1
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors........................................... F-2
Balance Sheets as of December 31, 1997 and 1996.......................... F-3
Statements of Operations for the years ended
December 31, 1997, 1996 and 1995...................................... F-4
Statements of Changes in Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995................................ F-5
Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995...................................... F-6
Notes to Financial Statements............................................ F-7
F-1
2
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
GelTex Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of GelTex Pharmaceuticals,
Inc. as of December 31, 1997 and 1996, and the related statements of operations,
changes in stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. 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 in accordance with generally accepted auditing
standards. 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 provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of GelTex Pharmaceuticals, Inc.
at December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Boston, Massachusetts
February 9, 1998
F-2
3
GELTEX PHARMACEUTICALS, INC.
BALANCE SHEETS
DECEMBER 31,
1997 1996
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents (inclusive of reverse repurchase
agreements of $8,720,000 at December 31, 1996)............. $ 26,689,190 $ 20,801,465
Marketable securities........................................ 25,933,722 52,623,094
Prepaid expenses and other current assets.................... 1,393,342 1,923,878
Due from Joint Venture....................................... 1,859,328 --
------------ ------------
Total current assets............................................. 55,875,582 75,348,437
Long-term receivables............................................ 27,000 20,000
Property and equipment, net...................................... 7,659,328 2,246,910
Intangible assets, net........................................... 466,673 453,123
Investment in Joint Venture...................................... 3,089,196 --
------------ ------------
$ 67,117,779 $ 78,068,470
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses........................ $ 4,827,752 $ 2,495,869
Current portion of long-term obligations..................... 1,949,053 391,766
------------ ------------
Total current liabilities........................................ 6,776,805 2,887,635
Long-term obligations, less current portion...................... 6,922,666 124,360
Commitments and contingencies....................................
Stockholders' equity:
Undesignated Preferred Stock, $.01 par value, 5,000,000
shares authorized, none issued or outstanding.............. -- --
Common Stock, $.01 par value, 50,000,000 and 20,000,000
shares authorized; 13,642,264 and 13,521,302 shares
issued and outstanding at December 31, 1997 and 1996,
respectively............................................... 136,423 135,213
Additional paid-in capital................................... 108,658,239 105,407,670
Deferred compensation........................................ (509,632) (46,129)
Unrealized gain on available-for-sale securities............. 77,402 19,967
Accumulated deficit.......................................... (54,944,124) (30,460,246)
------------ ------------
Total stockholders' equity....................................... 53,418,308 75,056,475
------------ ------------
$ 67,117,779 $ 78,068,470
============ ============
The accompanying notes are an integral part of the financial statements.
F-3
4
GELTEX PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
1997 1996 1995
------------ ------------ -----------
REVENUE:
License fee and research revenue.......... $ 1,000,010 $ 1,244,474 $ 750,000
Collaborative Joint Venture
research revenue........................ 9,195,727 -- --
Research grant............................ 289,254 418,541 157,410
------------ ------------ -----------
Total revenue............................... 10,484,991 1,663,015 907,410
COSTS AND EXPENSES:
Research and development.................. 22,251,062 21,755,298 6,503,788
Collaborative Joint Venture
research expense...................... 9,195,727 -- --
------------ ------------ -----------
Total research and development...... 31,446,789 21,755,298 6,503,788
General and administrative................ 4,089,467 2,923,569 1,873,247
Other, nonrecurring costs................. -- 230,000 --
------------ ------------ -----------
Total costs and expenses.................... 35,536,256 24,908,867 8,377,035
------------ ------------ -----------
Loss from operations........................ (25,051,265) (23,245,852) (7,469,625)
Equity in loss of RenaGel Joint Venture..... (2,310,345) -- --
Interest income............................. 3,094,874 3,342,723 684,138
Interest expense............................ (217,142) (75,015) (99,158)
------------ ------------ -----------
Net loss.................................... $(24,483,878) $(19,978,144) $(6,884,645)
============ ============ ===========
Basic and diluted net loss per share........ $ (1.80) $ (1.60) $ (.85)
============ ============ ===========
Shares used in computing
basic and diluted net loss per share..... 13,592,000 12,513,000 8,109,000
The accompanying notes are an integral part of the financial statements.
F-4
5
GELTEX PHARMACEUTICALS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------- ----------------------- PAID IN
SHARES AMOUNTS SHARES AMOUNTS CAPITAL
---------- ------------ ----------- -------- -----------
Balance at January 1, 1995 ................. 6,598,949 $ 17,665,688 588,916 $ 5,889 $ 5,260
---------- ------------ ----------- -------- ------------
Issuance of Common Stock under stock
option plan and exercise of warrants .... 472,200 4,722 110,533
Adjustment to Unrealized gain (loss) on
Available-for-sale securities ............
Deferred compensation associated
with stock option grants ................ 77,178
Amortization of deferred compensation ......
Issuance of Common Stock upon conversion
of all outstanding Preferred Stock ...... (6,598,949) $(17,665,688) 6,598,949 65,989 17,599,699
Issuance of Common Stock through an Initial
Public Offering, net of offering Costs
of $2,512,934 ........................... 2,875,000 28,750 26,208,316
Net loss ...................................
---------- ------------ ----------- -------- ------------
Balance at December 31, 1995 ............... -0- -0- 10,535,065 105,350 44,000,986
---------- ------------ ----------- -------- ------------
Issuance of Common Stock under stock
option plan and exercise of warrants .... 103,837 1,039 152,868
Issuance of Common Stock under employee
stock purchase plan ..................... 7,400 74 113,919
Adjustment to Unrealized gain (loss) on
available-for-sale securities ..........
Amortization of deferred compensation ......
Issuance of Common Stock through a
Secondary Public Offering, net
of Offering costs of $327,602 ........... 2,875,000 28,750 61,139,897
Net loss ...................................
---------- ------------ ----------- -------- ------------
Balance at December 31, 1996 ............... -0- -0- 13,521,302 135,213 105,407,670
---------- ------------ ----------- -------- ------------
Issuance of Common Stock under stock
option plan and exercise of
warrants - net .......................... 16,758 168 89,265
Issuance of Common Stock to
Joint Venture Partner .................. 100,000 1,000 2,495,678
Issuance of Common Stock under
employee stock purchase plan ............. 4,204 42 71,426
Adjustment to Unrealized gain (loss) on
available-for-sale securities ...........
Deferred compensation associated
with stock option grants ................ 594,200
Amortization of deferred compensation ......
Net loss ...................................
---------- ------------ ----------- -------- ------------
Balance at December 31, 1997 ............... -0- $ -0- 13,642,264 $136,423 $108,658,239
========== ============ =========== ======== ============
UNREALIZED
GAIN (LOSS)
ON AVAILABLE TOTAL
DEFFERRED ACCUMULATED FOR SALE STOCKHOLDERS'
COMPENSATION DEFICIT SECURITIES EQUITY
------------ ------------ ------------ -------------
Balance at January 1, 1995 ................. $ (3,597,457) $(100,406) $ 13,978,974
---------- ------------ --------- ------------
Issuance of Common Stock under stock
option plan and exercise of warrants .... 115,255
Adjustment to Unrealized gain (loss) on
Available-for-sale securities ............ $ 181,996 181,996
Deferred compensation associated
with stock option grants ................ $ (77,178) --
Amortization of deferred compensation ...... 21,353 21,353
Issuance of Common Stock upon conversion
of all outstanding Preferred Stock ...... --
Issuance of Common Stock through an Initial
Public Offering, net of offering Costs
of $2,512,934 ........................... 26,237,066
Net loss ................................... -- (6,884,645) -- (6,884,645)
--------- ------------ --------- ------------
Balance at December 31, 1995 ............... (55,825) (10,482,102) 81,590 $ 33,649,999
--------- ------------ --------- ------------
Issuance of Common Stock under stock
option plan and exercise of warrants .... 153,907
Issuance of Common Stock under employee
stock purchase plan ..................... 113,993
Adjustment to Unrealized gain (loss) on
available-for-sale securities .......... (61,623) (61,623)
Amortization of deferred compensation ...... 9,696 9,696
Issuance of Common Stock through a
Secondary Public Offering, net
of Offering costs of $4,237,601 ......... 61,168,647
Net loss ................................... (19,978,144) (19,978,144)
--------- ------------ --------- ------------
Balance at December 31, 1996 ............... (46,129) (30,460,246) 19,967 75,056,475
--------- ------------ --------- ------------
Issuance of Common Stock under stock
option plan and exercise of
warrants - net .......................... 89,433
Issuance of Common Stock to
Joint Venture Partner .................. 2,496,678
Issuance of Common Stock under
employee stock purchase plan ............. 71,468
Adjustment to Unrealized gain (loss) on
available-for-sale securities ........... 57,435 57,435
Deferred compensation associated
with stock option grants ................ (594,200)
Amortization of deferred compensation ...... 130,697 130,697
Net loss ................................... (24,483,878) (24,483,878)
--------- ------------ --------- ------------
Balance at December 31, 1997 ............... $(509,632) $(54,944,124) $ 77,402 $ 53,418,308
========= ============ ========= ============
The accompanying notes are an integral part of the financial statements.
F-5
6
GELTEX PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
1997 1996 1995
------------ ------------ -----------
OPERATING ACTIVITIES
Net loss.................................................... $(24,483,878) $(19,978,144) $(6,884,045)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization............................ 1,193,394 745,805 503,730
Equity in net loss of RenaGel Joint Venture.............. 2,310,345 -- --
Changes in operating assets and liabilities:
Prepaid expenses and other current assets.............. 530,536 (1,351,014) (399,619)
Due from Joint Venture................................. (1,859,328) -- --
Long term receivables.................................. (7,000) -- 20,000
Accounts payable and accrued expenses.................. 2,331,883 1,107,453 333,501
------------ ------------ -----------
Net cash used in operating activities....................... (19,984,048) (19,475,900) (6,427,033)
INVESTING ACTIVITIES
Purchase of marketable securities........................... (26,388,812) (89,360,425) (21,713,604)
Proceeds from sale and maturities of marketable securities.. 53,135,619 57,670,818 8,293,470
Investment in Joint Venture................................. (5,399,541) -- --
Purchase of intangible assets............................... (259,904) (327,829) (265,469)
Purchase of property and equipment, net..................... (6,228,763) (882,998) (497,889)
------------ ------------ -----------
Net cash provided by (used in) investing activities......... 14,858,599 (32,900,434) (14,183,492)
FINANCING ACTIVITIES
Sale of Common Stock and warrants, net of issuance costs.... 2,586,111 61,322,554 26,352,321
Proceeds from employee stock purchase plan.................. 71,468 113,993 --
Proceeds from financing of assets........................... 8,782,495 -- 300,000
Payments on notes payable and capital lease obligations..... (426,900) (438,736) (421,918)
------------ ------------ -----------
Net cash provided by financing activities................... 11,013,174 60,997,811 26,230,403
------------ ------------ -----------
Increase in cash and cash equivalents....................... 5,887,725 8,621,477 5,619,878
Cash and cash equivalents at beginning of year.............. 20,801,465 12,179,988 6,560,110
------------ ------------ -----------
Cash and cash equivalents at end of year.................... $ 26,689,190 $ 20,801,465 $12,179,988
============ ============ ===========
The accompanying notes are an integral part of the financial statements.
F-6
7
GELTEX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. NATURE OF BUSINESS AND PRESENTATION
GelTex Pharmaceuticals, Inc. (the "Company") is engaged in the design and
development of non-absorbed polymer-based pharmaceuticals that selectively bind
to and eliminate target substances from the intestinal tract.
Through 1996 the Company was considered a development stage company. During
1997, the Company entered into a Joint Venture arrangement with a corporate
partner for the final development and commercialization of RenaGel(R) phosphate
binder (see Note 3) and recognized revenue from the Joint Venture. Accordingly,
the Company believes it is no longer in the development stage and has removed
the references and reporting requirements of Statement of Financial Accounting
Standards No. 7, "Accounting and Reporting by Development Stage Companies."
2. SIGNIFICANT ACCOUNTING POLICIES
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement No. 129, "Disclosure of Information About Capital Structure,"
which is applicable to all companies and required to be adopted for fiscal
years beginning after December 15, 1997. Capital structure disclosures
required by Statement No. 129 include liquidation preferences of preferred
stock, information about the pertinent rights and privileges of the
outstanding equity securities, and the redemption amounts for all issues of
capital stock that are redeemable at fixed or determinable prices on fixed
determinable dates. Adoption of this standard is not expected to have a
material impact on the Company's financial statements or results of
operations.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, "Reporting Comprehensive Income," which is required to be adopted
for fiscal years beginning after December 15, 1997. The Statement
establishes standards for the reporting and display of comprehensive income
and its components in a full set of general purpose financial statements.
Adoption of this standard is not expected to have a material impact on the
Company's financial statements or results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 131, "Disclosures about segments of an Enterprise and Related
Information," which is required to be adopted for fiscal years beginning
after December 15, 1997. The Statement changes the way public companies
report segment information in annual financial statements and also requires
those companies to report selected segment information in interim financial
reports to shareholders. Adoption of this standard is not expected to have a
material impact on the Company's financial statements or results of
operations.
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
F-7
8
GELTEX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
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 9).
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. 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
a separate component of stockholders' equity. 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.
At December 31, 1996, the Company held certain securities under
agreements to resell on January 2, 1997 ("Reverse Repurchase Agreements").
Due to the short-term nature of the agreements, the Company did not take
possession of the securities which were instead held in the Company's
safekeeping account at its investment advisor bank. The Company purchases
only high grade securities, typically with short maturities.
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, an integral part of
their cash management activities. Management determines the appropriate
classification of debt securities at the time of purchase and reevaluates
such designation on an ongoing basis.
PROPERTY AND EQUIPMENT
Equipment, furniture and fixtures are stated at cost and are being
depreciated using the straight-line method over estimated useful lives of
five years. Equipment under capital leases is stated at the present value of
future lease obligations and is depreciated over the life of the leases.
Leasehold improvements are stated at cost and are amortized over the
remaining life of the related building lease.
INTANGIBLE ASSETS
The Company capitalizes the costs of purchased technology and obtaining
patents on its technology. These capitalized costs are amortized over their
estimated future lives of five years using the straight-line method.
Accumulated amortization at December 31, 1997 and 1996 was $533,526 and
$287,172, respectively.
F-8
9
GELTEX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
REVENUE RECOGNITION
The Company recognizes grant revenue and collaborative Joint Venture
revenue as reimbursable expenses are incurred and license fee revenue as
earned.
NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earning Per Share." Statement No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings
per share. Basic earnings per share excludes any dilutive effect of options,
warrants or convertible securities. Due to its loss position, the Company's
previous net loss per share amounts conform to Statement No. 128
requirements for basic earnings per share. Also due to its loss position,
diluted earnings per share is the same amount as basic earnings per share.
Pursuant to the requirements of the Securities and Exchange Commission,
common stock equivalent shares relating to certain stock options and
convertible preferred stock issued prior to the Company's public offering in
November 1995 are included for all periods prior to the offering whether or
not they are anti-dilutive. Options to purchase 1,435,479 shares of common
stock at $.125 -- $30.75 per share and warrants to purchase 11,400 shares of
common stock at $2.50 per share were outstanding at December 31, 1997.
3. JOINT VENTURE AGREEMENT
In June 1997, the Company entered into a joint venture with Genzyme
Corporation for the final development and commercialization of RenaGel(R)
phosphate binder (the "Joint Venture") through the establishment of RenaGel
LLC. The Company accounts for its investment in the Joint Venture using the
equity method of accounting. Under the terms of the collaboration agreement
amongst the Joint Venture Partners, the Company licensed all of its rights
to RenaGel(R) phosphate binder (outside of Japan and certain Pacific Rim
countries) to the Joint Venture, and Genzyme agreed to pay $27.5 million,
consisting of a $2.5 million equity investment (received in June 1997), a
$15.0 million payment due upon receipt of marketing approval from the Food
and Drug Administration ("FDA"), and a $10.0 million payment due one year
after FDA approval. Under the terms of the collaboration agreement, it is
expected that each company will fund 50% of the budgeted costs and expenses
associated with the development and commercialization of RenaGel(R)
phosphate binder. Each party that incurs project expenses, either as
internal operating costs or as third party obligations, is reimbursed by
the Joint Venture for 100% of the costs incurred. As a result, in the
Company's balance sheet, reimbursement owed to the Company from the Joint
Venture is recorded as amounts due from Joint Venture under current assets;
amounts owed by the Company to fund the Joint Venture are recorded as due
to the Joint Venture under current liabilities; and amounts paid to the
Joint Venture and not yet reimbursed to a party are included in the
investment in the Joint Venture. To the extent that each party equally
funds the Joint Venture costs, both companies will share equally in all
profits.
Summarized financial information regarding the Joint Venture as of
December 31, 1997 is as follows:
Revenues........................................ $ -0-
Research & development expenses................. 4,624,000
Interest income................................. 3,000
Net loss........................................ 4,621,000
Current assets.................................. 2,212,000
Non-current assets.............................. 4,765,000
Current liabilities............................. 1,799,000
Non-current liabilities......................... -0-
F-9
10
GELTEX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. MANUFACTURING AGREEMENT
In April 1997, the Company entered into a contract manufacturing
agreement for RenaGel(R) phosphate binder. Under the terms of the agreement,
the Company is required to fund one-half of initial capital equipment costs
of approximately $6.0 million, of which the Company had paid $2,250,000 at
December 31, 1997. The Company may be obligated to pay up to $3.75 million
in additional equipment costs in the event that the Company requires the
manufacturer to increase capacity and implement certain manufacturing
changes designed to result in a lower product unit cost. The contract
manufacturing agreement also requires the Company to purchase minimum
quantitites of product beginning in 1998. The minimums are based upon the
Company's estimated product requirements and are subject to increases as
product sales increase and as the manufacturer increases its capacity for
the product. All of the above-referenced capital equipment costs and the
minimum purchase obligations are costs associated with the Joint Venture
with Genzyme Corporation and, to the extent that each company is funding 50%
of the budgeted costs and expenses of the Joint Venture, they will be borne
equally by the Company and Genzyme Corporation.
5. AVAILABLE-FOR-SALE SECURITIES
The following is a summary of available-for-sale securities:
DECEMBER 31, 1997:
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ---------- ---------- -----------
U.S. Corporate Securities................. $31,554,211 $ 69,639 $(68,438) $31,555,412
U.S. Government Obligations............... 10,350,225 76,201 -- 10,426,426
Money Market Accounts..................... 7,613,194 -- -- 7,613,194
----------- -------- -------- -----------
Total..................................... $49,517,630 $145,840 $(68,438) $49,595,032
=========== ======== ======== ===========
DECEMBER 31, 1996:
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ---------- ---------- -----------
U.S. Corporate Securities................. $48,336,763 $ -- $(4,030) $48,332,733
U.S. Government Obligations............... 20,106,537 23,997 -- 20,130,534
Money Market Accounts..................... 4,928,183 -- -- 4,928,183
----------- ------- ------- -----------
Total..................................... $73,371,483 $23,997 $(4,030) $73,391,450
=========== ======= ======= ===========
The fair value of available-for-sale securities is determined using the
published closing prices of these securities as of December 31, 1997 and
1996. These securities are classified at their estimated fair value in the
accompanying balance sheet as follows:
DECEMBER 31,
1997 1996
----------- -----------
Cash equivalents.......................... $23,661,310 $20,768,356
Marketable securities..................... 25,933,722 52,623,094
----------- -----------
$49,595,032 $73,391,450
=========== ===========
F-10
11
GELTEX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. AVAILABLE-FOR-SALE SECURITIES - (CONTINUED)
The cost and estimated fair value of available-for-sale debt securities,
which excludes money market accounts, at December 31, 1997, by contractual
maturity, are shown below.
ESTIMATED
COST FAIR VALUE
----------- -----------
Due in one year or less................ $41,904,436 $41,981,838
=========== ===========
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at
December 31:
1997 1996
---------- ----------
Accounts payable........................ $3,404,322 $1,209,777
Accrued research and
development expenses................... 466,043 711,153
Accrued compensation.................... 467,939 329,548
Accrued other........................... 489,448 245,391
---------- ----------
$4,827,752 $2,495,869
========== ==========
7. PROPERTY AND EQUIPMENT
At December 31, property and equipment consisted of the following:
1997 1996
---------- ----------
Leasehold improvements............. $6,971,467 $1,718,986
Equipment........................... 2,734,399 1,758,117
----------- ----------
9,705,866 3,477,103
Less accumulated depreciation
and amortization.................. 2,046,538 1,230,193
---------- ----------
Property and equipment, net....... $7,659,328 $2,246,910
========== ==========
Depreciation expense for the years ended December 31, 1997, 1996 and 1995
was approximately $816,000, $585,000 and $400,000, respectively.
At December 31, 1997 and 1996, property under capitalized leases includes
$92,194 in equipment and $900,000 in leasehold improvements with aggregate
accumulated amortization at December 31, 1997 and 1996 of $362,016 and $299,677
respectively. Additionally, leasehold improvements of $1,718,986 with
accumulated amortization of $644,732 were subject to a sublease arrangement (See
Note 15).
F-11
12
GELTEX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCKHOLDERS' EQUITY
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 offer or 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 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.
9. EQUITY INCENTIVE PLANS 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, 1997, the Company has reserved 2,000,000 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; however, the Company maintains the right to
repurchase any unvested shares of Common Stock upon termination of such
stockholder's employment with the Company. Of the total options outstanding at
December 31, 1997, options to purchase 225,000 shares of the Company's Common
Stock vest upon the earlier of the achievement by the Company of certain product
development milestones or December 2004.
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.
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
4,204 shares issued under the ESPP at an average price of $17 per share in 1997
and 7,400 shares at an average price of $18 per share in 1996. There were no
shares issued under the ESPP in 1995.
Under the Company's 1995 Director Stock Option Plan (the "Directors Plan"),
all directors who are not employees of the Company are currently eligible to
participate in the Directors Plan. 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
F-12
13
GELTEX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. EQUITY INCENTIVE PLANS AND STOCK WARRANTS - CONTINUED
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 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 $25,947,119, or $1.91 per share,
$20,415,636, or $1.63 per share, and $6,928,242 or $.85 per share, in 1997, 1996
and 1995, respectively.
The fair value of stock options granted and stock purchase shares issued
during 1997, 1996 and 1995 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 1997, 1996 and 1995,
respectively: volatility of 48%, 60% and 60%, risk-free interest rate of 6%,
6.2% and 6.3%, weighted average expected life (years) of 4, 4 and 6.4, and no
dividends. The effects on fiscal 1997, 1996 and 1995 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.
The weighted average per share exercise price of stock options granted,
exercised and canceled during 1997 was $23.49, $2.41 and $7.25, respectively.
The weighted average fair value of stock options granted during 1997 was $10.27
per share. The weighted average fair value of stock purchase shares issued
during 1997 was $5.10 per share.
The weighted average per share exercise price of stock options granted,
exercised and canceled during 1996 was $18.48, $2.02 and $5.53, respectively.
The weighted average fair value of stock options granted during 1996 was $9.38
per share. The weighted average fair value of stock purchase shares issued
during 1996 was $5.49 per share.
F-13
14
GELTEX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. EQUITY INCENTIVE PLANS AND STOCK WARRANTS - (CONTINUED)
A summary of activity in the Plan and the Directors Plan through
December 31, 1997 follows:
OPTIONS
---------------------------------------------
AVAILABLE
FOR PRICE
AWARD OUTSTANDING PER SHARE
--------- ----------- ---------------
Balance at January 1, 1995............. 51,584 645,500 $ .125--$ .32
Authorized............................. 700,000 --
Awarded................................ (589,150) 589,150 $ .32 --$11.25
Exercised.............................. -- (449,450) $ .125--$ .32
-------- ---------
Balance at December 31, 1995........... 162,434 785,200 $ .125--$11.25
Authorized............................. 400,000 --
Awarded................................ (336,400) 336,400 $11.75 --$24.25
Exercised.............................. -- (76,668) $ .125--$13.00
Canceled or repurchased................ 35,051 (31,151) $ .25 --$ 9.00
-------- ---------
Balance at December 31, 1996........... 261,085 1,013,781 $ .125--$24.25
Authorized............................. 310,000 --
Awarded................................ (560,800) 560,800 $17.25 --$30.75
Exercised.............................. -- (57,507) $ .125--$20.50
Canceled or repurchased................ 92,345 (77,595) $ .32 --$25.00
-------- ---------
Balance at December 31, 1997........... 102,630 1,439,479 $ .125--$30.75
======== =========
A summary of the weighted-average exercise price and remaining contractual
life of options outstanding under the Plan and the Directors Plan as of
December 31, 1997 follows:
WEIGHTED-
AVERAGE
WEIGHTED- REMAINING
AVERAGE CONTRACTUAL
PRICE PER OPTIONS EXERCISE LIFE
SHARE OUTSTANDING PRICE (YEARS)
---------- ----------- --------- -----------
$.125-$.32 450,134 $ .28 6.69
$ 9-$15 197,667 $11.78 8.18
$16-$24.25 544,387 $20.21 8.84
$24.75-$30.75 247,291 $27.49 9.14
A summary of the weighted-average exercise price and remaining contractual
life of options outstanding under the Plan and the Directors Plan as of
December 31, 1996 follows:
WEIGHTED
WEIGHTED- AVERAGE
AVERAGE REMAINING
OPTIONS EXERCISE CONTRACTUAL
PRICE PER SHARE OUTSTANDING PRICE LIFE (YEARS)
- --------------- ----------- -------- ------------
$.125-$.32 534,617 $ .28 7.71
$9-$15 227,764 $11.73 9.15
$16-$24.25 251,400 $20.37 9.64
A summary of the weighted-average exercise price of options exercisable
under the Plan and the Directors Plan as of December 31, 1997:
WEIGHTED-
AVERAGE
OPTIONS EXERCISE
PRICE PER SHARE EXERCISABLE PRICE
- --------------- ----------- --------
$.125-$.32 450,134 $ .28
$9-$15 134,600 $11.44
$16-$24.25 157,806 $20.19
$24.75-$30.75 6,689 $27.39
A summary of the weighted-average exercise price of options exercisable
under the Plan and the Directors Plan as of December 31, 1996:
WEIGHTED-
AVERAGE
OPTIONS EXERCISE
PRICE PER SHARE EXERCISABLE PRICE
- --------------- ----------- --------
$.125-$.32 309,617 $ .30
$9-$15 119,697 $11.77
$16-$24.25 43,499 $20.56
At December 31, 1997 and 1996, the Company had a warrant outstanding to
purchase 11,400 shares of the Company's Common Stock at an exercise price of
$2.50 per share. This warrant expires on November 8, 2000.
10. INCOME TAXES
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $54,505,000 and research and development tax credit carry forwards
of approximately $3,739,000, which expire through 2012. 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 will be subject
to limitations under the change in stock ownership rules of the Internal Revenue
Service.
F-14
15
GELTEX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES - (CONTINUED)
Significant components of the Company's deferred tax assets as of
December 31 are as follows:
1997 1996
------------ ------------
Deferred tax assets:
Net operating loss carryforwards ........... $ 21,802,000 $ 12,373,000
Research and development tax credits ....... 3,739,000 1,290,000
Other ...................................... 506,000 236,000
------------ ------------
Total deferred tax assets .................... 26,047,000 13,899,000
Valuation allowance ...................... (25,829,000) (13,708,000)
------------ ------------
Net deferred tax assets ...................... 218,000 191,000
Deferred tax liabilities:
Intangible assets and other .............. (218,000) (191,000)
------------ ------------
Total deferred tax liabilities ........... (218,000) (191,000)
------------ ------------
Net deferred tax asset (liability) ........... $ -- $ --
============ ============
The valuation allowance increased by $12,121,000 and $8,872,000 during 1997
and 1996, respectively, due primarily to the increase in tax credits and net
operating loss carryforwards.
11. LONG TERM OBLIGATIONS
Long term obligations consist of:
DECEMBER 31,
------------------------
1997 1996
----------- ---------
Note payable to a bank bearing interest at
LIBOR plus 1.75% (7.66% at December 31,
1997) payable in monthly installments
through December, 2001 ............................. $ 4,990,003 $ --
Note payable to a bank bearing interest at
prime (8.5% at December 31, 1997) payable
in quarterly installments commencing June 1998
through June, 2002 with a final payment of
$1,178,571 due on September 30, 2002 ............... 3,000,000 --
Note payable to a bank bearing interest at
prime (8.5% at December 31, 1997) payable in
monthly installments through December, 2000 ....... 757,357 --
Note payable to a bank ............................. 124,359 288,398
Capital lease obligation ........................... -- 227,728
----------- ---------
8,871,719 516,126
Less current portion ............................... (1,949,053) (391,766)
----------- ---------
$ 6,922,666 $ 124,360
=========== =========
F-15
16
GELTEX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. LONG TERM OBLIGATIONS - (CONTINUED)
The bank loan proceeds have been used to finance the build-out of new
facilities and the acquisition of certain equipment. Under the terms of the loan
agreements, 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. At December 31, 1997 the Company was in compliance with
such covenants.
Substantially all of the Company's equipment is pledged as collateral under
the loan agreements,
At December 31, 1997, the maturities of long term obligations are as
follows:
1998.............................. $1,949,053
1999.............................. 1,953,292
2000.............................. 1,907,429
2001.............................. 1,676,068
2002.............................. 1,385,877
In 1996, the Company determined that it was likely to exercise an option to
acquire title to certain leasehold improvements, which was exercised in 1997.
Accordingly, in 1996 the Company recorded a non-recurring charge of $230,000 in
connection with such option.
Given the variable rate of interest on the Company's bank debt, management
believes that the carrying value of notes payable approximates the fair value at
December 31, 1997.
12. LICENSE AGREEMENTS
In December 1994 and October 1995, the Company entered into license
agreements (the "Agreements") with two Japanese pharmaceutical companies (the
"Partners") whereby the Company granted to the Partners licenses to make, use,
and sell certain of the Company's products in certain areas of the world, as
defined by the Agreements (the "Territories"). The Agreements require the
Partners to bear all costs to develop and commercialize the licensed products in
the respective Territories. In consideration of these Agreements, the Company
received a non-refundable license fee in 1994, research support revenue in 1995
and 1996, and milestone payments in 1996 and 1997. The payment of the license
fee received in 1994 and the milestone payment in 1996 were made net of a 10%
withholding tax, which was paid on the Company's behalf by the respective
partner. The Agreement requires the Company to remit to this partner any future
tax benefit received by the Company as a result of the withholding taxes paid.
The 1995 Agreement was canceled in 1996. The 1994 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.
13. RESEARCH GRANT
In February 1995, the Company was awarded a Federal research grant of $2.0
million. The grant is to be paid to the Company for reimbursement of expenses
related to the development of certain products through January 1998.
F-16
17
GELTEX PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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, 1997, 1996 and
1995.
15. COMMITMENTS
During 1997, the Company relocated to an expanded facility. The Company
leases its new offices and research laboratories under an operating lease with
an initial ten year term and a provision for a five year extension. In October
1997, the Company entered into a sublease arrangement for its old facility with
another company for an initial three year term with an option to extend for one
year. Total annual future minimum lease payments and minimum sublease payments
are as follows:
Lease Sublease
Payments Payments
---------- --------
1998........................ $ 377,400 $280,140
1999........................ 377,400 280,140
2000........................ 377,400 256,800
2001........................ 377,400 --
2002........................ 415,200 --
Thereafter.................. 1,612,500 --
---------- --------
Total....................... $3,537,300 $817,080
========== ========
Rental expense charged to operations was approximately $279,600 in 1997,
$76,400 in 1996 and $78,900 in 1995.
16. SUBSEQUENT EVENT
In January 1998, the Board of Directors authorized the management of the
Company to file a Registration Statement with the Securities and Exchange
Commission covering the sale by the Company of shares of Common Stock at a price
to the public of up to $85,000,000.
F-17