1
Exhibit 99.1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors...................................... 2
Consolidated Balance Sheets as of December 31, 1999 and 1998........ 3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997................................. 4
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997..................... 5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997................................. 6
Notes to Consolidated Financial Statements.......................... 7
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REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
GelTex Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of GelTex
Pharmaceuticals, Inc. as of December 31, 1999 and 1998, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The financial statements of RenaGel LLC (a limited liability company
in which the Company has a 50% interest), as of December 31, 1999 and 1998, and
for the years then ended, have been audited by other auditors whose report has
been furnished to us; insofar as our opinion on the consolidated financial
statements relates to data included for RenaGel LLC, as of, and for the years
ended, December 31, 1999 and 1998, it is based solely on their report.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of GelTex
Pharmaceuticals, Inc. at December 31, 1999 and 1998, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
Ernst & Young LLP
Boston, Massachusetts
February 22, 2000
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GELTEX PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------------
1999 1998
--------------- -------------
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 20,178,391 $ 30,874,900
Marketable securities........................................... 52,250,534 74,077,436
Prepaid expenses and other current assets....................... 1,763,400 2,708,487
Due from affiliates............................................. 411,250 10,251,100
Due from Joint Venture.......................................... 664,741 1,128,124
--------------- -------------
Total current assets................................................. 75,268,316 119,040,047
Long-term receivables, affiliates.................................... 371,750 470,000
Long-term receivables................................................ -- 32,725
Property and equipment, net.......................................... 11,117,725 7,899,470
Purchased goodwill, net.............................................. 6,753,729 --
Intangible assets, net............................................... 1,282,490 818,963
Investment in Joint Venture.......................................... 11,295,056 5,183,580
--------------- ---------------
$ 106,089,066 $ 133,444,785
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses........................... $ 5,175,756 $ 4,848,728
Due to Joint Venture............................................ -- 1,349,400
Current portion of long-term obligations........................ 1,646,296 2,020,614
--------------- ---------------
Total current liabilities............................................ 6,822,052 8,218,742
Other, long-term liabilities......................................... 5,390 --
Long-term obligations, less current portion.......................... 6,559,884 5,206,180
Commitments and contingencies........................................ -- --
Stockholders' equity:
Preferred Stock, $.01 par value, 5,000,000
shares authorized, none issued or outstanding............... -- --
Common Stock, $.01 par value, 50,000,000 shares authorized;
18,063,122 and 16,792,444 shares issued and outstanding at
December 31, 1999 and 1998, respectively.................... 180,631 167,924
Additional paid-in capital...................................... 202,210,089 186,762,715
Deferred compensation........................................... (483,019) (663,722)
Accumulated other comprehensive income.......................... (245,099) 264,388
Accumulated deficit............................................. (108,960,862) (66,511,442)
--------------- ---------------
Total stockholders' equity........................................... 92,701,740 120,019,863
--------------- ---------------
$ 106,089,066 $ 133,444,785
=============== ===============
The accompanying notes are an integral part of the consolidated financial
statements
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GELTEX PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997
--------------- --------------- ----------
REVENUE:
License fee and research revenue............... $ 10,667,708 $ 25,000,000 $ 1,000,010
Collaborative Joint Venture project
Reimbursement................................. 5,781,169 7,658,232 9,195,727
Research grant................................. -- -- 289,254
-------------- -------------- --------------
Total revenue....................................... 16,448,877 32,658,232 10,484,991
COSTS AND EXPENSES:
Research and development....................... 32,601,593 27,904,064 22,251,062
Collaborative Joint Venture project costs...... 5,781,169 7,658,232 9,195,727
-------------- -------------- --------------
Total research and development............ 38,382,762 35,562,296 31,446,789
General and administrative..................... 6,934,674 5,583,361 4,089,467
Acquired in-process research and development... 9,530,000 -- --
-------------- -------------- --------------
Total costs and expenses............................ 54,847,436 41,145,657 35,536,256
-------------- -------------- --------------
Loss from operations................................ (38,398,559) (8,487,425) (25,051,265)
Equity in loss of Joint Venture..................... (7,937,041) (7,535,630) (2,310,345)
Interest income..................................... 4,371,831 5,069,250 3,094,874
Interest expense.................................... (485,651) (613,513) (217,142)
-------------- -------------- --------------
Net loss............................................ $ (42,449,420) $ (11,567,318) $ (24,483,878)
============== ============== ==============
Net loss per common share and common share
assuming dilution.................................. $ (2.50) $ (0.72) $ (1.80)
============== ============== ==============
Shares used in computing net loss per common share
and common share assuming dilution................. 17,003,000 16,023,000 13,592,000
The accompanying notes are an integral part of the consolidated financial
statements.
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GELTEX PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
ACCUMULATED
ADDITIONAL OTHER TOTAL STOCK-
COMMON STOCK PAID-IN- DEFERRED ACCUMULATED COMPREHENSIVE HOLDERS'
SHARES AMOUNTS CAPITAL COMPENSATION DEFICIT INCOME EQUITY
------ ------- ---------- ------------ ----------- ------------- -----------
Balance at January 1, 1997..................... 13,521,302 $135,213 $105,407,670 $ (46,129) $ (30,460,246) $ 19,967 $ 75,056,475
Comprehensive income:
Net loss..................................... (24,483,878) (24,483,878)
Other comprehensive income, unrealized 57,435 57,435
gain on available for sale securities........ ------------
Comprehensive income........................... (24,426,443)
Issuance of common stock under stock option
plan and exercise of warrants ............... 16,758 168 89,265 89,433
Issuance of stock to Joint Venture partner..... 100,000 1,000 2,495,678 2,496,678
Issuance of stock under employee stock
Purchase plan................................ 4,204 42 71,426 71,468
Deferred compensation associated with stock
Option grants................................ 594,200 (594,200) --
Amortization of deferred compensation.......... -- -- -- 130,697 -- -- 130,697
---------- -------- ------------ ---------- ------------- --------- ------------
Balance at December 31, 1997................... 13,642,264 136,423 108,658,239 (509,632) (54,944,124) 77,402 53,418,308
Comprehensive income:
Net loss..................................... (11,567,318) (11,567,318)
Other comprehensive income, unrealized 186,986 186,986
gain on available for sale securities........ ------------
Comprehensive income........................... (11,380,332)
Issuance of common stock under stock
Option plan and exercise of warrants......... 130,549 1,305 1,033,150 1,034,455
Issuance of common stock under employee
stock purchase plan.......................... 19,631 196 317,527 317,723
Deferred compensation associated with stock
Option grants................................ 1,024,190 (1,024,190) --
Amortization of deferred compensation 870,100 870,100
Issuance of common stock through a follow-
on Public Offering, net of offering costs of
$5,240,391................................... 3,000,000 30,000 75,729,609 -- -- -- 75,759,609
---------- -------- ------------ ---------- ------------- --------- ------------
Balance of December 31, 1998................... 16,792,444 $167,924 $186,762,715 $ (663,722) $ (66,511,442) $ 264,388 $120,019,863
Comprehensive income:
Net loss (42,449,420) (42,449,420)
Other comprehensive loss, unrealized
loss on available for sales securities..... (509,487) (509,487)
------------
Comprehensive income (42,958,907)
Issuance of common stock under stock option
plan and exercise of warrants................ 76,737 767 107,116 107,883
Issuance of common stock under employee
stock purchase plan.......................... 18,745 187 245,787 245,974
Deferred compensation associated with stock
option grants................................ 377,035 (377,035) --
Amortization of deferred compensation.......... 557,738 557,738
Issuance of common stock for acquisition....... 1,175,196 11,752 14,717,436 -- -- -- 14,729,188
---------- -------- ------------ ---------- ------------- --------- ------------
Balance at December 31, 1999................... 18,063,122 $180,631 $202,210,089 $ (483,019) $(108,960,862) $(245,099) $ 92,701,740
========== ======== ============ ========== ============= ========= ============
The accompanying notes are an integral part of the consolidated financial
statements.
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GELTEX PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997
------------- ------------- ------------
OPERATING ACTIVITIES
Net loss....................................................... $ (42,449,420) $ (11,567,318) $(24,483,878)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization .............................. 2,124,833 1,536,564 1,193,394
Equity in net loss of Joint Venture ........................ 7,937,041 7,535,630 2,310,345
Acquired in-process research and development ............... 9,530,000 -- --
Compensation from issuance of stock options ................ 557,738 870,100 130,697
Changes in operating assets and liabilities:
Prepaid expenses and other current assets ........... 945,088 (1,279,694) 495,085
Due from affiliates ................................. 9,839,850 (10,251,100) --
Due from Joint Venture .............................. 463,383 695,753 (1,823,877)
Long term receivables, affiliates ................... 98,250 (470,000) --
Long term receivables ............................... 32,725 (5,725) (7,000)
Accounts payable and accrued expenses ............... (616,333) 20,976 2,331,883
Amount due to Joint Venture ......................... (1,349,400) 1,349,400 --
------------- ------------- ------------
Net cash used in operating activities ......................... (12,886,245) (11,565,414) (19,853,351)
INVESTING ACTIVITIES
Purchase of marketable securities ............................. (106,049,917) (212,710,698) (26,388,812)
Proceeds from sale and maturities of marketable securities .... 126,633,355 165,624,065 53,135,619
Investment in Joint Venture ................................... (14,048,517) (9,630,014) (5,399,541)
Purchase of intangible assets ................................. (797,382) (592,790) (259,904)
Purchase of property and equipment ............................ (4,886,436) (1,536,206) (6,228,763)
------------- ------------- ------------
Net cash provided by (used in) investing activities ........... 851,103 (58,845,643) 14,858,599
FINANCING ACTIVITIES
Sale of Common Stock and warrants, net of issuance costs ...... 107,883 76,794,069 2,586,111
Proceeds from employee stock purchase plan .................... 245,974 317,723 71,468
Proceeds from financing of assets ............................. 3,000,000 -- 8,782,495
Payments on notes payable ..................................... (2,015,224) (1,644,925) (426,900)
------------- ------------- ------------
Net cash provided by financing activities ..................... 1,338,633 75,466,867 11,013,174
Increase (decrease) in cash and cash equivalents .............. (10,696,509) 4,185,710 5,887,725
Cash and cash equivalents at beginning of year ................ 30,874,900 26,689,190 20,801,465
------------- ------------- ------------
Cash and cash equivalents at end of year ...................... $ 20,178,391 $ 30,874,900 $ 26,689,190
============= ============= ============
Supplemental disclosures of cash flow information:
Acquisition of SunPharm Corporation ......................
Interest paid ............................................ $ 485,651 $ 613,513 $ 217,142
The accompanying notes are an integral part of the consolidated financial
statements.
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GELTEX PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. BUSINESS
GelTex Pharmaceuticals, Inc. has historically focused its efforts on the
development of non-absorbed, polymer-based pharmaceuticals that selectively bind
to and eliminate target substances from the intestinal tract. With its
acquisition of SunPharm Corporation in November 1999, the Company acquired
expertise in two chemically related classes of molecules, polyamines and iron
chelators. In October 1998 and February 2000, the Company received approval from
the United States Food and Drug Administration, or the FDA, and the European
Commission, respectively, for its lead product Renagel Capsules (sevelamer
hydrochloride), and in July 1999, the Company filed a New Drug Application, or
NDA, with the FDA seeking approval for its second compound, Cholestagel
(colesevelam hydrochloride). Throughout 1999, GelTex continued its product
development efforts focused on therapeutic agents for the treatment of obesity
and infectious diseases.
2. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The accompanying financial statements include the accounts of GelTex
Pharmaceuticals, Inc. and its wholly-owned subsidiaries ("the Company"). All
significant intercompany balances and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. The more significant areas requiring the use of management
estimates relate to future cash flows associated with assets and useful lives
for depreciation and amortization. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an initial
maturity of three months or less and money market funds to be cash equivalents.
These cash equivalents are classified as "available-for-sale" and are carried at
fair value, with unrealized gains and losses reported in Accumulated Other
Comprehensive Income.
MARKETABLE SECURITIES
Marketable securities consist of U.S. government obligations and high-grade
commercial instruments maturing within one to two years and are classified as
available-for-sale. The Company considers these investments, which represent
funds available for current operations, as an integral part of their cash
management activities. Realized gains and losses and declines in value which are
judged to be other than temporary on available-for-sale securities are included
in investment income. The cost of securities sold is based on the specific
identification method. Interest and dividends and amortization of premiums and
accretion of discounts on available-for-sale securities are included in interest
income. The Company purchases only high grade securities, typically with short
maturities. Management determines the appropriate classification of
debt securities at the time of purchase and reevaluates such designation on an
ongoing basis.
As of December 31, 1999, the Company pledged $3.0 million of marketable
securities as collateral to secure $3.2 million of financing for the purchase of
a building and land adjacent to the Company's headquarters.
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2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Expenditures for
additions, major renewals and betterments are capitalized and expenditures for
maintenance and repairs are charged to income as incurred. Interest is
capitalized as part of the acquisition cost of major construction projects.
Depreciation is completed by the straight-line method over estimated useful
lives which are generally as follows:
Buildings............................ 30 years
Leasehold improvements............... Life of building lease
Furniture, fixtures and equipment.... 5 years
The Company reviews the value of its property, plant and equipment whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable.
INTANGIBLE ASSETS
Intangible assets represent the excess of cost of acquired businesses over
the fair value of identifiable net assets and the cost of technology and
patents. Intangible assets are amortized on a straight-line basis over periods
of five to seven years. The Company reviews the value of its goodwill and other
intangible assets whenever events or changes in circumstances indicate that the
carrying value may not be fully recoverable.
STOCK BASED COMPENSATION
The Company accounts for stock based compensation plans in accordance with
the provisions of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB No. 25). Accordingly, deferred compensation is
recorded to the extent that the current market price of the underlying stock
exceeds the exercise price on the date of grant. Such deferred compensation is
amortized over the respective vesting periods of such option grants. The Company
adopted the disclosure requirements of Financial Accounting Standards Board
Statement No. 123, "Accounting for Stock Based Compensation" (SFAS No. 123), and
provides pro forma net loss and pro forma loss per share note disclosures for
employee stock option grants made after 1994 as if the fair-value based method
defined in SFAS No. 123 had been applied. Transactions with non-employees, in
which goods or services are the consideration received for the issuance of
equity instruments, are accounted for using the fair market value method defined
in SFAS No. 123 (see Note 10).
FINANCIAL INSTRUMENTS
The Company utilizes foreign exchange forward contracts as hedges against
exposure to fluctuations in exchange rates associated with certain commitments
denominated in foreign currencies (see Note 15). Gains and losses are deferred
and recognized as adjustments of carrying amounts when the hedged transaction
occurs. As of December 31, 1999, the Company had $7.6 million of foreign
exchange contracts outstanding. Deferred gains or losses at December 31, 1999
are not material as the contracts' fair market value approximates its notional
value.
In order to mitigate the impact of fluctuations in U.S. interest rates, the
Company has entered into interest rate swaps on an outstanding long-term
obligation (see Note 12) and on an outstanding long-term commitment (see Note
15). Net interest payable or receivable is determined on a quarterly basis and
is insignificant at December 31, 1999.
The Company does not hold or issue derivative financial instruments for
trading purposes.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents, short-term
instruments and financial instruments used in hedging activities.
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2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK (CONTINUED)
The Company places its temporary cash investments with high credit quality
financial institutions and in high quality commercial paper and, by policy,
limits the amount of credit exposure with any one financial institution. The
counterparty to the agreements relating to the Company's foreign exchange
commitments is a high credit quality financial institution. The Company does not
believe that there is a significant risk of nonperformance by this counterparty.
EARNINGS PER COMMON AND POTENTIAL COMMON SHARE
The Company accounts for earnings per share in accordance with the
provisions of the Financial Accounting Standards Board Statement No. 128,
"Earnings Per Share." Basic earnings per share excludes any dilutive effect of
options, warrants or convertible securities. Due to its loss position, diluted
earnings per share is the same amount as basic earnings per share.
REVENUE RECOGNITION
The Company recognizes grant revenue and collaborative Joint Venture
revenue as reimbursable expenses are incurred and license fee revenue when
performance obligations, if any, are satisfied.
RECLASSIFICATION
Certain amounts from the prior years have been reclassified to conform to
current year presentation.
ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information." The Statement establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and interim financial reports. The Statement also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. Under this Statement, the Company's
operations are treated as one operating segment. The adoption of the Statement
did not affect the Company's results of operations or its financial position.
In June 1999, the Financial Accounting Standards Board issued Statement No.
137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of
the Effective Date of FASB Statement No. 133--an amendment of FASB Statement
133" which is required to be adopted by the Company in fiscal year 2001. The
Statement provides a comprehensive and consistent standard for the recognition
and measurement of derivatives and hedging activities in which the Company
engages. Management of the Company anticipates that, due to its limited use of
derivative instruments, the adoption of this Statement will not have a
significant effect on the Company's results of operations or its financial
position.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements"
("SAB 101") which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. SAB 101 is effective the
first fiscal quarter of fiscal years beginning after December 15, 1999 and
requires companies to report any changes in revenue recognition as a cumulative
change in accounting principle at the time of implementation in accordance with
APB Opinion No. 20, "Accounting Changes." The Company has concluded that SAB 101
will not have a material impact on the financial position or results of
operations of the Company.
3. ACQUISITION
In November 1999, the Company completed the purchase of SunPharm
Corporation, a life sciences firm that developed proprietary pharmaceuticals
based on polyamine and iron chelator technologies. The total purchase price,
including transaction costs and liabilities assumed, was $16.4 million. The
acquisition was accounted for under the purchase accounting method and resulted
in the recording of approximately $6.9 million of purchased goodwill and a
one-time charge of $9.5 million for in-process research and development. The
Company is amortizing the purchased goodwill on a straight-line basis over a
seven year life. The Company financed the acquisition through the issuance of
approximately 1.2 million of its Common Shares. The value of the Common Stock
issued in connection with the acquisition was calculated using a fair value of
$12.31 per share. This per share fair value represents the average closing
price of the Company's Common Stock on the date the acquisition was completed.
Common Stock issuable upon exercise of SunPharm Corporation options and warrants
was assigned a fair value using the Black-Scholes method. The consolidated
financial statements include SunPharm Corporation's operating results from the
date of acquisition.
Acquired in-process research and development for the merger was evaluated
utilizing the present value of the estimated after-tax cash flows expected to be
generated by the purchased technology, which, at the effective time of the
merger, had not reached technological feasibility. The cash flow projections for
revenues are based on estimates of growth rates and the aggregate size of the
respective market for each product; probability of technical success given the
stage of development at the time of acquisition; royalty rates based on prior
licensing agreements; product's sales cycles; and the estimated life of a
product's underlying technology. Estimated operating expenses and income taxes
are deducted from revenue projections to arrive at estimated after-tax cash
flows. Projected operating expenses include general and administrative expenses
and research and development costs. The rates utilized to discount projected
cash flows range from 40% to 50%, depending upon the relative risk of the
project and the weighted average cost of capital for GelTex at the time of the
merger.
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3. ACQUISITION (CONTINUED)
The acquired in-process research and development of approximately $9.5
million represents the value determined by the Company's management to be
attributable to the acquired in-process research and development assets
associated with the technology acquired in the SunPharm acquisition. Of this
amount, approximately $8.7 million is related to the DENSPM for solid tumor
cancer project and approximately $0.8 million is related to the DEHOP for
AIDS-related diarrhea project. The values associated with these programs
represent GelTex's management ascribed values, based on the discounted cash
flows currently expected from the technologies acquired. If these projects are
not successfully developed, the business, operating results, and financial
condition of GelTex may be adversely affected.
As of the date the merger agreement was signed, GelTex concluded that once
completed, the technologies under development can only be economically used for
their specific and intended purposes and that the acquired in-process research
and development technology has no alternative future uses after taking into
consideration the overall objectives of the projects, progress toward the
objectives, and uniqueness of developments to these objectives.
The major risks associated with the timely completion and commercialization
of these products is the ability to confirm the safety and efficacy of the
technology based on the data of long-term clinical trials. If these projects
are not successfully developed, future results of operations of the Company may
be adversely affected. Additionally, the value of the other intangible assets
acquired may become impaired.
The Company believes that the assumptions used to value the acquired
intangibles were reasonable at the time of the acquisition. No assurance can be
given, however, that the underlying assumptions used to estimate expected
project revenues, development costs, or profitability, or the events associated
with such projects, will transpire as estimated. For these reasons, among
others, actual results may vary from the projected results.
The following unaudited pro forma information presents the results of
operations of the Company as if the acquisition had taken place on January 1,
1998, and excludes the write-off of in-process research and development of $9.5
million:
(IN THOUSANDS, EXCEPT YEAR-ENDED YEAR-ENDED
PER SHARE AMOUNTS) DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
Revenue $ 17,074 $ 32,889
Net loss $ (37,958) $ (16,317)
Net loss per share $ (2.09) $ (0.95)
These pro forma results of operations have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the acquisition occurred on the date
indicated, or which may result in the future.
4. JOINT VENTURE AGREEMENT
Formation of the Joint Venture
In June 1997, the Company entered into a joint venture with Genzyme
Corporation for the final development and commercialization of Renagel(R)
Capsules (the "Joint Venture"). Under the agreement, Genzyme paid the Company a
$15.0 million non-refundable payment in 1998 upon receipt of marketing approval
from the FDA, and made an additional $10.0 million non-refundable payment one
year after FDA approval in October 1999. The terms of the Joint Venture require
the Company and Genzyme to each make capital contributions to the Joint Venture
in an amount equal to 50% of all costs and expenses associated with the
development and commercialization of Renagel, including costs and expenses
incurred by either party in performing under the agreement, and the Company and
Genzyme will share equally in the profits generated from sales of the product.
Capital Contributions to the Joint Venture
Under the terms of the joint venture agreement, GelTex and Genzyme each
make equal capital contributions to the Joint Venture which are accounted for by
the parties as investments in the Joint Venture. The amount of the periodic
capital contributions are based upon the costs incurred for product development
and commercialization ("Project Costs") which are approved by both parties. To
the extent that either party fails to make all or any portion of a required
periodic capital contribution to the Joint Venture and the other party does not
exercise its right to terminate the agreement, each party's percentage ownership
interest in the Joint Venture will be immediately adjusted to correspond to the
cumulative amount of capital contributions made by each party as of such date.
Thereafter, each party's monthly capital contribution will be made in proportion
to each party's adjusted percentage ownership interest in the Joint Venture. At
December 31, 1999, each party had contributed approximately $29.1 million to the
Joint Venture through periodic contributions, representing each party's 50%
share of a total of approximately $58.2 million in periodic capital
contributions to the Joint Venture. As of December 31, 1998, $1,349,400 was
owed to the Joint Venture by the Company. The Company recorded this amount as a
current liability. The Joint Venture recorded this amount as a contra equity
account. This amount was subsequently paid in January 1999.
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4. JOINT VENTURE AGREEMENT (CONTINUED)
Reimbursement of Project Costs
The Company and Genzyme have agreed to undertake product development and
commercialization activities on behalf of the Joint Venture. Project Costs
include certain costs associated with the design and development of the product
manufacturing process, receipt of regulatory approval, product distribution and
marketing and selling the product, and such other costs necessary to manufacture
and sell the product commercially. The Project Costs incurred by GelTex and
Genzyme under the development and commercialization plans, either as internal
operating costs or as third party obligations, are fully reimbursed to the
parties by the Joint Venture, without regard to the percentage ownership
interest of the parties. In the accompanying statement of operations,
Collaborative Joint Venture project reimbursement represents project costs
incurred by the Company and billed to the Joint Venture. In the accompanying
balance sheet, Due from Joint Venture represents Project Costs billed to the
Joint Venture but not yet reimbursed.
Accounting for the Joint Venture
The Company accounts for its investment in the Joint Venture using the
equity method of accounting. Accordingly, the Company recognizes its 50%
ownership interest in the net income or net loss of the Joint Venture in the
accompanying statement of operations as Equity in loss of Joint Venture.
Termination of the Joint Venture
The Joint Venture can be terminated for certain material breaches which
remain uncured after a stated period of time has lapsed; upon the bankruptcy or
change of control of either party; or for any reason with one year prior written
notice at any time after receipt of FDA approval to market Renagel which
occurred in October 1998. Depending upon the reason for termination, each party
has certain rights to purchase the other's interest in the Joint Venture and
proceed with the development and commercialization of Renagel on its own.
Summarized financial information regarding the Joint Venture as of, and for
year ended, December 31, 1999 is as follows:
Revenues....................................... $ 19,543,000
Other income................................... 1,557,000
Cost of products sold.......................... 7,362,000
Selling, general and administrative expenses... 18,624,000
Research and development expenses.............. 11,154,000
Interest income................................ 166,000
-------------
Net loss....................................... $ (15,874,000)
Current assets................................. $ 22,720,000
Non-current assets............................. $ 7,965,000
Current liabilities............................ $ 8,093,000
Non-current liabilities........................ $ -
Summarized financial information regarding the Joint Venture as of, and for
the year ended, December 31, 1998 is as follows:
Revenues....................................... $ 266,000
Cost of products sold.......................... 113,000
Selling, general and administrative expenses... 6,493,000
Research and development expenses.............. 8,778,000
Interest income................................ 22,000
-------------
Net loss....................................... $ (15,096,000)
Current assets................................. $ 9,930,000
Non-current assets............................. $ 7,209,000
Current liabilities............................ $ 8,147,000
Non-current liabilities........................ $ -
Summarized financial information regarding the Joint Venture as of, and for the
period June 6, 1997 (date of inception) through December 31, 1997 is as follows:
Selling, general and administrative expenses... $ 35,000
Research and development expenses.............. 4,588,000
Interest income................................ 3,000
------------
Net loss....................................... $ (4,620,000)
11
12
5. AVAILABLE-FOR-SALE SECURITIES
The following is a summary of available-for-sale securities:
DECEMBER 31, 1999:
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS GAINS FAIR VALUE
------------ -------------- -------------- -------------
U.S. Corporate Securities..... $ 33,744,199 $ 1,733 $ (79,347) $ 33,666,585
U.S. Government Obligations... 16,252,291 -- (168,342) 16,083,949
Money Market Accounts......... 18,574,249 857 -- 18,575,106
------------ -------------- -------------- -------------
Total......................... $ 68,570,739 $ 2,590 $ (247,689) $ 68,325,640
============ ============== =============== =============
DECEMBER 31, 1998:
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS GAINS FAIR VALUE
------------ -------------- -------------- -------------
U.S. Corporate Securities..... $ 70,372,614 $ 238,388 $ (13,923) $ 70,597,079
U.S. Government Obligations... 16,967,112 39,922 -- 17,007,034
Money Market Accounts......... 12,417,649 -- -- 12,417,649
------------ --------------- -------------- ------------
Total......................... $ 99,757,375 $ 278,310 $ (13,923) $ 100,021,762
============ =============== =============== =============
The fair value of available-for-sale securities is determined using the
published closing prices of these securities as of December 31, 1999 and 1998.
These securities are classified at their estimated fair value in the
accompanying balance sheet as follows:
DECEMBER 31,
-----------------------------
1999 1998
------------ --------------
Cash equivalents........... $ 16,075,106 $ 25,944,326
Marketable securities...... 52,250,534 74,077,436
------------ -------------
$ 68,325,640 $ 100,021,762
============ =============
The cost and estimated fair value of available-for-sale debt securities,
which excludes money market accounts, at December 31, 1999, by contractual
maturity, are shown below.
ESTIMATED
COST FAIR VALUE
------------ ------------
Due in one year or less.................. $ 37,745,724 $ 37,665,756
Due after one year through two years..... 12,250,766 12,084,778
------------ ------------
$ 49,996,490 $ 49,750,534
============ ============
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at December
31:
1999 1998
------------- ------------
Accounts payable........... $ 3,392,854 $ 3,698,102
Accrued compensation....... 643,531 604,729
Accrued other.............. 1,139,371 545,897
------------ ------------
$ 5,175,756 $ 4,848,728
============ ============
7. PROPERTY, PLANT AND EQUIPMENT, NET
At December 31, property, plant and equipment consisted of the following:
1999 1998
------------ ------------
Leasehold improvements............................ $ 7,114,246 $ 7,011,258
Equipment......................................... 5,747,963 4,308,627
Property and plant................................ 3,344,111 --
------------ ------------
16,206,320 11,319,885
Less accumulated depreciation and amortization.... 5,088,595 3,420,415
------------ ------------
Property, plant and equipment, net................ $ 11,117,725 $ 7,899,470
============ ============
12
13
7. PROPERTY, PLANT AND EQUIPMENT, NET (CONTINUED)
Depreciation expense for the years ended December 31, 1999, 1998 and 1997
was approximately $1,668,000, $1,296,000 and $816,000, respectively. Leasehold
improvements of $1,718,986, with accumulated amortization of $1,232,522, were
subject to a sublease arrangement (see Note 14).
8. INTANGIBLE ASSETS
At December 31, intangible assets consisted of the following:
1999 1998
------------ ------------
Purchased goodwill................ $ 6,876,524 $ --
Less accumulated amortization..... 122,795 --
------------ ------------
Purchased goodwill, net........... 6,753,729 --
Patents and technology............ 2,390,375 1,592,990
Less accumulated amortization..... 1,107,885 774,027
------------ ------------
Patents and technology, net....... 1,282,490 818,963
Intangible assets, net............ $ 8,036,219 $ 818,963
============ ============
9. STOCKHOLDERS' EQUITY
In November 1999, the Company completed the acquisition of SunPharm
Corporation by issuing 1,175,196 shares of common stock.
The Company has a Shareholder Rights Plan (the "Rights Plan") designed to
protect shareholders from unsolicited attempts to acquire the Company on terms
that do not maximize stockholder value. In connection with the Rights Plan, the
Board of Directors designated 500,000 shares of the Company's preferred stock as
Series A Junior Participating Preferred Stock. Under the Rights Plan, a right to
purchase one one-hundredth of one share of the Series A Junior Participating
Stock (the "Rights") was distributed as a dividend for each share of Common
Stock. The terms of the Rights Plan provide that the Rights will become
exercisable upon the earlier of the tenth day after any person or group (other
than a person or group eligible to file statements on Schedule 13G who or which
the Board of Directors determines shall not be an Acquiring Person, as defined
in the Rights Plan) acquires 20% or more of the Company's outstanding Common
Stock or the tenth business day after any person or group commences a tender or
exchange offer which would, if completed, result in the offeror owning 20% or
more of the Company's outstanding Common Stock. The Rights may generally be
redeemed by action of the Board of Directors at $0.001 per Right at any time
prior to the tenth day following the public announcement that any person or
group (other than a person or group eligible to file statements on schedule 13G
who or which the Board of Directors determines shall not be an Acquiring person,
as defined in the Rights Plan) has acquired 20% or more of the outstanding
Common Stock of the Company. The Rights expire on March 11, 2006. The Rights
have certain anti-takeover effects in that they would cause substantial dilution
to the party attempting to acquire the Company.
In certain circumstances, the Rights allow the Company's stockholders to
purchase the number of shares of the Company's Common Stock having a market
value at the time of the transaction equal to twice the exercise price of the
Rights, or in certain circumstances, the stockholders would be able to acquire
that number of shares of the acquirer's common stock having a market value, at
the time of the transaction, equal to twice the exercise price of the Rights.
The Company will continue to issue Rights with future issuances of common stock.
10. EQUITY INCENTIVE PLANS, STOCK OPTIONS AND STOCK WARRANTS
Under the Company's 1992 Equity Incentive Plan (the "Plan"), employees and
directors of and consultants to the Company are eligible for awards. At December
31, 1999, the Company has reserved 3,350,000 shares of its Common Stock for
awards. Awards can consist of incentive and nonstatutory stock options, stock
appreciation rights, restricted stock awards and other stock-based awards.
Certain incentive and nonstatutory options granted under the Plan may be
exercised upon grant and vest over five years and certain others are exercisable
over a four-year vesting period. The Company maintains the right to repurchase
any unvested shares of Common Stock upon termination of such stockholder's
employment with the Company.
Incentive stock options are granted with an option price of not less than
the fair market value of the Common Stock at the award date. Nonstatutory
options may be granted at prices as determined by the Board of Directors. Stock
appreciation rights may be awarded in tandem with stock options or alone. Stock
appreciation rights granted alone may be granted at prices as determined by the
Board. The Board may also award performance shares, restricted stock and stock
units subject to such terms, restrictions, performance criteria, vesting
requirements and other conditions deemed appropriate.
13
14
10. EQUITY INCENTIVE PLANS, STOCK OPTIONS AND STOCK WARRANTS (CONTINUED)
The Company has a 1995 Employee Stock Purchase Plan (the "ESPP") which
provides for the grant of rights to eligible employees to purchase up to 250,000
shares of the Company's Common Stock at the lesser of 85% of the fair market
value at the beginning or the end of the established offering period. There were
18,745 shares issued under the ESPP at an average price of $13.00 per share in
1999, 19,631 shares at an average price of $16 per share in 1998, and 4,204
shares at an average price of $17 per share in 1997.
All directors who are not employees of the Company are currently eligible
to participate in the Company's 1995 Director Stock Option Plan ("Directors
Plan"). At December 31, 1999, the Company had reserved 150,000 shares of its
Common Stock for awards. The Directors Plan provides for the granting of options
with a term of 10 years to purchase up to 110,000 shares of Common Stock at an
exercise price equal to the fair market value of Common Stock at the date of
grant. Generally, upon election or re-election at each annual meeting, each
eligible director shall be granted options to purchase 4,000 shares of Common
Stock for each year of the term of office to be served. The options granted vest
in annual installments of 4,000 shares over the term served.
The Company applies APB 25 and related interpretations in accounting for
its stock-based compensation plans, including its 1992 Equity Incentive Plan,
its 1995 Employee Stock Purchase Plan, and prior to December 15, 1998, its 1995
Director Stock Option Plan. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock.
Had compensation expense for the Company's stock-based compensation plans
been determined based upon the fair market value at the grant date for stock
option awards ("stock options") and at the end of the plan period for stock
purchased under its Employee Stock Purchase Plan ("stock purchase shares"),
consistent with the methodology prescribed under SFAS 123, the Company's net
loss and net loss per share would have been $48,634,898, or $2.86 per share,
$16,242,487, or $1.01 per share, and $25,947,119 or $1.91 per share, in 1999,
1998 and 1997, respectively.
The fair value of stock options granted and stock purchase shares issued
during 1999, 1998 and 1997 was estimated at the date of the grant and the end of
the plan period, respectively, using the Black-Scholes option-pricing model with
the following weighted average assumptions for 1999, 1998 and 1997: volatility
of 67%, 67% and 48%, respectively, risk-free interest rate of 6%, weighted
average expected life (years) of four, and no dividends. The effects on fiscal
1999, 1998 and 1997 pro forma net loss and net loss per share of expensing the
estimated fair value of stock options and stock purchase shares are not
necessarily representative of the effects on reported net loss for future years
due to such things as the vesting period of the stock options and the potential
for issuance of additional stock options and stock purchase shares in future
years.
Options Issued Under the Plan and the Directors Plan
The weighted average per share exercise price of stock options granted,
exercised and canceled during 1999 was $14.51, $1.39 and $20.85, respectively.
The weighted average fair value of stock options granted during 1999 was $8.05
per share. The weighted average fair value of stock purchase shares issued
during 1999 was $4.50 per share.
The weighted average per share exercise price of stock options granted,
exercised and canceled during 1998 was $22.80, $8.17 and $16.17, respectively.
The weighted average fair value of stock options granted during 1998 was $12.47
per share. The weighted average fair value of stock purchase shares issued
during 1998 was $4.95 per share. The weighted average exercise price of the
1,864,021 and 781,811 options outstanding and exercisable as of December 31,
1998, was $17.29 and $12.71, respectively.
The weighted average per share exercise price of stock options granted,
exercised and canceled during 1997 was $23.25, $2.80 and $7.97, respectively.
The weighted average fair value of stock options granted during 1996 was $9.61
per share. The weighted average fair value of stock purchase shares issued
during 1997 was $5.49 per share. The weighted average exercise price of the
1,433,579 and 470,375 options outstanding and exercisable as of December 31,
1997, was $13.99 and $9.61, respectively.
14
15
10. EQUITY INCENTIVE PLANS, STOCK OPTIONS AND STOCK WARRANTS (CONTINUED)
A summary of activity in the Plan and the Directors Plan through December
31, 1999 follows:
OPTIONS
AVAILABLE PRICE
FOR AWARD OUTSTANDING PER SHARE
--------- ----------- ---------
Balance at January 1, 1997 . 261,085 1,010,466 $ .125--$24.25
Authorized ................. 310,000 -- --
Awarded .................... (555,300) 555,300 $17.25 --$30.75
Exercised .................. -- (54,192) $ .125--$20.50
Canceled or repurchased .... 100,679 (77,995) $ .32 --$25.00
------- --------- ---------------
Balance at December 31, 1997 116,464 1,433,579 $ .125--$30.75
Authorized ................. 750,000 -- --
Awarded .................... (637,690) 637,690 $15.375--$29.25
Exercised .................. -- (124,339) $ .125--$24.75
Canceled or repurchased .... 86,409 (82,909) $ .25 --$30.75
------- --------- ---------------
Balance at December 31, 1998 315,183 1,864,021 $ .125--$30.75
Authorized ................. 640,000 -- --
Awarded .................... (757,253) 757,253 $10.00 -- 28.00
Exercised .................. -- (77,987) $ .125--$18.25
Canceled or repurchased .... 162,933 (161,683) $ .30 --$30.75
------- --------- ---------------
Balance at December 31, 1999 360,863 2,381,604 $ .125--$30.50
Deferred compensation of $377,035 recorded in 1999 represents the fair
value of options to purchase common stock granted to certain non-employees in
return for consulting services and is included in the table above. The related
compensation expense is being amortized ratably over the periods of service.
A summary of the weighted-average exercise price and remaining contractual
life of options outstanding and the weighted average exercise price of options
exercisable under the Plan and the Directors Plan as of December 31, 1999
follows:
WEIGHTED-
AVERAGE
WEIGHTED- REMAINING WEIGHTED-
AVERAGE CONTRACTUAL AVERAGE
PRICE PER OPTIONS EXERCISE LIFE OPTIONS EXERCISE
SHARE OUTSTANDING PRICE (YEARS) EXERCISABLE PRICE
----- ----------- ----- ------- ----------- -----
$ .125--$ .32 285,172 $ .29 4.66 276,004 $ .29
$ .33 --$ 9.00 7,000 $ 9.00 5.70 5,950 $ 9.00
$ 9.01 --$15.00 631,386 $12.58 8.86 175,349 $12.11
$15.01 --$24.25 966,653 $19.37 7.78 490,576 $19.73
$24.26 --$30.50 491,393 $26.32 8.06 215,033 $26.64
--------- ------ ---- --------- ------
2,381,604 $16.69 1,162,912 $15.19
Options issued outside of the Plan and the Directors Plan
In 1997, the Company issued options to employees and consultants outside of
the Plan and the Directors Plan.
The weighted average per share exercise price of stock options canceled
during 1999 was $25.58. No options were granted outside the Plan or the
Directors Plan in 1999.
The weighted average per share exercise price of stock options granted and
canceled during 1998 was $26.22 and $23.67, respectively. The weighted average
fair value of stock options granted during 1998 was $14.56 per share. The
weighted average exercise price of the 159,985 and 42,709 options outstanding
and exercisable as of December 31, 1998, was $26.56 and $26.74, respectively.
The weighted average per share exercise price of stock options granted
during 1997 was $27.06. The weighted average fair value of stock options granted
during 1997 was $8.49 per share. The weighted average exercise price of the
38,500 options outstanding as of December 31, 1997, was $27.06. There were no
options exercisable as of December 31, 1997.
15
16
10. EQUITY INCENTIVE PLANS, STOCK OPTIONS AND STOCK WARRANTS (CONTINUED)
A summary of activity for options issued outside of the Plan and the
Directors Plan through December 31, 1999 follows:
OPTIONS
AVAILABLE PRICE
FOR AWARD OUTSTANDING PER SHARE
--------- ----------- --------------
Balance at January 1, 1997...... - - -
Authorized...................... 175,000 - -
Awarded......................... (38,500) 38,500 $27.00--$27.06
Exercised....................... - - -
Canceled or repurchased - - -
-------- ------- --------------
Balance at December 31, 1997.... 136,500 38,500 $27.00--$27.06
Authorized...................... - - -
Awarded......................... (145,500) 130,485 $23.25--$27.00
Exercised....................... - - -
Expired......................... - - -
Canceled or repurchased......... 9,000 (9,000) $23.25--$27.00
-------- ------- --------------
Balance at December 31, 1998.... - 159,985 $23.25--$27.06
Authorized...................... - - -
Awarded......................... - - -
Exercised....................... - - -
Expired......................... (12,209) - $23.37--$26.37
Canceled or repurchased......... 12,209 (12,209) $23.37--$26.37
-------- ------- --------------
Balance at December 31, 1999.... - 147,776 $23.25--$27.06
A summary of the weighted-average exercise price and remaining contractual
life of options outstanding and the weighted average exercise price of options
exercisable outside of the Plan and the Directors Plan as of December 31, 1999
follows:
WEIGHTED-
AVERAGE
WEIGHTED- REMAINING WEIGHTED-
AVERAGE CONTRACTUAL AVERAGE
PRICE PER OPTIONS EXERCISE LIFE OPTIONS EXERCISE
SHARE OUTSTANDING PRICE (YEARS) EXERCISABLE PRICE
-------------- ------------ --------- ----------- ----------- ---------
$23.25--$27.06 147,776 $ 26.65 8.16 79,841 $ 26.72
Options and Warrants granted through the acquisition of SunPharm Corporation
In November 1999, in conjunction with the acquisition of SunPharm
Corporation, the Company granted 72,089 options to purchase GelTex Common Stock
at exercise prices of between $2.20 and $54.25 and 206,253 warrants to purchase
GelTex Common Stock at exercise prices of between $13.22 and $51.63. The fair
value of these options and warrants was included in the calculation of the total
purchase price of the SunPharm acquisition.
The weighted average per share exercise price of stock options and warrants
granted during 1999 was $27.46 and $26.98, respectively.
A summary of activity for options issued outside of the Plan and the
Directors Plan through December 31, 1999 follows:
OPTIONS AVAILABLE PRICE
FOR AWARD OUTSTANDING PER SHARE
---------------- ----------- ---------
Balance at January 1, 1999...... - - -
Authorized...................... 72,089 - $2.20--$54.25
Awarded or expired.............. (72,089) 72,089 $2.20--$54.25
Exercised....................... - - -
Canceled or repurchased......... - - -
------ ------ -------------
Balance at December 31, 1999.... - 72,089 $2.20--$54.25
16
17
10. EQUITY INCENTIVE PLANS, STOCK OPTIONS AND STOCK WARRANTS (CONTINUED)
A summary of the weighted-average exercise price and remaining contractual
life of options outstanding and the weighted average exercise price of options
exercisable outside of the Plan and the Directors Plan as of December 31, 1999
follows:
WEIGHTED-
AVERAGE
WEIGHTED- REMAINING WEIGHTED-
AVERAGE CONTRACTUAL AVERAGE
PRICE PER OPTIONS EXERCISE LIFE OPTIONS EXERCISE
SHARE OUTSTANDING PRICE (YEARS) EXERCISABLE PRICE
------------- ----------- --------- ----------- ----------- ---------
$2.20--$54.25 72,089 $27.46 6.96 51,271 $27.46
11. INCOME TAXES
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $97,094,000 and research and development tax credit carryforwards
of approximately $5,120,000, which expire through 2019. Since the Company has
incurred only losses since its inception and due to the degree of uncertainty
related to the ultimate use of the loss carryforwards and tax credits, the
Company has fully reserved this tax benefit. Additionally, the future
utilization of net operating loss carryforwards and tax credits may be subject
to limitations under the change in stock ownership rules of the Internal Revenue
Service.
The difference between the Company's expected tax provision (benefit), as
computed by applying the U.S. Federal Corporate Tax Rate of 34% to income (loss)
before provision for income taxes and the actual tax is attributable to tax
losses for which the Company has not recognized any tax benefit.
Significant components of the Company's deferred tax assets as of December
31 are as follows:
1999 1998
------------ ------------
Deferred tax assets:
Net operating loss carryforwards....... $ 38,666,000 $ 26,166,000
Research and development tax credits... 5,120,000 5,529,000
Other.................................. 1,263,000 661,000
------------ ------------
Total deferred tax assets................... 45,049,000 32,356,000
Valuation allowance............... (44,529,000) (32,029,000)
------------ ------------
Net deferred tax assets..................... 520,000 327,000
Deferred tax liabilities:
Intangible assets and other....... (520,000) (327,000)
------------ ------------
Total deferred tax liabilities.... (520,000) (327,000)
------------ ------------
Net deferred tax asset (liability).......... $ - $ -
============ ============
The valuation allowance increased by $12,500,000 and $6,200,000 during 1999
and 1998, respectively, due primarily to the increase in tax credits and net
operating loss carryforwards.
12. LONG TERM OBLIGATIONS
Long term obligations consist of:
DECEMBER 31,
------------------------------
1999 1998
------------- --------------
Note payable to a bank bearing interest at LIBOR plus 1.55% (7.73% at December 31,
1999) payable in quarterly installments commencing June 30, 1998 through June 30, 2002
with a final payment of $1,178,571 due on September 30, 2002......................... $ 4,981,836 $ 6,725,206
Note payable to a bank bearing interest at prime (8.50% at December 31, 1999) payable in
monthly installments through December 2000........................................... 224,344 501,588
Note payable to a bank bearing interest at LIBOR (6.18% at December 31, 1999) due
on September 30, 2002................................................................ 3,000,000 --
------------- --------------
8,206,180 7,226,794
------------- --------------
Less current portion............................................................... (1,646,296) (2,020,614)
------------- --------------
$ 6,559,884 $ 5,206,180
============= =============
17
18
12. LONG TERM OBLIGATIONS (CONTINUED)
In order to mitigate the impact of fluctuations in U.S. interest rates, the
Company entered into an interest rate swap in June 1998 on its principal note
payable to a bank. The Company swapped its variable rate of interest, LIBOR plus
1.55%, for a fixed rate of interest of 7.49%. Net interest payable or receivable
is determined on a quarterly basis and is insignificant at December 31, 1999.
The bank loan proceeds have been used to finance the build-out of
facilities, the acquisition of certain equipment, and the purchase of a building
and land. Under the terms of the loan agreements, the Company is required to
comply with certain financial covenants. At December 31, 1999 the Company was in
compliance with such covenants.
Substantially all of the Company's equipment and $3.0 million of its
marketable securities is pledged as collateral under the loan agreements.
At December 31, 1999, the maturities of long term obligations are as
follows:
2000.............................. 1,646,296
2001.............................. 1,421,952
2002.............................. 5,137,932
2003.............................. -
Management believes that the carrying value of notes payable approximates
fair value at December 31, 1999, given that the interest rates on the Company's
bank debt are based on incremental borrowing rates currently available on loans
with similar terms and maturities.
13. COLLABORATION AGREEMENTS
In December 1999, the Company entered into a Collaboration Agreement with
Sankyo Pharma Inc., which granted Sankyo exclusive rights to market Cholestagel
in the United States in exchange for certain initial, milestone and royalty
payments from Sankyo. At the same time, the Company entered into another
Collaboration Agreement with Sankyo under which the Company sold Sankyo an
option to obtain the exclusive right to develop and market a second-generation
cholesterol-lowering compound in the United States, Europe and Japan. Sankyo has
agreed to pay for all development costs for the second-generation compound for
so long as their option to license the compound remains in effect, as well as
milestone payments and royalty payments.
In December 1994, the Company entered into a license agreement (the
"Agreement") with a different Japanese pharmaceutical company (the "Partner")
whereby the Company granted to the Partner a license to make, use, and sell
certain of the Company's products in certain areas of the world, as defined by
the Agreement (the "Territories"). The Agreement requires the Partner to bear
all costs to develop and commercialize the licensed products in the respective
Territories. In consideration of this Agreement, the Company received a
non-refundable license fee in 1994 and milestone payments in 1996 and 1997. The
Agreement calls for additional milestone payments to be paid to the Company
through the commercialization of the product licensed under the Agreement and
royalties based on certain percentages of sales, as defined in the Agreement.
14. EMPLOYEE BENEFIT PLAN
The Company maintains an Employment Retirement Plan ("401(k) Plan") under
section 401(k) of the Internal Revenue Code covering all full-time employees.
Employee contributions may be made to the 401(k) Plan up to limits established
by the Internal Revenue Service. Company matching contributions may be made at
the discretion of the Board of Directors. The Company did not make a
contribution to the 401(k) Plan for the years ended December 31, 1999, 1998 and
1997.
15. COMMITMENTS
Synthetic Lease
In October 1999, the Company completed the build-out of a new corporate
headquarters. The purchase and construction of the facility was approximately
$25.0 million and was financed through a synthetic lease transaction. The
synthetic lease is asset-based financing structured to be treated as an
operating lease for accounting purposes. The lease term commenced on October 21,
1998 and continues for seven years, thereafter. Upon the completion of the
construction phase in October 1999, the Company began to pay rent on a monthly
basis of approximately $187,000, which is based on a fixed rate of 8.99% on the
outstanding balance.
18
19
15. COMMITMENTS (CONTINUED)
During the term of the lease, the Company has the option to purchase the
building and the improvements for a purchase price equal to the total amount
funded by the lessor, plus any accrued and unpaid rent and certain other costs
outlined in the agreements (the "Purchase Price"). At the end of the lease term,
the Company has the option to (i) purchase the building and the improvements for
the Purchase Price, (ii) arrange for the facility to be purchased by a third
party, or (iii) return the building and improvements to the lessor; provided,
however, in the case of options (ii) and (iii), the Company is contingently
liable to the extent the lessor is not able to realize 85% of the Purchase Price
upon the sale or other disposition of the property.
Under the terms of the synthetic lease, the Company is required to comply
with certain financial covenants which, among other things, require the
maintenance of minimum levels of cash, tangible net worth, liquidity and debt
service coverage and prohibits the payment of dividends. The Company was in
compliance with these terms at December 31, 1999.
Manufacturing Agreements
In September 1999, the Company entered into an agreement with its contract
manufacturer for the initial commercial production of bulk inventory for
Cholestagel. The Company is obligated under the terms of the agreement to pay
approximately 352.1 million Austrian schillings (approximately $27.3 million as
of December 31, 1999) through 2000. Under the terms of the Collaboration
Agreement with Sankyo Pharma Inc. (see Note 13), Sankyo has agreed to purchase
this initial production of inventory for approximately $21.4 million. The
difference was charged to operations in 1999.
In November 1999, the Company entered into an agreement with its
manufacturer of the raw material for Cholestagel and Renagel. Under the terms of
the agreement, the Company will be obligated to purchase certain minimum
quantities of material beginning in 2000. The Company estimates that its minimum
purchase obligations during 2000 will be approximately $3.0 million, and that
its minimum purchase obligations during each of the remaining six years of the
term of the agreement will be approximately $2.7 million.
In August 1999, the Company entered into a Letter of Intent with a
manufacturer to provide certain tableting, packaging and labeling services to
the Company with respect to Renagel. Under the terms of the letter of intent,
GelTex has made minimum purchase commitments, which are expected to commence in
2000 and will be in the amount of approximately $4.0 million a year. The minimum
purchase costs are costs associated with the Renagel Joint Venture with Genzyme
Corporation and will be borne equally by the Company and Genzyme. The Letter of
Intent is expected to be superseded by a definitive Manufacturing Agreement to
be entered into between the manufacturer and the Renagel Joint Venture in the
second quarter of 2000.
Subleases
The Company leased its former offices and research laboratories under an
operating lease with an initial ten-year term and a provision for a five-year
extension. The Company is currently negotiating a sublease for this facility.
The Company has entered into a sublease arrangement for its prior facility with
another company for an initial three-year term with an option to extend for one
year. The original lease agreement between the Company and landlord remains in
effect. Total annual future minimum lease payments and minimum sublease payments
under these agreements are as follows:
LEASE SUBLEASE
PAYMENTS PAYMENTS
---------- ----------
2000................. 456,297 316,800
2001................. 457,875 316,800
2002................. 497,284 316,800
2003................. 481,450 316,800
2004................. 390,300 158,400
Thereafter........... 793,800 --
---------- ----------
Total................ $3,077,006 $1,425,600
========== ==========
The future minimum lease payments relating to the synthetic lease, which
are not included in the table above, are approximately $2.2 million per year
beginning in October 1999 and will continue for approximately six years,
thereafter.
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15. COMMITMENTS (CONTINUED)
Rental expense charged to operations was approximately $633,993 in 1999,
$441,850 in 1998 and $279,600 in 1997.
Operating Lease
In September 1999, the Company negotiated a $4.0 million operating lease
line to finance the cost of equipment purchases. The Company will draw down the
line over the next 18 months and will repay the line in 60 equal monthly
installments commencing in March 2001. As of December 31, 1999, the Company had
drawn down $600,000 of the line and was obligated for minimum lease payments
of approximately $142,000 per year for the next five years.
Under the terms of the lease, the Company is required to comply with
certain financial covenants which, among other things, require the maintenance
of minimum levels of cash, tangible net worth, liquidity and debt service
coverage and prohibits the payment of dividends. The Company was in compliance
with these terms at December 31, 1999.
Research Contracts
The Company routinely contracts with universities, medical centers,
contract research organizations, and other institutions for the conduct of
research and clinical studies on the Company's behalf. These agreements are
generally for the duration of the contracted study and contain provisions that
allow the Company to terminate the study prior to its completion.
17. SUBSEQUENT EVENT
On February 7, 2000, the Company filed a registration statement with the
Securities and Exchange Commission for the issuance of up to 3.5 million shares
of Common Stock.
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