EX-99.2 4 a2049128zex-99_2.txt EXHIBIT 99.2 EXHIBIT 99.2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FOCAL, INC. CONDENSED BALANCE SHEETS
DECEMBER 31, MARCH 31, 2000 2001 ------------------- -------------------- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 3,672,672 $ 5,490,253 Marketable securities 201,318 201,318 Inventories 1,982,020 1,511,104 Accounts receivable and prepaid expenses 814,298 837,730 ------------------- -------------------- Total current assets 6,670,308 8,040,405 Notes receivable from related parties 247,736 173,430 Property, plant & equipment, net 2,118,626 2,020,199 ------------------- -------------------- Total assets $ 9,036,670 $ 10,234,034 =================== ==================== LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 2,939,535 $ 2,186,916 Current portion of deferred revenue 933,877 882,936 Current portion of capital lease obligations 688,828 600,483 ------------------- -------------------- Total current liabilities 4,562,240 3,670,335 Capital lease obligations 650,528 535,388 Deferred revenue 4,000,000 3,800,000 ------------------- -------------------- Total long term liabilities 4,650,528 4,335,388 Stockholders' equity: Common stock 149,357 173,642 Additional paid-in capital 95,366,165 100,343,521 Notes receivable from related parties (447,743) (419,743) Accumulated other comprehensive income 1,319 1,319 Accumulated deficit (95,245,196) (97,870,427) ------------------- -------------------- Total stockholders' equity (176,098) 2,228,311 ------------------- -------------------- Total liabilities and stockholders' equity $ 9,036,670 $ 10,234,034 =================== ==================== SEE ACCOMPANYING NOTES.
1 FOCAL, INC. CONDENSED STATEMENTS OF OPERATIONS (unaudited)
Three months ended March 31, 2000 2000 2001 As previously As reported restated Revenues: Collaborative R&D revenues $ - $ 200,000 $ 249,005 Product revenues 237,366 237,366 612,628 ------------ ------------ ----------- Total revenues 237,366 437,366 861,633 Costs and Expenses: Cost of product revenues 455,792 455,792 771,243 Research & development 3,166,252 3,166,252 1,369,234 Sales, general & administrative 864,067 864,067 1,445,792 ------------ ------------ ----------- Total costs and expenses 4,486,111 4,486,111 3,586,269 Insurance recovery 475,408 475,408 - Interest income (net) 131,498 131,498 99,405 ------------ ------------ ----------- Net loss before cumulative effect of change in accounting principle $ (3,641,839) $ (3,441,839) $(2,625,231) ------------ ------------ ----------- Cumulative effect of change in accounting principle - (5,600,000) - ------------ ------------ ----------- Net loss $ (3,641,839) $ (9,041,839) $(2,625,231) AMOUNTS PER COMMON SHARE: Loss before cumulative effect of change in accounting principle $ (0.26) $ (0.24) $ (0.15) Cumulative effect of change in accounting principle - (0.40) - ------------ ------------ ----------- Basic and diluted net loss per share $ (0.26) $ (0.64) $ (0.15) ============ ============ =========== Shares used in computing net loss per share 14,235,994 14,235,994 17,283,249 ============ ============ ===========
SEE ACCOMPANYING NOTES. 2 FOCAL, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ----------------------------------------------------------- 2000 2000 2001 ----------------------------------------------------------- As previously As restated reported OPERATING ACTIVITIES Net loss $ (3,641,839) $ (9,041,839) $ (2,625,231) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 256,240 256,240 267,068 Amortization of deferred compensation 80,190 80,190 - Cumulative effect of change in accounting principle - 5,400,000 - Non-cash transactions 8,475 8,475 - Interest income accrued on notes receivable from related parties (11,781) (11,781) (518) Increase (decrease) in operating assets and liabilities: Accounts receivable and prepaid expenses (192,168) (192,168) (23,432) Inventories (370,217) (370,217) 470,916 Accounts payable and accrued liabilities (4,876) (4,876) (752,619) Deferred revenue - - (250,941) Other assets (126) (126) - Notes receivable 6,049 6,049 102,823 ------------------------------------------------------------- Net cash used in operating activities (3,870,053) (3,870,053) (2,811,934) INVESTING ACTIVITIES Sale of marketable securities 6,893,568 6,893,568 - Purchase of marketable securities (3,757,999) (3,757,999) - Purchase of property and equipment (87,445) (87,445) (168,641) ------------------------------------------------------------- Net cash provided by (used in) investing activities 3,048,124 3,048,124 (168,641) FINANCING ACTIVITIES Proceeds from equity financing, net of issuance costs - - 5,000,000 Proceeds from exercise of stock options 19,454 19,454 1,641 Proceeds from issuance of common stock under the employee stock purchase plan - - - Principal payments on notes receivable 129,042 129,042 - Proceeds from lease financing 79,086 79,086 - Principal payments on capital lease obligations (284,734) (284,734) (203,485) ------------------------------------------------------------- Net cash provided by (used in) financing activities (57,152) (57,152) 4,798,156 Net increase (decrease) in cash and cash equivalents (879,081) (879,081) 1,817,581 Cash and cash equivalents at beginning of the period 8,746,897 8,746,897 3,672,672 ------------------------------------------------------------- Cash and cash equivalents at end of the period $ 7,867,816 $ 7,867,816 $ 5,490,253 =============================================================
SEE ACCOMPANYING NOTES. 3 FOCAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS MARCH 31, 2001 (UNAUDITED) NOTE 1. BASIS OF PRESENTATION Focal, Inc. develops, manufactures and commercializes synthetic, absorbable, liquid surgical sealants, based on its proprietary polymer technology. The Company's family of surgical sealant products is being developed for use inside the body to seal leaks resulting from lung, neurological, cardiovascular and gastrointestinal surgery. The accompanying unaudited, condensed financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q. Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, the accompanying financial statements include all adjustments, including normal recurring accruals, considered necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. Certain reclassifications have been made to conform to the 2001 presentation. The results of operations for the three months ended March 31, 2001 are not necessarily indicative of the results that may be expected for the entire fiscal year ended December 31, 2001. These financial statements should be reviewed in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K, as amended, for the year ended December 31, 2000. NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS Effective in the fourth quarter of 2000, Focal changed its method of accounting for revenue recognition in accordance with Staff Accounting Bulletin (SAB) No. 101, "REVENUE RECOGNITION IN FINANCIAL STATEMENTS." Previously, Focal had recognized revenue relating to non-refundable, up-front, license and milestone payments and certain research funding payments from its strategic partners in accordance with the contract. Under the new accounting method adopted retroactively to January 1, 2000, Focal now recognizes revenue from non-refundable, up-front, license and milestone payments not specifically tied to a separate earnings process, ratably over the term of the research contract or the distribution arrangement. When payments are specifically tied to a separate earnings process and when considered appropriate, revenue is recognized when earned. In addition, when appropriate, Focal recognized revenue from certain research payments based upon the level of research services performed during the research contract or over the term of the agreement. Payments received in advance of research performed are designated as deferred revenue. The cumulative effect of the change in accounting principle resulted in a charge to income of $5.6 million, which is included in the loss for the year ended December 31, 2000. The amount of revenue to be recognized in future years that is included in the cumulative effect of the change in accounting principle is $800,000 for each of the next six years. In December 2000, the Company recorded a charge of $5.6 million to deferred revenues in connection with the adoption of SAB 101 and contractual arrangements with Ethicon. The Company amortizes these deferred revenues ratably over the life of the arrangement, at a rate of $200,000 per quarter. Effective July 5, 2001, the Company will recognize $4.4 million, the remaining deferred revenue balance, as a result of terminating its contractual relationship with Ethicon. (See Note 8.) 4 In the first quarter of 2001, the Company adopted FAS 133, "Accounting for Derivative Investments and Hedging Activities", which did not have a material impact on the Company's financial position or results of operations. NOTE 3. NET LOSS PER SHARE Basic and diluted net loss per share is computed using the weighted average number of shares of common stock outstanding during the period. The effect of stock options and warrants are excluded in the diluted calculation, as their effect is antidilutive. NOTE 4. REVENUE RECOGNITION FOR PRODUCT SALES Product revenues are recognized only when the contract is signed, the product has been shipped and all obligations have been delivered to the customer, the fee is fixed and determinable, and collection is probable. Product revenues recorded during the three months ended March 31, 2001 are attributable to sales of FocalSeal(R)-L lung sealant, applicator kits and light sources to Genzyme Biosurgery; a division of Genzyme Corporation, and AdvaSeal-L to Ethicon, Inc., a Johnson & Johnson Company. North American sales to Genzyme Biosurgery represented 77% of total product revenues, while international sales to Ethicon represented 23% of total product revenues. NOTE 5. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market using estimated standard costs. At December 31, 2000 and March 31, 2001, inventories consisted of the following:
December 31, March 31, 2000 2001 --------------------------------------- Purchased parts and subassemblies $ 1,443,572 $ 1,188,472 Work in process 321,006 208,688 Finished goods 217,442 113,944 --------------------------------------- $ 1,982,020 $ 1,511,104 =======================================
NOTE 6. COMPREHENSIVE LOSS The components of comprehensive loss for the three months ended March 31, 2000 and 2001 are as follows:
Three months ended March 31, 2000 2000 2001 --------------------------------------------------- As reported As restated Net loss $ (3,641,839) $ (9,041,839) $ (2,625,231) Other comprehensive income: Change in unrealized gain on marketable securities 338 338 -- --------------------------------------------------- Comprehensive loss $ (3,641,501) $ (9,041,501) $ (2,625,231) ===================================================
5 NOTE 7. EQUITY FINANCING On January 3, 2001, the Company issued and sold to Genzyme 2,427,184 shares of common stock, $0.01 par value per share, at a purchase price of $2.06 per share for aggregate gross proceeds of $5.0 million. The shares were sold to Genzyme pursuant to the terms of the Stock Purchase Agreement (the "Stock Purchase Agreement"), executed by the parties in October 1999 in connection with a Distribution and Marketing Collaboration Agreement (the "Distribution Agreement") also entered into by the parties in October 1999 relating to North American distribution of certain Focal products. See Note 8 for a discussion of certain modifications to the Stock Purchase Agreement. NOTE 8. SUBSEQUENT EVENTS On April 5, 2001, the Company notified Ethicon that it was terminating the Distribution, License and Supply Agreement with Ethicon (the "Ethicon Agreement"), such termination to be effective ninety days after such notice (July 5, 2001). Under the terms of the Ethicon Agreement, the Company had the right to terminate the Ethicon Agreement on 90 days' prior written notice if Ethicon failed to meet the applicable purchase minimums set forth in the agreement on or before April 5, 2001, either by purchasing products or by making a payment to the Company. Because Ethicon failed to do so, the Company exercised its rights to terminate the agreement. On April 25, 2001, the Company entered into a definitive Agreement and Plan of Merger (the "Merger Agreement") by and among the Company, Genzyme Corporation, and Sammy Merger Corp., a Delaware corporation and a wholly-owned subsidiary of Genzyme (the "Merger Sub"), pursuant to which the Company agreed to be acquired by Genzyme. Subject to the terms and conditions of the Merger Agreement, Merger Sub will merge with and into the Company (the "Merger"), with the Company to survive the Merger as a wholly-owned subsidiary of Genzyme, and each outstanding share of the Company's Common Stock will be converted into the right to receive 0.1545 shares (the "Exchange Ratio") of Genzyme Biosurgery Division Common Stock, $0.01 par value, a series of Genzyme's common stock designed to reflect the value and track the performance of its Genzyme Biosurgery Division. In addition, each outstanding option and warrant to purchase the Company's Common Stock will be converted into an option or warrant to purchase the number of shares of Genzyme Biosurgery Division Common Stock equal to the number of shares of the Company's Common Stock subject to such option or warrant multiplied by the Exchange Ratio, and the associated exercise price will be adjusted accordingly. Genzyme currently owns approximately 22.2% of the Company's Common Stock. The Merger is expected to close in the second or third quarter of 2001, and is subject to approval by the Company's stockholders and satisfaction of customary closing conditions. The Merger is structured as a taxable transaction and is expected to be accounted for as a purchase. 6 In a separate letter agreement (the "Letter Agreement"), dated April 25, 2001, Genzyme and the Company also agreed to certain additional terms related to the Merger. These terms include modifications to the Company's option to issue up to $5 million of shares of the Company's Common Stock to Genzyme under their existing Stock Purchase Agreement. As modified, the per share purchase price for the option would be fixed at $0.70 per share or, if the Company's Common Stock ceases to be listed on the Nasdaq National Market prior to the purchase date, $0.40 per share. However, if the Merger Agreement is terminated prior to June 15, 2001, the purchase price will be the average closing price of the Company's Common Stock (or, if not then listed, the fair market value as determined in good faith by the Board of Directors) for the five consecutive trading days immediately preceding the purchase date. Under the revised terms, the Company can exercise the option between June 15, 2001 and July 12, 2001. If the Company exercises this option and the applicable conditions to closing are met, the sale of the shares of the Company's Common Stock to Genzyme would occur in four installments on each of July 16, 2001, July 31, 2001, August 15, 2001 and August 31, 2001. Genzyme has also agreed to waive specified conditions to its obligation to purchase shares of the Company's Common Stock upon exercise of the option, including a requirement that the Company's shares of Common Stock be listed on the Nasdaq National Market (the "NNM"). The Nasdaq Stock Market ("Nasdaq") has informed the Company that, based upon the Company's Annual Report on Form 10-K, Nasdaq has determined that the Registrant no longer meets the net tangible asset requirement for continued listing on the NNM and that, therefore, Nasdaq is reviewing the Company's eligibility for continued listing on the NNM. The Company has submitted a plan for achieving compliance. Nasdaq has also informed the Company that the Company failed to meet the minimum bid requirement of $1.00 for 30 consecutive trading days. Nasdaq has indicated that the Company will be provided until July 18, 2001, to demonstrate compliance by trading at or above $1.00 for ten consecutive trading days. If the Company is unable to achieve compliance with the minimum bid price on or before July 18, 2001, Nasdaq has indicated that it will deliver written notification of its determination to delist the Company's Common Stock from the NNM. As a result of the foregoing, there can be no assurance that the Company's Common Stock will not be delisted from the NNM. 7