................... - - 1.9 ----- ---- --- Net cash (used in) provided by financing activities........... (3.1) 22.5 1.6 --- ---- --- Effect of exchange rate changes on cash....................... (0.1) 0.0 0.0 --- --- --- Net increase (decrease) in cash and cash equivalents.......... 18.5 (0.9) 14.4 Cash and cash equivalents at beginning of period.............. 16.5 17.4 3.0 ---- ---- --- Cash and cash equivalents at end of period.................... $ 35.0 $ 16.5 $ 17.4 ====== ====== ====== Supplemental cash flow data: Interest paid, net of capitalized interest............... $ 1.4 $ 0.7 $ 0.1 Income taxes paid........................................ $ 9.4 $ 0.4 $ 0.2 Non-cash investing and financing: Sale of common stock financed with note receivable....... $ 2.6 $ 9.8 $ 0.4 Issuance of common stock in conversion of debt........... $ 4.9 - -
See notes to consolidated financial statements. F-6 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS Biomatrix, Inc. (the "Company") was founded in 1981 to develop, manufacture and commercialize a series of proprietary viscoelastic products made of biological polymers called hylans for use in therapeutic medical applications and skin care. Hylans are chemically modified forms of the naturally occurring hyaluronan (also known as hyaluronic acid or sodium hyaluronate). Hylans are the second generation of viscoelastics used in medicine, and are characterized by significantly enhanced physical (rheological) properties (elasticity, viscosity and pseudoplasticity) as compared to naturally occurring hyaluronan, from which the first generation viscoelastics are made. The discovery of hylans has allowed the Company to develop a range of patented products with superior viscoelastic properties in the forms of fluids, gels and solids. The Company's operations consist of therapeutic medical products, skin care intermediate products and toxicity testing. The Company's business is subject to certain risks and uncertainties, including but not limited to governmental regulation, reimbursement, dependence on distribution relationships, patents, competition, manufacturing, rapid growth, dependence on key personnel, fluctuation in operating results and product liability. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Biomatrix Medical Canada Inc., Biomatrix UK Ltd., Biomatrix France SARL, Biomatrix Switzerland GmbH, Biomatrix Svenska AB, Biomatrix Germany GmbH, Biomatrix Belgium BVBA and its majority-owned subsidiary, Biomatrix Limited Hong Kong. All significant intercompany accounts and transactions have been eliminated in consolidation. PROPERTY, PLANT AND EQUIPMENT AND CAPITALIZED INTEREST Property, plant and equipment is recorded at cost. Interest related to borrowings for a construction project with a term greater than one year is capitalized. The interest is capitalized during the term of the project and capitalization ceases when the project is completed. Building, research laboratory equipment, office equipment and manufacturing equipment are depreciated on the straight-line method over their estimated useful lives. Capital leases and leasehold improvements are amortized on the straight-line method over the estimated useful life of the property or the terms of the related lease, whichever is shorter. Expenditures for additions, major renewals and improvements are capitalized and expenditures for maintenance and repairs are charged to expense as incurred. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and the resulting gain or loss is recognized in income for the period. IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, a loss is recognized. The impairment loss is measured by the amount the book value exceeds the fair value of the asset. The fair value would be determined by obtaining a quote from an independent third party or by using a discounted expected future cash flow model. There were no impaired long-lived assets at December 31, 1999. CASH AND CASH EQUIVALENTS Cash and cash equivalents include highly liquid short-term investments in money market funds, at cost, and U.S. Government or Government Agency securities purchased with a maturity of less than three months. FAIR VALUE OF FINANCIAL INSTRUMENTS Cash, accounts receivable, notes receivable, accounts payable and accrued liabilities are reflected in the financial statement at fair value because of the short-term maturity of those instruments. The fair value of the Company's notes payable and capital lease obligations (including current installments) are estimated based on the current rate offered to the Company for debt of the same remaining maturities. The estimated fair value of the Company's notes payable and capital lease obligations approximates the carrying value at December 31, 1999 and 1998. INVENTORY Inventory is stated at the lower of cost or market and costs are removed on a first-in first-out (FIFO) basis. Inventory is reviewed on a quarterly basis for obsolete, slow-moving or impaired items. There were no obsolete, slow-moving or impaired items at December 31, 1999. F-7 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVESTMENTS Investments, which typically consist of U.S. Government and Government Agency Securities, are classified as held-to-maturity and are reported at amortized cost, which approximates market. DEFERRED DEBT FEES Deferred debt fees are included in other assets and are amortized over the term of the corresponding debt. REVENUE RECOGNITION Revenue from product sales is recognized at the time the products are shipped to the customer or marketing partner. These Revenues are recorded at the minimum/supply price. Additional Revenue from product sales in the form of formula price adjustments, which is based on the difference between the contractual percentage of net sales of a marketing partner to their customers and the minimum/supply price, is recognized in the same period that the marketing partner records the sale to their customers. Revenue from non-refundable up-front and milestone payments is recognized in the period earned, which is when the activity has been performed or the milestone has been achieved under the terms of the contracts with the marketing partners. The Company is planning to adopt Staff Accounting Bulletin No. 101, "Revenue Recognition," during the second quarter of 2000, which will impact the way the Company records its non-refundable up-front and milestone payments. (See Note 17 for further discussion). Research contract revenue is recognized at the time the service is performed. 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. Actual results could differ from those estimates. CONTINGENCIES The Company accounts for contingencies in accordance with Statement of Financial Accounting Standards ("SFAS") No. 5, "Accounting for Contingencies." As such when a loss is probable and reasonably estimable a reserve is established and information regarding such reserve is disclosed in the notes to the financial statements. In the event the Company plans to defend a legal matter vigorously, and the costs of such defense are not covered by an insurance policy, the Company will establish a reserve for future probable estimated legal fees, if estimable. INCOME TAXES Deferred taxes are provided on the liability method, in accordance with SFAS No. 109, "Accounting for Income Taxes," whereby deferred tax assets are recognized for deductible temporary differences, and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Deferred tax assets are reduced by a valuation allowance, when, in the opinion of management, it is more likely than not that some portions or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. FOREIGN CURRENCY TRANSLATION The assets and liabilities of the Company's subsidiaries are translated into U.S. dollars at year-end exchange rates and revenue and expense items are translated at average rates of exchange prevailing during the year. Resulting translation adjustments are a component of accumulated other comprehensive income in shareholders' equity. Gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than the Company's functional currency) are included in miscellaneous income. ACCOUNTING FOR STOCK-BASED COMPENSATION In accordance with the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," the Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its employee stock option plans. See Note 11 for a summary of the pro forma effects on reported net income and earnings per share for fiscal 1999, 1998, and 1997 based on the fair value of options and shares granted as prescribed by SFAS No. 123. F-8 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NET INCOME PER COMMON SHARE In 1998, the Company adopted SFAS No. 128, "Earnings per Share," which requires the presentation of basic earnings per share and diluted earnings per share. Basic net income per share is computed by dividing net income by the weighted-average common shares outstanding for the period. Diluted net income per share is reflective of all common share equivalents. The Company has convertible debt which converts into 500,000 shares of common stock at December 31, 1999, and 750,000 shares of common stock at December 31, 1998. However, this instrument has not been included in diluted earnings per share for 1999 and 1998 because its effect would be anti-dilutive. A reconciliation of weighted average shares outstanding from basic to diluted is as follows:
1999 1998 1997 ---- ---- ---- Weighted average shares outstanding - Basic 22,959,394 22,450,398 21,789,538 Dilutive effect of stock options 1,390,558 1,253,360 864,874 ---------- ---------- ---------- Weighted average shares outstanding - Diluted 24,349,952 23,703,758 22,654,412 ========== ========== ==========
RECLASSIFICATION Certain amounts in the 1998 and 1997 consolidated statements of operations and the 1998 consolidated balance sheet have been reclassified in order to conform to the 1999 presentation. 3. INVENTORIES Inventories at December 31, 1999 and 1998 consisted of:
1999 1998 ----- ----- Raw materials.................................................... $ 0.6 $ 1.5 Work-in-process.................................................. 7.2 4.8 Finished Goods................................................... 0.7 0.5 ----- ----- $ 8.5 $ 6.8 ===== =====
4. NOTES RECEIVABLE - RELATED PARTIES Notes receivable - related parties relate to the acquisition of common stock of the Company at fair market value by several officers and directors of the Company during 1999, 1998, and 1997. The notes are with recourse and are payable with simple interest upon maturity. The interest rates, which are determined in accordance with Internal Revenue Service standards, on the notes outstanding as of December 31, 1999 range from 5.30% to 7.18%. The amount of the notes outstanding at December 31, 1999 and 1998 mature at the following dates:
1999 1998 ----- ----- May 2007......................................................... $ 0.5 $ 0.5 January 2008..................................................... 1.0 0.9 March 2008....................................................... 0.6 0.6 April 2008....................................................... 1.8 1.7 June 2008........................................................ 7.3 6.9 March 2009....................................................... 2.6 - September 2009................................................... 0.2 - ----- ----- $14.0 $10.6 ===== =====
In August 1998, an officer of the Company repaid a note in the amount of $2.8 million including interest. All notes issued during 1999, 1998 and 1997 have been for common stock issued pursuant to the Company's 1997 Restricted Stock Plan. F-9 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at December 31, 1999 and 1998 consisted of:
Estimated 1999 1998 Useful Life ------ ------ ----------- Buildings................................................... $ 31.7 $ 22.4 25 years Land ...................................................... 2.2 2.2 N/A Construction in progress.................................... 0.2 4.9 N/A Manufacturing equipment..................................... 8.5 7.7 5-10 years Research laboratory equipment............................... 2.2 2.1 5-10 years Office equipment............................................ 4.8 3.1 3-10 years Leasehold improvements...................................... 1.2 1.1 1-5 years ------ ------ 50.8 43.5 Less accumulated depreciation and amortization.............. (9.5) (5.8) ------ ------ $ 41.3 $ 37.7 ====== ======
Depreciation expense for the three years ended December 31, 1999, 1998 and 1997 was, $3.7 million, $1.6 million and $0.7 million, respectively. Capitalized interest for the years ended December 31, 1998 and 1997 was $0.2 million and $0.4 million, respectively. There was no capitalized interest for the year ended December 31, 1999. Repairs and maintenance expenses for the three years ended December 31, 1999, 1998 and 1997 were $0.8 million, $0.4 million and $0.1 million, respectively. Assets recorded under capital leases of $4.6 million as of December 31, 1998 were included in land, buildings and construction in progress. The accumulated depreciation of assets under capital leases was $0.1 million at December 31, 1998. There were no assets under capital leases at December 31, 1999. Assets pledged under equipment financing at December 31, 1999 and 1998 are included in manufacturing equipment in the amount of $3.7 million. Assets mortgaged as of December 31, 1999 and 1998 are included in buildings in the amount of $2.3 million and $2.1 million, respectively. 6. ACCRUED EXPENSES Accrued expenses at December 31, 1999 and 1998 consisted of:
1999 1998 ----- ----- Accrued Expenses: Taxes payable............................................... $ 2.0 $ 1.9 Accrued personnel expenses.................................. 1.8 1.5 Royalties................................................... 2.2 1.1 Other accrued expenses...................................... 2.0 1.1 ----- ----- $ 8.0 $ 5.6 ===== =====
7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS Long-Term Debt and Capital Lease Obligations at December 31, 1999 and 1998 consisted of:
1999 1998 ----- ----- Notes Payable: Equipment loan.................................................. $ 1.9 $ 2.3 Mortgage note, payable in monthly installments through July 2001.. 0.3 0.3 Construction and equipment loan................................. 0.3 0.5 Capital lease obligations.......................................... - 4.7 Convertible subordinated debt...................................... 10.0 15.0 ------ ------ Total ................................................ 12.5 22.8 Less current maturities......................................... (0.6) (5.2) ------ ------ Long term portion............................................... $ 11.9 $ 17.6 ====== ======
F-10 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED) In July 1996, the Company refinanced an outstanding mortgage on its Canadian manufacturing facility with another mortgage that accrues interest at an annual rate of 9.5% and has a final payment of $0.3 million due in June 2001. The Company's majority-owned Canadian subsidiary obtained a $1.0 million construction and manufacturing equipment loan from the Canadian government of which $0.9 million and $0.1 million was funded in 1993 and 1994, respectively. Interest on the loan accrues at the prevailing annual variable rate, which was approximately 8.0% at December 31, 1999 and 8.25% at December 31, 1998. In January 1996, the Company amended the repayment terms of the agreement, whereby the Company will make quarterly principal payments and a final payment in 2001. The principal payments shall correspond to 30% of the Canadian subsidiary's quarterly net profit (excluding depreciation), with an annual maximum of $0.2 million and an annual minimum of $0.1 million. The loan agreement contains covenants that require the maintenance of certain financial ratios by the Canadian subsidiary, with which the Company has complied. In September 1996, the Company entered into a capital lease of a building and land where the Company's U.S. manufacturing facility is located. This lease was accounted for as a capital lease and had an imputed interest rate of approximately 9%. During 1999, the Company exercised its option to acquire this building and purchased it at a price of approximately $4.6 million. In May 1998, the Company issued $15.0 million of subordinated convertible debt to a third party. The debt has a five-year term and a coupon rate of 6.9% with interest payable on a semi-annual basis. The debt contains a conversion feature that allows the third party to convert the debt into common shares at $20 per share after one year. In addition, the Company can call the debt at par after three years or after two years if certain conditions are satisfied. During the fourth quarter of 1999, the debt holder converted one-third, or $5.0 million, of the debt into 250,000 shares of common stock. Therefore at December 31, 1999, there is $10.0 million of convertible debt outstanding. Debt fees related to this transaction of $0.3 million and $0.6 million at December 31, 1999 and 1998 are included in other assets and are being amortized on a straight-line basis over the five-year term of the debt. The debt contains certain financial covenants, with which the Company has complied. In December 1998, the Company obtained equipment financing from GE Capital in the amount of $2.3 million. The debt has a five-year term, a coupon rate of 7.4%, and is payable in equal monthly installments. Certain of the Company's machinery and equipment is pledged as collateral for this financing. The debt contains certain financial covenants which the Company has complied with. Future minimum payments due under the note payable and mortgage obligations are as follows at December 31, 1999:
Year Amount ---- ------ 2000....................................... $ 1.5 2001....................................... 1.7 2002....................................... 1.2 2003....................................... 10.9 ------ Total minimum payments..................... $ 15.3 Less - amount representing interest........ (2.8) ------ Principal obligations...................... $ 12.5 Less - current portion..................... (0.6) ------ Long-Term portion.......................... $ 11.9 ======
In August 1999, the Company secured a revolving line of credit from Merrill Lynch Business Financial Services, Inc. in the amount of $10.0 million. Funds can be borrowed against the line at an interest rate equal to the 30-Day Commercial Paper Rate, as defined in the agreement, plus 1.99%. To the extent the Company draws down on this line, the borrowed amount will be collateralized by the U.S. manufacturing facility. There were no borrowings against this line at December 31, 1999. The Company also has a $0.4 million credit agreement with a Canadian bank with an interest rate at prime plus 0.5%. There were no borrowings outstanding at December 31, 1999 and 1998. F-11 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 8. CAPITAL STOCK In March 1995, the Company completed a private sale of 500,000 shares of common stock to Recordati Industria Chimica e Farmaceutica S.p.A. ("Recordati"). Net proceeds to the Company related to this sale were $2.0 million. In July 1997, the Company repurchased 86,666 shares of common stock from Recordati. This purchase required approximately $0.9 million of funds and these shares are included at cost on the balance sheet as treasury stock. In April 1996, the Company completed a private sale of 400,000 shares of common stock at fair market value to an officer of the Company. The aggregate purchase price of $2.5 million was financed in full with a full recourse promissory note issued from the Company. In August 1998, the officer of the Company repaid the note in full plus accrued interest. In 1997, the Company completed sales of 266,000 shares of restricted common stock to several officers and directors of the Company. The aggregate purchase price of $2.3 million was financed with full recourse promissory notes issued from the Company. In 1998, the Company completed sales of 606,000 shares of restricted common stock to several officers and directors of the Company. The aggregate purchase price of $9.8 million was financed with full recourse promissory notes issued from the Company. In 1999, the Company completed sales of 82,000 shares of restricted common stock to several officers and a consultant of the Company. The aggregate purchase price of $2.6 million was financed with full recourse promissory notes issued from the Company. On April 6, 1999 the Company announced a two-for-one common stock split to be distributed in the form of a 100% stock dividend (the "Stock Split"). As a result of this action, on April 23, 1999, an additional 11,503,408 shares were distributed to the shareholders of record on April 16, 1999, of which 46,147 shares represented treasury stock of the Company. The shares issued, outstanding and in treasury of 11,424,179, 11,378,032 and 46,147 at December 31, 1998 have been restated to 22,848,358, 22,756,064, and 92,294 to reflect the Stock Split. Par value remains at $0.0001 per share. The par value of the additional shares resulting from the Stock Split has been reclassified from additional paid-in capital to common stock. All historical share and per share amounts in the accompanying statements have been restated to reflect the Stock Split. The 3,000 shares of authorized preferred stock are issuable by the Board of Directors. The terms, designations and other criteria are determinable by the Board of Directors upon issuance. In June 1991, Biomatrix, Inc. capitalized Biomatrix Medical Canada ("BMC"). In connection with this transaction additional capital was raised through a Canadian venture capital firm for which it received 62,500 shares of Class A stock in BMC. In April 1998, the Canadian venture capital firm exercised its right to convert the 62,500 shares of Class A stock in BMC into 76,924 shares of Biomatrix, Inc. common stock. As a result, BMC is now a wholly-owned subsidiary of Biomatrix, Inc. No gain or loss was recognized on the conversion of shares. F-12 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 9. INCOME TAXES
Year Ended December 31, 1999 1998 1997 ---- ---- ---- Income (Loss) before income taxes: Domestic................................... $ 31.0 $ 14.3 $ 17.2 Foreign.................................... ( 0.0) (0.2) (0.9) ---- ---- ---- $ 31.0 $ 14.1 $ 16.3 ====== ====== ====== Income tax provision: Domestic, Federal.......................... $ 10.7 $ 1.3 $0.4 Domestic, State............................ 1.6 0.7 0.2 Foreign.................................... 0.1 - - --- ----- ----- $ 12.4 $ 2.0 $ 0.6 ====== ====== ======
A reconciliation of the United States federal statutory rate to the Company's effective tax rate for the years ended December 31, 1999, 1998, and 1997 is as follows:
1999 1998 1997 ---- ---- ---- Statutory federal corporate rate................. 35.0% 35.0% 35.0% State income taxes, net of federal tax benefit... 4.1 6.2 1.0 Foreign related items............................ 1.5 4.1 2.0 Research and development credits................. - (2.4) - Benefit of net operating losses.................. (1.7) (6.0) (35.8) Nondeductible items.............................. 0.9 1.6 - Change in valuation allowance.................... - (27.2) (1.1) Other ........................................... - 3.0 - Alternative minimum tax.......................... - - 2.2 ---- ---- --- Effective tax rate............................... 39.8% 14.3% 3.3% ==== ==== ===
Temporary differences and carryforwards which give rise to deferred tax assets are as follows:
Deferred Tax Assets ------------------- 1999 1998 ---- ---- Net operating losses........................................ $ 1.6 $ 1.9 Research credits............................................ 0.6 1.9 Depreciation................................................ 2.1 1.3 Alternative minimum tax credit.............................. - 0.4 Other....................................................... 1.2 1.1 --- --- 5.5 6.6 Valuation allowance...................................... (4.3) (3.8) --- ----- Total deferred taxes............................... $1.2 $2.8 ==== ====
At December 31, 1999, approximately $0.7 million of the deferred tax assets is included in prepaid expenses and other current assets, and $0.5 million is included in other assets. At December 31, 1998, deferred tax assets of $2.8 million were included in other assets. The Company's valuation allowance of $4.3 million and $3.8 million in 1999 and 1998, respectively, was provided on deferred tax assets, which were primarily foreign related items, due to the uncertainty of realization. The Company has foreign federal net operating loss carryforwards of approximately $5.4 million of which $1.6 million expire at various times from December 31, 2001 through December 31, 2006. Approximately $3.8 million of the foreign federal net operating loss carryforwards will carryover indefinitely. In addition, the Company has foreign tax credit carryovers at December 31, 1999 of approximately $0.6 million of which $0.3 million expire at various times from December 31, 2002 through December 31, 2007. Approximately $0.3 of the foreign tax credits carryover indefinitely. F-13 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 10. COMMITMENTS OPERATING LEASE The Company occupies office and laboratory space under a lease expiring in July 2004. Rent expense for operating leases charged to operations for the years ended December 31, 1999, 1998 and 1997 approximated $0.7 million, $0.7 million and $0.5 million, respectively. Future minimum operating lease payments for the facility and other items are: 2000............................................ $ 1.0 2001............................................ 0.9 2002............................................ 0.8 2003............................................ 0.7 2004............................................ 0.7 Thereafter...................................... - ----- Total minimum obligations....................... $ 4.1 =====
LICENSE AGREEMENTS In November 1993 and June 1994, the Company entered into license and distribution agreements with Syntex Pharmaceuticals International Limited ("Syntex") to market Synvisc in selected European countries and South Africa. In return, for the exclusive marketing rights, Syntex paid up-front payments in 1993 and 1994 of $1.2 million, and $5.0 million, respectively. Subsequent to these agreements, Syntex was acquired by Roche AB, ("Roche"), a subsidiary of F. Hoffmann-LaRoche Ltd. Subsequent to the acquisition of Syntex by Roche, in the fourth quarter of 1995 the Company signed an agreement with Roche reacquiring the marketing rights to Synvisc for all countries identified in the previous agreements, except for Sweden and South Africa. The Company received a non-refundable initial payment in 1995 and a non-refundable final payment in 1996 in connection with the finalization of this agreement, which amounts have been included in income from licenses in the respective years. We are currently in discussions with Roche concerning its marketing rights in Sweden. In September 1995, the Company entered into a distribution agreement with Rhone-Poulenc Rorer Canada Inc. ("RPR"). The agreement provides RPR with exclusive marketing rights for Synvisc in Canada. In return, in 1995, the Company received an up-front non-refundable license fee payment of $3.5 million, which has been included in income from licenses. The Company terminated this agreement on December 31, 1999. The Company currently markets and sells Synvisc to the Canadian market through our subsidiary Biomatrix Medical Canada Inc. In June 1996, the Company entered into a distribution agreement with Inamed Corporation ("Inamed"), formerly Collagen Aesthetics, Inc.. The agreement provides Inamed with exclusive marketing rights for Hylaform in Europe, Canada, Japan, Australia and other select countries. In return, the Company received an up-front, non-refundable payment of $5.0 million in consideration of the costs and expenses that have been incurred by the Company related to the research and development of Hylaform. The Company is entitled to receive a royalty based upon sales of Inamed's dermal augmentation products as well as an additional royalty on the potential growth of Inamed's total dermal augmentation business. Additionally, the Company manufactures and supplies Hylaform to Inamed for a contractual percentage of Inamed's sales price. The Company has also entered into a distribution agreement with Inamed for the United States. Under such agreement, Inamed has the exclusive distribution rights to Hylaform in the United States subject to an additional payment and FDA approval. In December 1996, the Company entered into a distribution agreement with Boehringer Ingelheim France, S.A. ("Boehringer Ingelheim"). The agreement provides Boehringer Ingelheim with exclusive marketing rights for Synvisc in France. In return, the Company received an up-front non-refundable payment of $1.0 million, which has been included in income from licenses in 1996, and could receive milestone payments of up to $7.0 million if sales reach certain levels. The Company manufactures and supplies Synvisc to Boehringer Ingelheim for a contractual percentage of Boehringer Ingelheim's sales price. Additionally, Boehringer Ingelheim reimburses the Company, up to a fixed amount and for a certain period of time, for its costs of maintaining a team of area business consultants to assist in selling Synvisc in France. F-14 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 10. COMMITMENTS (CONTINUED) In February 1997, the Company entered into distribution agreements with Wyeth-Ayerst Laboratories ("Wyeth"), a division of American Home Products. The agreements provide Wyeth with exclusive marketing rights to Synvisc in the United States, Germany, Austria, Spain, Portugal, Greece and certain countries in the Middle East and Central Europe. In 1997, the Company received various non-refundable payments totaling $17.0 million. In 1998, the Company earned a non-refundable milestone of $6.0 million; such payment was received in February 1999. In 1999, the Company earned a milestone payment of $7.0 million as end-user sales reached a certain level. The Company could receive additional payments in the future if sales reach certain levels. The Company manufactures and supplies Synvisc to Wyeth for a contractual percentage of Wyeth's sales price. Additionally, Wyeth reimburses the Company, up to a fixed amount and for a certain period of time, for its costs of maintaining a team of area business consultants to assist in selling Synvisc in Europe and the United States. We are currently in discussions with Wyeth concerning its marketing rights for Synvisc in certain foreign countries. In April 1997, the Company entered into a distribution agreement with Bayer AG ("Bayer"). The agreement provides Bayer with exclusive marketing rights to Synvisc in Australia, Indonesia, Israel, Malaysia, New Zealand, Singapore, Taiwan and Thailand. In return, the Company received an up-front non-refundable payment of $3.0 million and could receive a milestone payment of $2.0 million upon certain approvals or if sales reach a certain level. The Company manufactures and supplies Synvisc to Bayer for a contractual percentage of Bayer's sales price. Additionally, Bayer will reimburse the Company, up to a fixed amount and for a certain period of time, for its costs of maintaining several area business consultants to assist in selling Synvisc in certain countries. In February 1998, the Company entered into a distribution agreement with Novartis Pharma AG ("Novartis"). The agreement provides Novartis with the exclusive marketing rights to Synvisc in Latin America and the Caribbean. In return, the Company earned a non-refundable payment of $3.1 million, of which $1.5 million was paid up-front in 1998 and $1.6 million was paid during the third quarter of 1999. The Company manufactures and supplies Synvisc to Novartis for a contractual percentage of Novartis' sales price. Additionally, Novartis will reimburse the Company for its costs of maintaining several area business consultants to assist in selling Synvisc in certain countries. RESEARCH AND DEVELOPMENT AGREEMENTS In July 1991, the Company entered into an agreement with Pharmacia to perform certain toxicity testing. The Company received $0.1 million, $0.6 million and $0.6 million of revenues relating to this testing for the years ended December 31, 1999, 1998, and 1997, respectively. Such amounts have been included in research contract revenue. During February 1990, the Company and its wholly owned subsidiary, Biomatrix Svenska AB, entered into an agreement with a Swedish Limited Partnership, Up-Will Investor KB ("Up-Will"). Up-Will invested in Biomatrix Svenska AB in order that the Company could pursue the obtainment of regulatory approvals to manufacture and market Synvisc in Germany, France, Spain and the United Kingdom. Up-Will provided Svenska AB with a total of approximately $1.5 million. In return, Up-Will receives a royalty from the Company equal to 6% of all net sales of Synvisc in the countries referred to above, for a period of 10 years from the date of first commercial sale in each country, regardless of whether the sales are made by the Company, Biomatrix Svenska AB or another party. Two of the Company's officers hold convertible debt in Up-Will. F-15 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 11. STOCK OPTIONS The Company has two fixed stock option plans which reserve shares of common stock for issuance to executives, employees, consultants and directors. The Company applies the provisions of Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock based compensation plans. Accordingly, compensation expense has been recognized to the extent applicable in the financial statements with respect to the two plans in accordance with APB No. 25. Had compensation cost for the Company's two stock option plans been determined based on the fair value at the grant date for awards in 1999, 1998 and 1997 consistent with the provisions of SFAS No. 123 "Accounting For Stock Based Compensation," the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below:
1999 1998 1997 ----- ----- ---- Net income - as reported........................ $18.6 $12.1 $ 15.7 Net income - pro forma.......................... 8.5 9.4 14.7 Net income per share - as reported (basic)...... 0.81 0.54 0.72 Net income per share - pro forma (basic)........ 0.37 0.42 0.68 Net income per share - as reported (diluted).... 0.76 0.51 0.69 Net income per share - pro forma (diluted)...... 0.35 0.39 0.65
Since option grants awarded during 1999, 1998 and 1997 typically vest over several years and additional awards are expected to be issued in the future, the pro forma results shown above are not likely to be representative of the effects on future years of the application of the fair value based method. The fair market value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
1999 1998 1997 ---- ---- ---- Dividend Yield N/A N/A N/A Expected Volatility 70% 70% 70% Risk-free Interest Rate 4.78% to 6.29% 4.31% to 5.84% 5.85% to 6.79% Expected Option Life 6.0 6.0 6.0
Under the amended plan approved by the shareholders in May 1997, the total number of shares of common stock that may be granted is 6,000,000. In May 1995, the shareholders approved a Stock Option Plan for Non-Employee Directors of the Company. This plan authorizes the granting of options on 200,000 shares of common stock to directors who are not employees of the Company, who will automatically receive an option to acquire 5,000 shares upon election or re-election to the Board. F-16 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 11. STOCK OPTIONS (CONTINUED) These plans provide that shares granted come from the Company's authorized but unissued or reacquired common stock. The price of the options granted pursuant to these plans is generally equal to the fair market value of the shares on the date of grant. The options are generally exercisable over four to five years. The options expire ten years from the grant date. Information regarding these option plans for 1999, 1998 and 1997 is as follows:
1999 1998 1997 --------------------------- --------------------------- ---------------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price --------------------------- --------------------------- ---------------------------- Options outstanding, Beginning of year...... 2,371,140 $9.20 1,854,714 $6.15 1,633,054 $ 3.06 Options exercised........... (194,008) 5.15 (139,364) 3.14 (584,840) 1.32 Options granted............. 632,016 26.08 728,740 15.79 821,600 8.84 Options canceled............ (77,800) 17.95 (72,950) 10.69 (15,100) 4.84 -------------- -------------- -------------- Options outstanding, End of year............ 2,731,348 $13.15 2,371,140 $9.20 1,854,714 $ 6.15 Option price range at End of year............ $0.50 to $40.00 $0.50 to $25.94 $0.50 to $16.00 Options exercisable, End of year............ 1,150,789 $7.43 853,610 $5.18 638,814 $ 3.06 Option price range for Exercised shares....... $0.50 to $19.00 $0.50 to $8.63 $0.50 to $8.63 Options available for grant At end of year......... 1,422,062 976,278 1,680,966 Weighted-average fair value Of options granted during The year........ $15.09 $10.89 $5.99
The following table summarizes information about stock options at December 31, 1999:
Options Outstanding Options Exercisable ---------------------------------------------------- ----------------------------------- Weighted- Average Weighted- Weighted- Number Remaining Average Number Average Outstanding Contractual Exercise Exercisable Exercise Range of Exercise Prices at 12/31/99 Life Price at 12/31/99 Price - --------------------------- ----------------- ----------------- ---------------- ------------------ ---------------- $0.50 - $ 1.00 32,042 4.54 $ 0.98 32,042 $ 0.98 $2.31 - $ 5.63 728,760 5.72 $ 3.75 517,360 $ 3.00 $6.00 - $15.00 945,090 7.30 $ 10.86 464,840 $ 9.56 $15.44 - $25.94 508,480 8.59 $ 17.69 117,813 $ 16.74 $26.19 - $40.00 516,976 9.14 $ 26.85 18,734 $ 29.79
Compensation expense of $0.2 million, $0.2 million and $0.1 million was recorded for the years ended December 31, 1999, 1998 and 1997, respectively, in accordance with APB No. 25. F-17 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 12. CONTINGENCY In August 1990, the Company received a notice from the Pennsylvania Department of Environmental Protection ("DEP") that it is one of approximately 1,000 potentially responsible parties ("PRPs") that may have clean-up responsibility at the Industrial Solvents and Chemical Company site in York Haven, Pennsylvania (the "Site"). During the late 1980s, the Company, through a licensed waste disposal transport company, shipped industrial solvents to the Site, which was operating as a recycling facility. The DEP reviewed hazardous waste found at the Site as well as the DEP's own records in order to identify additional PRPs and to quantify each PRP's volumetric contributions. The Company is a member of a steering committee that consists of many PRPs. As of December 31, 1997 the Company had a reserve of $0.7 million related to this matter. During the fourth quarter of 1998, the final remedy was selected by the DEP and the Company settled out of the matter pursuant to a buy-out proposal prepared by the steering committee and reversed the reserve. Therefore, at December 31, 1999 and 1998 the Company no longer had a reserve for any potential litigation regarding this matter. LITIGATION In October 1996, Michael Jarcho filed suit against Biomatrix in the United States District Court for the Southern District of California seeking to recover damages and declaratory judgment for our alleged breach of Jarcho's consulting agreement with Biomatrix, dated December 2, 1988. The agreement provides that Biomatrix is to pay royalties to Jarcho for products that result from his consultancy. Jarcho contends that Hylaform resulted from his consultancy and seeks a royalty on the Company's past and future net sales of Hylaform as well as punitive damages and recovery of attorney fees. The royalty Jarcho alleges he is entitled to would have totalled $0.4 million through December 31, 1999. The Company disagrees with Jarcho's claims and does not believe that Jarcho is owed any royalties as a result of Hylaform sales. On January 10, 1997, the court dismissed Jarcho's case on the grounds that the agreement requires such disputes to be brought exclusively in New Jersey state court. Jarcho moved for a partial reconsideration of the decision, which the Company opposed, and his motion was denied. On June 16, 1997, Jarcho filed suit in New Jersey state court. A tentative trial date has been set for May 2000. The Company has been defending this matter vigorously. In accordance with the Company's policy on contingencies, a provision has been made in the accompanying consolidated financial statements for estimated legal fees expected to be incurred in defending the matter vigorously. The Company is presently unable to predict the ultimate outcome of this matter or whether it would have a material impact on the results of operations, financial position or cash flows of Biomatrix. The Company has not made any provisions for any liability that might result from the claims made by Jarcho. 13. EMPLOYEE BENEFIT PLAN The Company adopted a defined contribution retirement savings plan effective January 1, 1992. Pursuant to Section 401k of the Internal Revenue Code, if a participant decides to contribute, a portion of the contribution can be matched by the Company. Company contributions are discretionary and plan expenses, which are immaterial, are paid by the Company on behalf of the plan. Presently, the Company does not offer its employees postretirement or postemployment benefits. Therefore, the Company is not impacted by the SFAS No. 106, "Employers' Accounting for Postretirement Benefits other than Pensions" or SFAS No. 112, "Employers' Accounting for Postemployment Benefits." F-18 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 14. CONCENTRATION OF CREDIT RISK AND MARKET RISK Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade receivables. The Company's temporary cash investments consist primarily of cash and money market funds. Concentration of credit risk with respect to trade receivables exists due to the Company's dependence on a few customers. However, the Company has not sustained any losses related to these customers. Because we currently have operations outside the U.S., we are exposed to market risk from changes in foreign exchange rates. To reduce the risk from fluctuations in foreign currencies, we have structured our various distribution agreements in United States dollars. Approximately 2% of 1999 total revenues were generated in foreign currencies. As of December 31, 1999, 9% of our total assets were located outside of the United States, and no single country had a significant concentration of cash. 15. SEGMENT DATA In the fourth quarter of 1998 the Company adopted SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 requires a new basis of determining the reportable business segments using the management reporting approach. Given the importance of revenue growth and product launches, the Company analyzes its revenues by product line and sales destination. The Company does not allocate its assets to the various product lines, but does analyze its assets on a geographic basis. The following data is utilized by the Company's Executive Committee (the chief operating decision makers) when analyzing the performance of the Company.
1999 1998 1997 ---- ---- ---- Product Sales: Synvisc: United States......................... $ 53.7 $ 28.5 $ 4.0 Rest of the World..................... 14.6 5.2 3.6 All Other Products...................... 3.7 4.1 4.1 ----- ----- ------ Total Product Sales..................... $ 72.0 $ 37.8 $ 11.7 ====== ====== ======= Identifiable Assets: United States........................... $ 89.8 $ 73.9 $ 36.1 Rest of the World....................... 9.2 9.4 7.8 ----- ----- ---- Total Assets............................ $ 99.0 $ 83.3 $ 43.9 ====== ====== =======
16. MAJOR CUSTOMER AND LICENSE FEE DATA A significant portion of the Company's products are sold to customers under the terms of multiple-year marketing and distribution agreements. In many cases, a customer has paid license fees to the Company for the exclusive rights in the respective territory. Of the reported product sales for each of the years ended December 31, 1999, 1998 and 1997, one customer accounted for 81% (Customer A 81%), one customer accounted for 78% (Customer A 78%), and three customers accounted for 64% (Customer A 40%, Customer B 14%, and Customer C 10%), respectively. Of the reported income from licenses, royalties, and research contracts for each of the years ended December 31, 1999, 1998 and 1997, one corporate partner accounted for 91% (Partner A 91%), two corporate partners accounted for 93% (Partner A 61% and Partner B 32%), and two corporate partners accounted for 96% (Partner A 82% and Partner C 14%), respectively. F-19 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 17. IMPACT OF THE ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999 (January 1, 2000 for the Company). SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. SFAS 133 is not expected to have an impact on the Company's consolidated results of operations, financial position or cash flows. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, Revenue recognition ("SAB 101"), which was amended on March 24, 2000 to delay the implementation date for registrants with fiscal years that begin between December 16, 1999 and March 15, 2000 until no later than their second fiscal quarter of the fiscal year beginning after December 15, 1999. To the extent the guidance in SAB 101 differs from the generally accepted accounting principles previously utilized by an SEC registrant, SAB 101 indicates that the SEC staff will not object to reporting the cumulative effect of a change in accounting principle. Prior to promulgation of SAB 101, the Company had reported non-refundable up-front and milestone fees received pursuant to distribution agreements in the period earned, which was deemed to be the date this activity was performed or the milestone was achieved. While the Company believes the pricing under these agreements entered into with various marketing partners provides for arms-length pricing of product sales, SAB 101 requires that the Company reviews all of its non-refundable fees to determine if they should be linked to the supply arrangements and reported as additional revenue from product sales made pursuant to those arrangements. The Company is currently in the process of evaluating the impact of SAB 101 on its accounting policy for non-refundable fees received pursuant to distribution agreements with marketing partners. The Company is in the process of reviewing each of its many distribution agreements to assess whether non-refundable, up-front license fees and/or milestone payments should be deferred in accordance with SAB 101. Accordingly, the Company anticipates that a change in its accounting policy will result in a cumulative effect adjustment for a change in accounting principle. The total cumulative effect of the non-cash, after-tax charge is preliminarily estimated to range from $13.0 million to $20.0 million. Such amount would be recorded as deferred revenue and recognized as product revenue in future periods. The Company will continue to assess the impact of SAB 101 and currently intends to implement changes resulting from SAB 101 in the second quarter of 2000. 18. SUBSEQUENT EVENTS - MERGER On March 6, 2000, Genzyme Corporation ("Genzyme"), a Massachusetts corporation, Seagull Merger Corporation, a Massachusetts corporation and wholly-owned subsidiary of Genzyme ("Merger Sub"), and Biomatrix entered into an Agreement and Plan of Merger (the "Merger Agreement") pursuant to which the parties will effect a business combination through a merger of Biomatrix with and into Merger Sub (the "Merger"). In connection with the Merger, Genzyme will form a new division, the Genzyme Biosurgery division, and will create a new series of common stock designated as "GZBX division Common Stock," $0.01 par value per share ("GZBX Stock"), which will be issued to the holders of Biomatrix common stock, $.0001 par value per share ("Biomatrix Common Stock"), in the Merger. The currently proposed terms of the GZBX Stock are set forth as an exhibit to the Merger Agreement. In connection with the Merger, Genzyme's Tissue Repair Division and Surgical Products Division will become part of the Genzyme Biosurgery division and the Genzyme Tissue Repair Common Stock ("GTR Stock") series and Genzyme Surgical Products Common Stock ("GSP Stock") series will be exchanged for GZBX Stock (the "Genzyme Reorganization"). The transaction, which will be accounted for using the purchase method of accounting, is expected to close in the second quarter of 2000. Under the terms of the Merger Agreement, each outstanding share of Biomatrix Common Stock will be converted, at the option of the holder, into either (i) $37.00 in cash or (ii) one share of GZBX Stock (the "Merger Consideration"). Based on the cash election price and the number of shares of Biomatrix Common Stock outstanding, Biomatrix expects that the cash portion of the transaction will be approximately $245 million. Under the Merger Agreement, 28.38% of the shares of Biomatrix Common Stock outstanding at the effective time of the Merger will be exchanged for cash and the remaining 71.62% of the shares of Biomatrix Common Stock outstanding at the time of the Merger will be converted into shares of GZBX Stock at a conversion rate of one share of GZBX Stock for each share of Biomatrix Common Stock. However, the number of shares of GZBX Stock to be issued in the Merger is subject to an upward adjustment if the value of the GZBX Stock to be issued in the Merger on the effective date of the Merger is less than 45% of the total Merger Consideration in order to preserve the status of the Merger as a tax-free reorganization. F-20 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 18. SUBSEQUENT EVENTS - MERGER (CONTINUED) Under the terms of the Merger Agreement, each outstanding share of GSP Stock will convert into 0.6060 shares of GZBX Stock and each share of GTR Stock will convert into 0.3352 shares of GZBX Stock. Based on the number of common shares outstanding for each entity at the signing date, the Genzyme Biosurgery division is expected to have approximately 35.2 million shares outstanding. Consummation of the Merger is subject to the adoption of the Agreement and Plan of Merger by the Biomatrix stockholders, the approval of the issuance of GZBX Stock in the Merger and the necessary amendments of Genzyme's charter by the Genzyme stockholders, including the approval of the exchange of GSP Stock for GZBX Stock by GSP stockholders and the exchange of GTR Stock for GZBX Stock by GTR stockholders, the receipt of regulatory approvals and certain other customary closing conditions. Certain officers of Biomatrix holding an aggregate of approximately 34% of the outstanding shares of Biomatrix Common Stock have agreed to vote their shares of Biomatrix Common Stock in favor of the Merger until the earlier to occur of the completion of the Merger or 5 days after the termination of the Merger Agreement. In addition, as a condition to Genzyme's entering into the Merger Agreement, Biomatrix granted Genzyme an option to acquire up to 4.6 million shares of Biomatrix Common Stock at a price of $30 per share. The option may only be exercised by Genzyme upon the termination of the Merger Agreement resulting from our shareholders' voting against the merger or our entering into an alternative transaction that is recommended by our Board. 19. SUBSEQUENT EVENTS - LITIGATION On July 21, and August 7, 15, and 30, 2000, class action lawsuits requesting unspecified damages were filed in the United States District Court for the District of New Jersey against Biomatrix and two of its officers and directors, Endre A. Balazs and Rory B. Riggs. In these actions, the plaintiffs seek to certify a class of all persons or entities who purchased or otherwise acquired Biomatrix common stock during the period between July 20, 1999 and April 25, 2000. The plaintiffs allege, amongst other things, that the defendants failed to accurately disclose information related to Biomatrix's product Synvisc-Registered Trademark- during the period between July 20, 1999 and April 25, 2000, and assert causes of action under the Securities Exchange Act of 1934 and Rule 10b-5 promulgated under that Act. We disagree with these claims and believe that information related to Synvisc was properly disclosed. Biomatrix intends to defend these actions vigorously. Under the certificate of incorporation of Biomatrix, officers and directors of Biomatrix are entitled to indemnification for such claims from Biomatrix to the full extent permitted by Delaware law. The Company is presently unable to predict the ultimate outcome of these cases or whether they would have a material impact on the results of operations, financial position or cash flows of Biomatrix. We have not made any provisions for any liability that might result from these claims. F-21 EX-99.2 4 a2039916zex-99_2.txt EXHIBIT 99.2 BIOMATRIX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in millions, except share and par value data)
September 30, December 31, 2000 1999 ---- ---- ASSETS Current assets: Cash and cash equivalents ...................................... $ 46.7 $ 35.0 Accounts receivable, less allowance for doubtful accounts ...... 12.6 10.1 Inventory, at lower of cost or market .......................... 8.2 8.5 License fees receivable ........................................ 1.6 -- Prepaid expenses and other current assets ...................... 4.2 3.2 -------- ------- Total current assets .................................... 73.3 56.8 Property, plant and equipment, net ................................ 39.7 41.3 Other assets ...................................................... 0.8 0.9 -------- ------- Total assets ............................................ $ 113.8 $ 99.0 ======== ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ............................................... $ 3.4 $ 1.3 Accrued expenses ............................................... 7.0 8.0 Notes payable - current ........................................ 0.9 0.6 -------- ------- Total current liabilities .............................. 11.3 9.9 Notes payable - long term ......................................... 11.1 11.9 -------- ------- Total liabilities ...................................... 22.4 21.8 -------- ------- Commitments and contingent liabilities Shareholders' equity: Preferred stock, 3,000 shares authorized; none issued .......... -- -- Common stock, $.0001 par value; 60,000,000 shares authorized; 23,695,659 and 23,374,366 issued and 23,603,365 and 23,282,072 outstanding in 2000 and 1999, respectively ........ 0.0 0.0 Additional paid-in capital ..................................... 84.6 82.7 Notes receivable - related parties ............................. (14.7) (14.0) Retained earnings .............................................. 24.3 10.9 Accumulated other comprehensive loss ........................... (1.9) (1.5) Treasury stock, 92,294 shares of common stock at cost .......... (0.9) (0.9) -------- ------- Total shareholders' equity ............................. 91.4 77.2 -------- ------- Total liabilities and shareholders' equity .............. $ 113.8 $ 99.0 ======== =======
3 The accompanying notes are an integral part of the condensed consolidated financial statements. BIOMATRIX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in millions, except share and per share data)
Three Months Ended Nine Months Ended September 30, September 30, ---------------------------- ---------------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Revenues: Net product sales .................................. $ 20.8 $ 18.1 $ 57.3 $ 52.7 Income from licenses, royalties and research contracts ........................... 1.7 0.2 9.1 7.4 ----------- ----------- ----------- ----------- Total revenues ............................ 22.5 18.3 66.4 60.1 ----------- ----------- ----------- ----------- Costs and expenses: Cost of goods sold ................................. 6.1 5.5 17.1 15.6 Research and development expenses .................. 2.3 2.4 7.6 6.6 Selling, general and administrative expenses ....... 6.1 4.8 20.8 13.3 ----------- ----------- ----------- ----------- Total costs and expenses .................. 14.5 12.7 45.5 35.5 ----------- ----------- ----------- ----------- Income from operations ............................. 8.0 5.6 20.9 24.6 Interest expense ................................... (0.2) (0.3) (0.7) (1.2) Interest and miscellaneous income .................. 1.0 0.5 2.3 1.1 ----------- ----------- ----------- ----------- Income before taxes ................................ 8.8 5.8 22.5 24.5 Provision for income taxes ......................... 3.7 2.5 9.2 10.2 ----------- ----------- ----------- ----------- Net income ......................................... $ 5.1 $ 3.3 $ 13.3 $ 14.3 =========== =========== =========== =========== Net income per share: Basic ......................................... $ 0.22 $ 0.14 $ 0.57 $ 0.63 =========== =========== =========== =========== Weighted average shares outstanding ........... 23,522,716 22,977,604 23,401,104 22,901,096 =========== =========== =========== =========== Diluted ....................................... $ 0.21 $ 0.14 $ 0.55 $ 0.59 =========== =========== =========== =========== Weighted average shares outstanding ........... 24,470,059 24,211,895 24,394,914 24,387,890 =========== =========== =========== ===========
4 The accompanying notes are an integral part of the condensed consolidated financial statements. 5 BIOMATRIX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in millions)
Nine Months Ended September 30, -------------------------- 2000 1999 ---- ---- Cash flows from operating activities: Net income ..................................................... $ 13.3 $ 14.3 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................................ 3.0 2.6 Stock option compensation .................................... 0.1 -- Change in assets and liabilities: Accounts receivable .......................................... (2.5) (3.4) Inventory .................................................... .3 (1.4) License fees receivable, prepaid expenses and other current assets .................................... (2.6) 7.0 Other assets ................................................. (0.8) 0.6 Accounts payable and accrued expenses ........................ 1.1 4.2 ------- ------- Net cash provided by operating activities ............. 11.9 23.9 ------- ------- Cash flows from investing activities: Capital expenditures ........................................... (1.2) (8.4) ------- ------- Net cash used for investing activities ................ (1.2) (8.4) ------- ------- Cash flows from financing activities: Payments of notes payable ...................................... (0.5) (5.1) Stock options exercised ........................................ 1.9 0.8 ------- ------- Net cash provided by (used for) financing activities .. 1.4 (4.3) ------- ------- Effect of exchange rate changes on cash ............................. (0.4) 0.0 ------- Net increase in cash and cash equivalents ........................... 11.7 11.2 Cash and cash equivalents at beginning of period .................... 35.0 16.5 ------- ------- Cash and cash equivalents at end of period .......................... $ 46.7 $ 27.7 ======= ======= Non-cash financing activities: Sale of common stock financed with notes receivable ............ $-- $ 2.6
The accompanying notes are an integral 6 part of the condensed consolidated financial statements. 7 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) NOTE 1 - BASIS OF PRESENTATION The condensed consolidated financial statements at September 30, 2000 and December 31, 1999 and for the three and nine months ended September 30, 2000 and 1999 are unaudited, but include all adjustments which the Company considers necessary for a fair presentation of the financial position at such dates and the operating results and cash flows for those periods. These condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 1999, which were included as part of the Company's Form 10-K, as amended and filed with the Securities and Exchange Commission. Results for interim periods are not necessarily indicative of results for the entire year. NOTE 2 - INVENTORIES Inventories at September 30, 2000 and December 31, 1999 consisted of (in millions):
September 30, December 31, 2000 1999 ---- ---- Raw Materials...................... $1.1 $0.6 Work-in-Process.................... 6.0 7.2 Finished Goods..................... 1.1 0.7 ---- ---- $8.2 $8.5 ==== ====
NOTE 3 - NOTES RECEIVABLE - RELATED PARTIES Notes receivable - related parties relates to the acquisition of common stock of the Company at fair market value by certain officers and directors of the Company pursuant to the Company's 1997 Restricted Stock Plan. The notes are with full recourse and are payable with simple interest upon maturity. The balance of the notes, including accrued interest, at September 30, 2000 and December 31, 1999 was $14.7 million and $14.0 million, respectively. The notes mature over a range of dates from May 2007 to September 2009. NOTE 4 - CONVERTIBLE DEBT In May 1998, the Company issued $15.0 million of subordinated convertible debt to a third party. The debt has a five-year term and a coupon rate of 6.9% with interest payable on a semi-annual basis. The debt contains a conversion feature that allows the third party to convert the debt into common shares at $20 per share. In addition, the Company can call the debt at par after three years or after two years if certain conditions are satisfied. During the fourth quarter of 1999, the debt holder converted one-third, or $5.0 million, of the debt into 250,000 shares of common stock. Therefore at December 31, 1999 and September 30, 2000, there was $10.0 million of convertible debt outstanding. 8 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (unaudited) NOTE 5 - COMPREHENSIVE INCOME Components of comprehensive income are net income and all other non-owner changes in equity, such as the change in the cumulative translation adjustment. The following table shows comprehensive income for the three and nine months ended September 30, 2000 and 1999 (in millions):
Three months ended Nine months ended September 30, September 30, 2000 1999 2000 1999 ---- ---- ---- ---- Net income...................................... $ 5.1 $ 3.3 $13.3 $14.3 Change in cumulative translation adjustment..... (0.3) (0.1) (0.4) 0.4 ----- ----- ----- ----- Comprehensive income............................ $ 4.8 $ 3.2 $12.9 $14.7 ===== ===== ===== =====
NOTE 6 - NET INCOME PER COMMON SHARE Basic net income per share is computed by dividing net income by the weighted-average common shares outstanding for the period. Diluted net income per share is reflective of all common stock equivalents. The Company has convertible debt which was convertible into 500,000 and 750,000 shares of common stock at September 30, 2000 and 1999, respectively (see Note 4). This instrument has not been included in diluted earnings per share for all periods presented because its effect would be anti-dilutive. A reconciliation of weighted-average shares outstanding from basic to diluted for the three and nine months ended September 30, 2000 and 1999 is as follows:
Three months ended Nine months ended September 30, September 30, 2000 1999 2000 1999 ---- ---- ---- ---- Weighted-average shares outstanding - Basic .......... 23,522,716 22,977,604 23,401,104 22,901,096 Dilutive effect of stock options...................... 947,343 1,234,291 993,810 1,486,794 ---------- ---------- ---------- ---------- Weighted-average shares outstanding - Diluted......... 24,470,059 24,211,895 24,394,914 24,387,890 ========== ========== ========== ==========
9 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (unaudited) NOTE 7 - SEGMENT DATA The following data is utilized by the Company's Executive Committee (the chief operating decision makers) when analyzing the performance of the Company. Given the importance of revenue growth and product launches, the Company analyzes its revenues by product line and sales destination. The Company does not allocate its assets to the various product lines, but does analyze its assets on a geographic basis. The following table presents the segment data for the three and nine months ended September 30, 2000 and 1999 (in millions):
Three months ended Nine months ended September 30, September 30, 2000 1999 2000 1999 ---- ---- ---- ---- Net product sales: Synvisc(R): United States ............................... $16.7 $13.4 $44.3 $39.3 Rest of the world ........................... 3.2 3.8 10.6 10.8 All other products ............................... 0.9 0.9 2.4 2.6 ----- ----- ----- ----- Total product sales .............................. $20.8 $18.1 $57.3 $52.7 ===== ===== ===== =====
September 30, December 31, 2000 1999 ---- ---- Identifiable assets (in millions): United States................................................. $100.9 $89.8 Rest of the world............................................. 12.9 9.2 ------ ----- Total assets.................................................. $113.8 $99.0 ====== =====
NOTE 8 - LITIGATION In October 1996, Michael Jarcho filed suit against Biomatrix in the United States District Court for the Southern District of California seeking to recover damages and declaratory judgment for our alleged breach of Jarcho's consulting agreement with Biomatrix, dated December 2, 1988. The agreement provides that Biomatrix is to pay royalties to Jarcho for products that result from his consultancy. Jarcho contends that Hylaform(R) resulted from his consultancy and seeks a royalty on the Company's past and future net sales of Hylaform as well as punitive damages and recovery of attorney fees. The royalty Jarcho alleges he is entitled to would have totaled $ 0.5 million through September 30, 2000. The Company disagrees with Jarcho's claims and does not believe that Jarcho is owed any royalties on Hylaform sales. On January 10, 1997, the court dismissed Jarcho's case on the grounds that the agreement requires such disputes to be brought exclusively in New Jersey state court. Jarcho moved for a partial reconsideration of the decision, which the Company opposed, and his motion was denied. On June 16, 1997, Jarcho filed suit in New Jersey state court. A tentative trial date has been set for January 2001. The Company has been defending this matter vigorously. In accordance with the Company's policy on contingencies, a provision has been made in the accompanying consolidated financial statements for estimated legal fees expected to be incurred in defending the matter vigorously. The Company is presently unable to predict the ultimate outcome of this matter or whether it would have a material impact on the results of operations, financial position or cash flows of Biomatrix. The Company has not made any provisions for any liability that might result from the claims made by Jarcho. 10 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8 - LITIGATION (CONTINUED) On July 21, and August 7, 15, and 30, 2000, class action lawsuits requesting unspecified damages were filed in the United States District Court for the District of New Jersey against Biomatrix and two of its officers and directors, Endre A. Balazs and Rory B. Riggs. In these actions, the plaintiffs seek to certify a class of all persons or entities who purchased or otherwise acquired Biomatrix common stock during the period between July 20, 1999 and April 25, 2000. The plaintiffs allege, amongst other things, that the defendants failed to accurately disclose information related to Biomatrix's product Synvisc during the period between July 20, 1999 and April 25, 2000, and assert causes of action under the Securities Exchange Act of 1934 and Rule 10b-5 promulgated under that Act. We disagree with these claims and believe that information related to Synvisc was properly disclosed. Biomatrix intends to defend these actions vigorously. In accordance with the Company's policy on contingencies, a provision has been made in the accompanying consolidated financial statements for estimated legal fees expected to be incurred in defending the matter vigorously. Under the certificate of incorporation of Biomatrix, officers and directors of Biomatrix are entitled to indemnification for such claims from Biomatrix to the full extent permitted by Delaware law. The Company is presently unable to predict the ultimate outcome of these cases or whether they would have a material impact on the results of operations, financial position or cash flows of Biomatrix. We have not made any provisions for any liability that might result from these claims. NOTE 9 - IMPACT OF THE ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS In December 1999, the staff of the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101, Revenue Recognition, which was most recently amended by SAB 101B on June 26, 2000 to delay the implementation date until no later than the fourth fiscal quarter for fiscal years beginning after December 15, 1999. To the extent the guidance in SAB 101 differs from the generally accepted accounting principles previously utilized by an SEC registrant, SAB 101 indicates that the SEC staff will not object to reporting the cumulative effect of a change in accounting principle. In consideration of SAB 101 and the guidance contained therein, we are re-examining all elements and provisions of our contracts, specifically non-refundable license fees and milestones, to determine the impact of SAB 101 on our policy of recording revenue. Based on our most recent analysis and our understanding of the requirements, we have revised our previous estimates and currently anticipate that the implementation of SAB 101 will result in a cumulative effect adjustment for a change in accounting principle. The total cumulative effect of the non-cash, after-tax charge is currently estimated to be approximately $2.2 million. Such amount would be recorded as deferred revenue and recognized as revenue in future periods. We will continue to assess the impact of SAB 101 as additional guidance and interpretations evolve over the remainder of the year. We intend to implement changes resulting from SAB 101 in the fourth quarter of 2000. 11 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10 - PROPOSED MERGER On March 6, 2000, Genzyme Corporation ("Genzyme"), a Massachusetts corporation, Seagull Merger Corporation, a Massachusetts corporation and wholly-owned subsidiary of Genzyme ("Merger Sub"), and Biomatrix entered into an Agreement and Plan of Merger (the "Merger Agreement") pursuant to which the parties will effect a business combination through a merger of Biomatrix with and into Merger Sub (the "Merger"). In connection with the Merger, Genzyme will form a new division, the Genzyme Biosurgery division, and will create a new series of common stock designated as "GZBX division Common Stock," $0.01 par value per share ("GZBX Stock"), which will be issued to the holders of Biomatrix common stock, $.0001 par value per share ("Biomatrix Common Stock"), in the Merger. The currently proposed terms of the GZBX Stock are set forth as an exhibit to the Merger Agreement. In connection with the Merger, Genzyme's Tissue Repair Division and Surgical Products Division will become part of the Genzyme Biosurgery division and the Genzyme Tissue Repair Common Stock ("GTR Stock") series and Genzyme Surgical Products Common Stock ("GSP Stock") series will be exchanged for GZBX Stock (the "Genzyme Reorganization"). The transaction, which will be accounted for using the purchase method of accounting, is expected to close in the fourth quarter of 2000. Under the terms of the Merger Agreement, each outstanding share of Biomatrix Common Stock will be converted, at the option of the holder, into either (i) $37.00 in cash, (ii) one share of GZBX Stock or (iii) a fixed combination of cash and GZBX Stock (the "Merger Consideration"). Under the Merger Agreement, notwithstanding elections made by Biomatrix shareholders, 28.38% of the shares of Biomatrix Common Stock outstanding at the effective time of the Merger will be exchanged for cash and the remaining 71.62% of the shares of Biomatrix Common Stock outstanding at the time of the Merger will be converted into shares of GZBX Stock at a conversion rate of one share of GZBX Stock for each share of Biomatrix Common Stock. Based on the cash election price and the number of shares of Biomatrix Common Stock outstanding, Biomatrix expects that the cash portion of the transaction will be approximately $245 million. However, the number of shares of Biomatrix Common Stock to be converted to cash in the Merger is subject to downward adjustment if there are Biomatrix shareholders exercising their dissenter's rights or if the value of the GZBX Stock to be issued in the Merger on the effective date of the Merger is less than 45% of the total Merger Consideration in order to preserve the status of the Merger as a tax-free reorganization. Under the terms of the Merger Agreement, each outstanding share of GSP Stock will convert into 0.6060 shares of GZBX Stock and each share of GTR Stock will convert into 0.3352 shares of GZBX Stock. Based on the number of common shares outstanding for each entity at the time when the registration statement on Form S-4 was filed by Genzyme Corporation, the Genzyme Biosurgery division is expected to have approximately 35.4 million shares outstanding. Consummation of the Merger is subject to the adoption of the Agreement and Plan of Merger by the Biomatrix stockholders, the approval of the issuance of GZBX Stock in the Merger and the necessary amendments of Genzyme's charter by the Genzyme stockholders, including the approval of the exchange of GSP Stock for GZBX Stock by GSP stockholders and the exchange of GTR Stock for GZBX Stock by GTR stockholders and certain other customary closing conditions. The Biomatrix stockholders' meeting is scheduled for December 7, 2000 and the Genzyme stockholders' meeting is scheduled for December 15, 2000. Certain officers of Biomatrix holding an aggregate of approximately 36.2% of the outstanding shares of Biomatrix Common Stock have agreed to vote their shares of Biomatrix Common Stock in favor of the Merger until the earlier to occur of the completion of the Merger or 5 days after the termination of the Merger Agreement. In addition, as a condition to Genzyme's entering into the Merger Agreement, Biomatrix has granted Genzyme an option to purchase 4.6 million shares of Biomatrix Common Stock at a price of $30 per share. The option may only 12 be exercised by Genzyme upon the termination of the Merger Agreement resulting from our shareholders' voting against the merger or our entering into an alternative transaction that is recommended by our Board. 13 BIOMATRIX, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10- PROPOSED MERGER (CONTINUED) Under the terms of the Merger agreement and prior to the closing of the Merger, Biomatrix expects to modify the stock option awards of one executive and two non-employee directors to immediately accelerate any unvested options upon the closing of the Merger. In addition, the Company expects to modify the option plan to provide that if any employee's employment is terminated within one year following the Merger other than (i) by the Company for cause (as defined in the Biomatrix Separation Pay Plan), (ii) by reason of death or (iii) by the employee without Good Reason (as defined in the Biomatrix Separation Pay Plan), all unvested options will immediately vest and become exercisable as of the date of termination. The Company expects that the aforementioned modifications will be made upon stockholder and board approvals and concurrent with the closing of the Merger which is anticipated to occur in the fourth quarter of fiscal 2000. At the time that the options and option plan are modified, Biomatrix will measure any compensation expense based on the stock price at the date that the modifications are made. The Company will record compensation expense in its financial statements with respect to the immediate acceleration of the options of the executive and non-employee directors at the modification date. The Company will record additional compensation expense for any unvested options that will accelerate at the date on which an employee is terminated. The amount of the compensation expense is based on the stock price at the date of modification and the unvested shares subject to acceleration. 14 -----END PRIVACY-ENHANCED MESSAGE-----