GILEAD SCIENCES, INC.
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1998, 1997 and 1996
CONTENTS
Report of Ernst & Young LLP, Independent Auditors..........................3
Audited Supplemental Consolidated Financial Statements
Supplemental Consolidated Balance Sheets...................................4
Supplemental Consolidated Statements of Operations.........................5
Supplemental Consolidated Statement of Stockholders' Equity................6
Supplemental Consolidated Statements of Cash Flows.........................7
Notes to Supplemental Consolidated Financial Statements....................9
2
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Gilead Sciences, Inc.
We have audited the accompanying supplemental consolidated balance sheets of
Gilead Sciences, Inc. (formed as a result of the consolidation of Gilead
Sciences, Inc. and NeXstar Pharmaceuticals, Inc.) as of December 31, 1998 and
1997, and the related supplemental consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. The supplemental consolidated financial statements
give retroactive effect to the merger of Gilead Sciences, Inc. and NeXstar
Pharmaceuticals, Inc. on July 29, 1999, which has been accounted for using
the pooling-of-interests method as described in the notes to the supplemental
consolidated financial statements. Our audits also included the financial
statement schedule listed in the Exhibit Index. These supplemental financial
statements and schedule are the responsibility of the management of Gilead
Sciences, Inc. Our responsibility is to express an opinion on these
supplemental financial statements and schedule 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 supplemental consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of Gilead Sciences, Inc. at December 31, 1998 and 1997, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1998, after giving retroactive
effect to the merger of NeXstar Pharmaceuticals, Inc., as described in the
notes to the supplemental consolidated financial statements, in conformity
with generally accepted accounting principles. Also in our opinion, the
supplemental financial statement schedule referred to above, when considered
in relation to the basic supplemental financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ ERNST & YOUNG LLP
Palo Alto, California
March 1, 1999,
except for Note 2, as to which the date is
July 29, 1999
3
GILEAD SCIENCES, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31,
1998 1997
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 101,136 $ 71,305
Marketable securities 247,607 316,056
Accounts receivable, net of allowance for doubtful accounts
of $1,480 in 1998 and $1,883 in 1997 43,090 34,643
Inventories 16,550 17,410
Prepaid expenses and other 8,506 18,234
-----------------------------
Total current assets 416,889 457,648
Property, plant and equipment, net 51,019 55,091
Other noncurrent assets, net of an allowance of $1,737 in 1997 19,856 4,250
-----------------------------
$ 487,764 $ 516,989
-----------------------------
-----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ - $ 5,034
Accounts payable 7,662 8,540
Accrued clinical and preclinical expenses 12,841 13,119
Accrued compensation and employee benefits 9,387 6,356
Other accrued expenses 19,327 10,833
Deferred revenue 3,275 9,658
Long-term obligations due within one year 4,842 7,298
-----------------------------
Total current liabilities 57,334 60,838
Accrued litigation settlement expenses due after one year 7,848 8,767
Long-term obligations due after one year 8,883 9,658
Convertible subordinated debentures 80,000 80,000
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.001 per share,
issuable in series; 5,000,000 shares authorized;
1,133,786 shares of Series B convertible
preferred issued and outstanding at
December 31, 1998 and 1997
(liquidation preference of $40,000) 1 1
Common stock, par value $.001 per share; 60,000,000 shares authorized;
41,562,837 shares and 40,425,217 shares issued and outstanding at
December 31, 1998 and 1997, respectively 42 40
Additional paid-in capital 716,964 696,160
Accumulated other comprehensive income (loss) (337) (50)
Deferred compensation (225) (437)
Accumulated deficit (382,746) (337,988)
-----------------------------
Total stockholders' equity 333,699 357,726
-----------------------------
$ 487,764 $ 516,989
-----------------------------
-----------------------------
See accompanying notes
Restated to reflect the business combination with NeXstar Pharmaceuticals, Inc.
which has been accounted for as a pooling of interests.
4
GILEAD SCIENCES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
---- ---- ----
Revenues:
Product sales, net $ 114,176 $ 100,887 $ 88,630
Contract revenue 29,638 29,811 33,458
Royalty revenue, net 7,305 1,560 33
--------- --------- ---------
Total revenues 151,119 132,258 122,121
--------- --------- ---------
Expenses:
Cost of goods sold 23,357 21,646 20,144
Research and development 127,773 112,177 89,641
Selling, general and administrative 78,634 70,803 69,612
Litigation settlement and related expenses 1,267 16,031 2,006
--------- --------- ---------
Total expenses 231,031 220,657 181,403
--------- --------- ---------
Operating loss (79,912) (88,399) (59,282)
Gain on sale of a majority interest in a
subsidiary 22,132 - -
Interest income 21,765 20,706 16,863
Interest expense (6,783) (4,878) (2,269)
--------- --------- ---------
Loss before provision for income taxes
and equity in loss of unconsolidated
affiliate (42,798) (72,571) (44,688)
Provision for income taxes 859 322 926
Equity in loss of unconsolidated affiliate (1,101) - -
--------- --------- ---------
Net loss $ (44,758) $ (72,893) $ (45,614)
--------- --------- ---------
--------- --------- ---------
Basic and diluted net loss per common
share $ (1.09) $ (1.85) $ (1.21)
--------- --------- ---------
--------- --------- ---------
Common shares used to calculate basic
and diluted net loss per common
share 41,015 39,432 37,641
--------- --------- ---------
--------- --------- ---------
See accompanying notes
Restated to reflect the business combination with NeXstar Pharmaceuticals, Inc.
which has been accounted for as a pooling of interests.
5
GILEAD SCIENCES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Accumulated
Other
Common Stock Additional Comprehensive Total
Preferred --------------- Paid-In Income Deferred Accumulated Stockholders'
Stock Shares Amount Capital (Loss) Compensation Deficit Equity
------------------------------------------------------------------------------------------------
Balance at December 31, 1995 $ - 32,999,083 $ 33 $ 449,985 $ 27 $(1,633) $(219,481) $ 228,931
Net loss - - - - - - (45,614) (45,614)
Unrealized loss on available
-for-sale marketable
securities, net - - - - (78) - - (78)
Foreign currency translation
adjustment - - - - (90) - - (90)
---------
Comprehensive loss - - - - - - - (45,782)
Private issuance of common stock - 541,121 1 24,995 - - - 24,996
Public offering at $37.75 per
share, net of issuance costs
of $7,063 - 4,305,844 4 155,478 - - - 155,482
Stock repurchases - (52) - - - - - -
Employee stock purchase plan - 203,684 - 2,664 - - - 2,664
Option exercises - 610,280 1 5,400 - - - 5,401
Warrant exercises - 97,338 - 1,233 - - - 1,233
Compensation expense related to
stock option transactions - - - 1,007 - (301) - 706
Amortization of deferred
compensation - - - - - 1,018 - 1,018
----------------------------------------------------------------------------------------------
Balance at December 31, 1996 $- 38,757,298 $39 $640,762 $(141) $(916) $(265,095) $374,649
Net loss - - - - - - (72,893) (72,893)
Unrealized gain on available-for
-sale marketable securities, net - - - - 255 - - 255
Foreign currency translation
adjustment - - - - (164) - - (164)
--------
Comprehensive loss - - - - - - - (72,802)
Issuance of warrant to related
party - - - 353 - - - 353
Stock repurchases - (155) - - - - - -
Employee stock purchase plan - 123,909 - 2,799 - - - 2,799
Option exercises - 1,251,556 1 12,176 - - - 12,177
Warrant exercises - 292,609 - 27 - - - 27
Issuance of 1,133,786 shares of
preferred stock 1 - - 39,999 - - - 40,000
Compensation expense related to
stock option transactions - - - 44 - (44) - -
Amortization of deferred
compensation - - - - - 523 - 523
----------------------------------------------------------------------------------------------
Balance at December 31, 1997 $1 40,425,217 $40 $ 696,160 $ (50) $(437) $(337,988) $357,726
Net loss - - - - - - (44,758) (44,758)
Unrealized loss on available-for-
sale marketable securities, net - - - - (301) - - (301)
Foreign currency translation
adjustment - - - - 14 - - 14
--------
Comprehensive loss - - - - - - - (45,045)
Private issuance of common stock - 364,257 1 9,982 - - - 9,983
Employee stock purchase plan - 133,404 - 2,879 - - - 2,879
Option exercises - 639,959 1 7,509 - - - 7,510
Amortization of deferred
compensation - - - - - 212 - 212
Amounts recognized under
compensatory stock transaction - - - 434 - - - 434
----------------------------------------------------------------------------------------------
Balance at December 31, 1998 $1 41,562,837 $42 $ 716,964 $(337) $(225) $(382,746) $333,699
---- ---------- --- --------- ----- ----- --------- --------
---- ---------- --- --------- ----- ----- --------- --------
See accompanying notes
Restated to reflect the business combination with NeXstar Pharmaceuticals, Inc.
which has been accounted for as a pooling of interests.
6
GILEAD SCIENCES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
YEAR ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996
---- ---- ----
OPERATING ACTIVITIES:
Net loss $ (44,758) $ (72,893) $ (45,614)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization of property, plant and equipment 12,099 12,255 12,683
Amortization of intangible assets 655 1,391 1,122
Write-off of purchased technology - 1,256 -
Gain on sale of a majority interest in a subsidiary (22,132) - -
Equity in loss of unconsolidated affiliate 1,101 - -
Litigation settlement charges 1,267 11,767 -
Additions (reductions) to allowance for doubtful accounts (294) 306 1,497
Reduction in allowance for note receivable (550) - -
Compensation expense related to grant of options and sale of stock,
including amortization of deferred compensation 646 523 1,724
Write down of investment in life science enterprise - - 1,241
Other 123 (202) 222
Changes in operating assets and liabilities:
Accounts receivable (8,120) (4,403) (13,825)
Inventories 860 (1,004) (6,601)
Prepaid expenses and other 9,728 (13,300) (1,628)
Other noncurrent assets (4,515) (275) (24)
Accounts payable (575) (4,313) 4,263
Accrued clinical and preclinical expenses (278) 7,897 799
Accrued compensation and employee benefits 3,096 984 1,368
Other accrued expenses 8,292 367 4,701
Deferred revenue (6,383) 9,131 119
----------------------------------------------
Net cash used in operating activities (49,738) (50,513) (37,953)
INVESTING ACTIVITIES:
Purchases of marketable securities (488,407) (430,498) (463,260)
Sales of marketable securities 390,251 196,515 248,552
Maturities of marketable securities 166,304 102,944 164,208
Capital expenditures (10,778) (14,345) (14,925)
Proceeds from sale of a majority interest in a subsidiary, net of closing
costs 14,652 - -
Investment in unconsolidated affiliate (4,900) - -
Proceeds from sale of investment in life science enterprise - 2,683 -
Payments received on note receivable 550 706 700
----------------------------------------------
Net cash provided by (used in) investing activities 67,672 (141,995) (64,725)
----------------------------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock - 40,000 -
Proceeds from issuances of common stock 20,372 15,003 189,780
Proceeds from (payments on) short-term borrowings, net (5,034) (7,902) 9,436
Payments of litigation settlement (1,313) (1,750) -
Proceeds from sale-leaseback transactions 119 2,217 2,978
Payments of equipment financing obligations (3,284) (5,773) (5,414)
Proceeds from issuance of long-term debt 4,359 18,108 14,527
Repayments of long-term debt (3,322) (26,882) (3,354)
Proceeds from issuance of convertible subordinated debentures, net
of offering costs - 77,200 -
----------------------------------------------
Net cash provided by financing activities 11,897 110,221 207,953
----------------------------------------------
Net increase (decrease) in cash and cash equivalents 29,831 (82,287) 105,275
Cash and cash equivalents at beginning of year 71,305 153,592 48,317
----------------------------------------------
Cash and cash equivalents at end of year $ 101,136 $ 71,305 $ 153,592
----------------------------------------------
----------------------------------------------
7
GILEAD SCIENCES, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
---- ---- ----
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 6,793 $ 2,815 $ 2,289
Income taxes paid 790 253 1,030
SUPPLEMENTAL DISCLOSURES OF GAIN ON SALE OF A MAJORITY
INTEREST IN A SUBSIDIARY:
Cash receipts, net of closing costs $ 14,652 $ - $ -
Receipt of 49% interest in manufacturing facility 5,500 - -
Net present value of guaranteed payments 2,668 - -
Other 63 - -
Net book value of 51% interest sold (751) - -
---------------------------------------
$ 22,132 $ - $ -
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Purchase of equipment and leasehold improvements
through accounts payable $ 757 $ 889 $ 1,020
Issuance of stock through director deferred - - 32
compensation plan
See accompanying notes
Restated to reflect the business combination with NeXstar Pharmaceuticals, Inc.
which has been accounted for as a pooling of interests.
8
GILEAD SCIENCES, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND ORGANIZATION
Gilead Sciences, Inc. (the "Company" or "Gilead") was incorporated in
Delaware on June 22, 1987, and is an independent biopharmaceutical company
that seeks to provide accelerated solutions for patients and the people who
care for them. The Company discovers, develops, manufactures and
commercializes proprietary therapeutics to treat life threatening and other
serious infectious, oncological and hematological diseases. Currently, the
Company markets AmBisome, an antifungal agent, DaunoXome, a drug approved for
the treatment of Kaposi's Sarcoma, and VISTIDE-TM- (cidofovir injection) for
the treatment of cytomegalovirus ("CMV") retinitis. In addition, the Company
is developing products to treat diseases caused by human immunodeficiency
virus ("HIV"), hepatitis B virus ("HBV") and influenza virus.
BASIS OF PRESENTATION
As more fully described in Note 2, on July 29, 1999, Gilead entered into a
business combination ("Merger") with NeXstar Pharmaceuticals, Inc.
("NeXstar"). The business combination has been accounted for as a pooling of
interests and the historical consolidated financial statements of Gilead for
all years prior to the business combination have been restated in the
accompanying Supplemental Consolidated Financial Statements to include the
financial position, results of operations and cash flows of NeXstar. Costs
of the acquisition, which will be charged to operations in 1999, are not
included in the consolidated results of operations through December 31, 1998.
The supplemental financial statements will become the historical financial
statements of Gilead upon issuance of financial statements for the subsequent
period that includes the date of the acquisition of NeXstar.
The accompanying supplemental consolidated financial statements include the
accounts of the Company and its wholly and majority-owned subsidiaries;
significant intercompany transactions have been eliminated. Certain
reclassifications have been made to prior year amounts to agree with the
current year presentation.
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.
REVENUE RECOGNITION
Product sales revenue is recognized upon passage of legal title of the inventory
and satisfaction of all of the Company's performance obligations. The Company
generally does not provide its customers with the right of product return;
however, the Company will replace product that has expired or is deemed to be
damaged or defective. Provisions are made for doubtful accounts, estimated
product returns, cash discounts and government discounts and rebates.
In connection with most of its European sales, the Company prices its products
in the currencies of the countries into which they are sold ("Payment
Currencies"). A significant majority of the Company's manufacturing costs are in
U.S. Dollars. Therefore, any decline in the value of the Payment Currencies
relative to the U.S. Dollar is likely to negatively impact gross margins for the
Company's products since the Company's manufacturing costs would remain
approximately the same while its revenue in terms of U.S. Dollars would decline.
In the past, revenues have been adversely affected by such currency
fluctuations.
9
Contract revenue recognized under the Company's collaborative research and
development ("R&D") arrangements, license and supply agreements and patent
rights purchase agreement is recorded as earned based upon the performance
requirements of the underlying contracts. Milestone payments are recognized as
revenue when all of the Company's performance obligations have been met, the
amount of the milestone payment is readily determinable and the Company has a
unilateral right to demand payment. Payments received in advance under such
agreements are recorded as deferred revenue until earned.
Royalty revenue from sales of VISTIDE is recognized when received, which is
generally in the quarter following that in which the corresponding sales occur.
All other royalty revenue is recognized in the period that the corresponding
sales are made to independent third party customers.
RESEARCH AND DEVELOPMENT COSTS
All R&D costs, including those funded by third parties, are charged to expense
as incurred.
STOCK-BASED COMPENSATION
In accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the Company has
elected to follow Accounting Principles Board Opinion ("APB") No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES, and related interpretations in accounting for its
employee stock option plans. Under APB No. 25, if the exercise price of the
Company's employee and director stock options equals or exceeds the fair value
of the underlying stock on the date of grant, no compensation expense is
recognized. See Note 13 for pro forma disclosures of stock-based compensation
pursuant to SFAS No. 123.
BASIC AND DILUTED LOSS PER COMMON SHARE
For all periods presented, both basic and diluted loss per common share are
computed based on the weighted average number of common shares outstanding
during the period. The impact of convertible debentures, stock options and
warrants could potentially dilute basic earnings per share in the future, but
were excluded from the computation of diluted loss per share as their effect
is antidilutive for the periods presented. In July 1999, the convertible
preferred stock converted into common stock. See Note 20, Subsequent Events.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with insignificant interest rate
risk and a remaining maturity of three months or less at the purchase date to be
cash equivalents. Gilead may enter into overnight repurchase agreements under
which it purchases securities with an obligation to resell them the following
day. Securities purchased under agreements to resell are recorded at face value
and reported in cash and cash equivalents.
SECURITIES AVAILABLE-FOR-SALE
Management determines the appropriate classification of its marketable debt
securities at the time of purchase and reevaluates such designation at each
balance sheet date. The Company's marketable debt securities are classified as
available-for-sale and carried at estimated fair values in cash equivalents and
marketable securities. At December 31, 1998, cash and cash equivalents includes
$89.2 million of securities designated as available-for-sale ($61.0 million at
December 31, 1997). Fair values of available-for-sale securities are based on
prices obtained from commercial pricing services. Unrealized gains and losses on
available-for-sale securities are excluded from earnings and reported as a
separate component of stockholders' equity. Interest income includes interest,
dividends, amortization of purchase premiums and discounts, and realized gains
and losses on sales of securities. The cost of securities sold is based on the
specific identification method.
10
CONCENTRATIONS OF CREDIT RISK
Gilead is subject to credit risk from its portfolio of cash equivalents and
marketable securities. By policy, the Company limits amounts invested in such
securities by maturity, industry group, investment type and issuer, except for
securities issued by the U.S. government. Gilead is not exposed to any
significant concentrations of credit risk from these financial instruments. The
goals of the Company's investment policy, in order of priority, are as follows:
1. Safety and preservation of principal;
2. Diversification of risk;
3. Liquidity of investments sufficient to meet cash flow requirements;
and
4. Competitive after-tax rate of return.
Gilead is also subject to risk from its accounts receivable related to
product sales. A substantial majority of the Company's product sales revenue
arises from export sales of AmBisome, primarily through the Company's
subsidiaries and distributors in Europe. The Company performs credit
evaluations of its customers' financial condition and generally has not
required collateral. The Company's accounts receivable are predominantly
trade receivables, and to date, the Company has experienced only modest
credit losses with respect to these accounts.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation and amortization are recognized using the
straight-line method. Estimated useful lives are as follows:
Description Estimated Useful Life (in years)
----------- -------------------------------
Building 20
Leasehold improvements Shorter of useful life or lease term
Laboratory and manufacturing equipment 4 - 8
Office furniture and equipment 6 - 7
Computer equipment 2 - 3
Capitalized software 3
Capitalized lease equipment Shorter of useful life or lease term
All of the Company's capitalized software is purchased. The Company has no
internally developed computer software.
LONG-LIVED ASSETS
The carrying value of long-lived assets is reviewed on a regular basis for the
existence of facts or circumstances both internally and externally that may
suggest impairment. Specific potential indicators of impairment include:
- - a significant decrease in the fair value of an asset;
- - a significant change in the extent or manner in which an asset is used or a
significant physical change in an asset;
- - a significant adverse change in legal factors or in the business climate
that affects the value of an asset or an adverse action or assessment by a
regulator;
- - an accumulation of costs significantly in excess of the amount originally
expected to acquire or construct an asset; and
- - operating or cash flow losses combined with a history of operating or cash
flow losses or a projection or forecast that demonstrates continuing losses
associated with an income-producing asset.
11
Should there be indication of an impairment, the Company will confirm this by
comparing the estimated future cash flows expected to result from the use of the
asset and its eventual disposition to the carrying amount of the asset. In
estimating these future cash flows, assets are grouped at the lowest level for
which there are identifiable cash flows that are largely independent of the cash
flows generated by other asset groups. If the sum of the expected future cash
flows (undiscounted and without interest changes) is less than the carrying
amount of the asset, an impairment loss, measured as the excess of the carrying
value of the asset over its fair value, will be recognized. The cash flow
estimates used in such calculations are based on management's best estimates,
using appropriate and customary assumptions and projections at the time.
OTHER ACCRUED LIABILITIES
At December 31, 1998, other accrued liabilities includes $5.0 million due to F.
Hoffmann-La Roche, Ltd. and Hoffmann-La Roche, Inc. (collectively, "Roche"). See
Note 4.
FOREIGN CURRENCY TRANSACTIONS AND CONTRACTS
Foreign exchange transaction losses included in the Supplemental Consolidated
Statements of Operations in 1998, 1997 and 1996 were $0.3 million, $0.3
million and $0.4 million, respectively.
The Company hedges certain of its foreign currency exposures related to
outstanding trade accounts receivable, accounts payable and firmly committed
purchase transactions with foreign exchange forward contracts. In general, these
contracts do not expose the Company to market risk because gains and losses on
the contracts offset gains and losses on the transactions being hedged. The
Company's exposure to credit risk from these contracts is a function of changes
in interest and currency exchange rates and, therefore, varies over time. Gilead
limits the risk that counterparties to these contracts may be unable to perform
by transacting only with major U.S. banks. The Company also limits its risk of
loss by entering into contracts that provide for net settlement at maturity.
Therefore, the Company's overall risk of loss in the event of a counterparty
default is limited to the amount of any unrecognized and unrealized gains on
outstanding contracts (i.e., those contracts that have a positive fair value) at
the date of default. The Company does not enter into speculative foreign
currency transactions and does not write options.
In accounting for hedges of accounts receivable and accounts payable, the
Company recognizes a gain or loss on each forward contract based on the
difference between the contract exchange rate and the market exchange rate on
each balance sheet date, which is reported as a selling, general and
administrative expense. With respect to hedges of firmly committed purchase
transactions, unrealized gains and losses on the underlying forward contracts
are deferred and reported as a component of the related transaction in the
period in which it occurs.
At December 31, 1998 and 1997, the Company had forward exchange contracts
outstanding of $42.4 million and $28.9 million, respectively. None of these
contracts have maturities that exceed one year.
The Company presently does not hedge its net investment in any of its foreign
subsidiaries.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist principally of cash and cash
equivalents, marketable securities, accounts receivable, certain other
non-current assets, forward foreign exchange contracts, short-term
borrowings, accounts payable, long-term obligations and convertible
subordinated debentures. Management believes the financial instruments'
recorded values approximate current values with the exception of the
convertible subordinated debentures. The fair value of the convertible
subordinated debentures at December 31, 1998 and 1997 was $69.4 million and
$74.4 million, respectively (such fair values being determined by the average
of the bid and asked price set by a market maker for the convertible
subordinated debentures), as compared to a carrying value of $80.0 million at
both dates.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
12
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which
establishes accounting and reporting standards for derivative instruments,
including forward foreign exchange contracts, and hedging activities. In June
1999, the FASB issued SFAS No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES--DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133.
SFAS No. 133 is now effective for fiscal years beginning after June 15, 2000
and, therefore, the Company will adopt this accounting standard effective
January 1, 2001. Management has not yet determined the impact of SFAS No. 133 on
its financial position or results of operations.
2. ACQUISTION OF NEXSTAR
On July 29, 1999, the Company acquired all of the outstanding common stock of
NeXstar, a Delaware corporation, pursuant to an Agreement and Plan of Merger
dated as of February 28, 1999. As a result, NeXstar became a wholly owned
subsidiary of Gilead. NeXstar was an integrated biopharmaceutical company
engaged in the discovery, development, manufacture and marketing of
proprietary pharmaceutical products to treat life threatening and other
serious oncological, hematological and infectious diseases. In connection
with the Merger, Gilead issued a total of 11,212,730 shares of Gilead common
stock, or 0.3786 of a share of Gilead common stock for each share of NeXstar
common stock, to NeXstar's stockholders as consideration for all shares of
common stock of NeXstar. In addition, holders of options and warrants
outstanding at the time of the Merger to purchase an aggregate of
approximately 2,236,413 shares of NeXstar common stock will receive, upon
exercise of such options and warrants, the same fraction of a share of Gilead
common stock, and holders of $80.0 million principal amount of 6.25%
Convertible Subordinated Debentures of NeXstar ("Debentures") will now have
the right to convert the Debentures into an indeterminate number of shares of
Gilead common stock. The Merger is intended to qualify as a tax-free
reorganization and to be accounted for as a pooling of interests.
As a result of the Merger, Gilead anticipates that a pre-tax charge of up to
approximately $19.0 million for direct merger-related transaction costs,
consisting primarily of professional fees and severance costs, will be
incurred.
The Supplemental Consolidated Financial Statements have been prepared to give
retroactive effect to the Merger with NeXstar on July 29, 1999. Generally
accepted accounting principles prohibit giving effect to a consummated
business combination accounted for by the pooling-of-interests method in
financial statements that do not include the date of consummation. The
accompanying supplemental consolidated financial statements do not extend
through the date of the consummation, however, they will become the
historical consolidated financial statements of the Company after financial
statements covering the date of consummation of the business combination are
issued.
The table below sets forth the combined net revenues and net loss for the
periods indicated:
Gilead NeXstar Adjustments Combined
Year ended December 31, 1998
Net revenues $ 32,570 $118,549 $ -- $151,119
Net income (loss) $(56,075) $ 10,920 $ 397 $(44,758)
Year ended December 31, 1997
Net revenues $ 40,037 $ 92,221 $ -- $132,258
Net loss $(27,993) $(43,910) $(990) $(72,893)
Year ended December 31, 1996
Net revenues $ 33,420 $ 88,701 $ -- $122,121
Net loss $(21,732) $(22,981) $(901) $(45,614)
3. AVAILABLE-FOR-SALE SECURITIES
The following is a summary of available-for-sale securities (in thousands):
13
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------------------------------------------------------------------
DECEMBER 31, 1998
U.S. treasury securities
and obligations of U.S.
government agencies $ 78,846 $ 62 $ (123) $ 78,785
Certificates of deposit 38,058 65 (11) 38,112
Corporate debt securities 34,676 152 (18) 34,810
Asset-backed securities 89,565 101 (185) 89,481
Other debt securities 95,626 - - 95,626
------- -------- -------- --------
Total $336,771 $ 380 $ (337) $336,814
------- -------- -------- --------
------- -------- -------- --------
DECEMBER 31, 1997
U.S. treasury securities
and obligations of U.S.
government agencies $ 43,791 $ 55 $ (9) $ 43,837
Certificates of deposit 67,485 20 (2) 67,503
Corporate debt securities 92,875 192 (5) 93,062
Asset-backed securities 118,362 121 (35) 118,448
Other debt securities 39,614 - - 39,614
------- -------- -------- --------
Total $362,127 $ 388 $ (51) $362,464
------- -------- -------- --------
------- -------- -------- --------
The following table presents certain information related to sales of
available-for-sales securities (in thousands):
Year Ended December 31,
1998 1997 1996
--------------------------------------------
Proceeds from sales $390,426 $198,515 $252,431
Gross realized gains on sales $ 1,127 $ 229 $ 451
Gross realized losses on sales $ (654) $ (142) $ (146)
At December 31, 1998, $63.7 million of the Company's portfolio of marketable
securities (excluding asset-backed securities) has a contractual maturity of
less than one year and $94.4 million of the portfolio has a contractual maturity
greater than one year but less than three years. None of the estimated
maturities of the Company's asset-backed securities exceed three years. Under
the Company's investment policy, it may enter into repurchase agreements
("repos") with major banks and authorized dealers provided that such repos are
collateralized by U.S. government securities with a fair value of at least 102%
of the fair value of securities sold to Gilead.
14
4. COLLABORATIVE ARRANGEMENTS
FUJISAWA
The Company's rights to market AmBisome are subject to an agreement between the
Company and Fujisawa Healthcare, Inc., as successor to Fujisawa USA, Inc.
("Fujisawa"). Under the terms of the agreement, as amended, Fujisawa and the
Company co-promote AmBisome in the United States, Fujisawa has sole marketing
rights to AmBisome in Canada and the Company has exclusive marketing rights to
AmBisome in the rest of the world, provided the Company pay royalties to
Fujisawa in connection with sales in most significant Asian markets, including
Japan. In connection with U.S. sales, Fujisawa purchases AmBisome from the
Company at cost; Fujisawa collects all payments from the sale of AmBisome in the
United States, and the Company receives 20% of the gross profits from the sale
of AmBisome in the United States. In 1998 and 1997, the Company recorded $4.8
million and $0.7 million of royalty income, respectively, in connection with the
agreement between the Company and Fujisawa.
SUMITOMO
In September 1996, the Company and Sumitomo Pharmaceuticals Co., Ltd.
("Sumitomo") entered into an agreement ("Sumitomo License") pursuant to which
Sumitomo has agreed to develop and market AmBisome in Japan. Under the terms
of the Sumitomo License, Sumitomo paid the Company an initial $7.0 million
licensing fee (less withholding taxes of $0.7 million) in October 1996 and a
$3.0 million milestone payment (less withholding taxes of $0.3 million) in
March 1998. Sumitomo also is required to make additional payments to the
Company if certain clinical and commercial milestones are met and to pay the
Company royalties on all Japanese AmBisome sales.
PHARMACIA & UPJOHN
In August 1996, the Company and Pharmacia & Upjohn S.A. ("Pharmacia & Upjohn")
entered into a License and Supply Agreement ("Pharmacia & Upjohn Agreement") to
market VISTIDE in all countries outside the United States. Under the terms of
the Pharmacia & Upjohn Agreement, Pharmacia & Upjohn paid Gilead an initial
license fee of $10.0 million. During the second quarter of 1997, VISTIDE was
approved for marketing in the European Union by the European Commission, which
triggered an additional cash milestone payment of $10.0 million by Pharmacia &
Upjohn to the Company. Also as a result of achieving this milestone, in the
second quarter of 1997 the Company issued and Pharmacia & Upjohn purchased
1,133,786 shares of Series B Convertible Preferred Stock for approximately $40.0
million, or $35.28 per share. For additional information about the preferred
stock, refer to Note 13.
Under the terms of the Pharmacia & Upjohn Agreement and related agreements
covering expanded access programs for VISTIDE outside of the United States, the
Company is responsible for maintaining the cidofovir patent portfolio and for
supplying to Pharmacia & Upjohn bulk cidofovir used to manufacture the finished
VISTIDE product ("Product"). Gilead is entitled to receive a royalty based upon
Pharmacia & Upjohn's sale of Product. It receives a portion of the royalty upon
shipping either bulk drug substance or Product to Pharmacia & Upjohn, and the
remainder upon Pharmacia & Upjohn's sale of Product to third parties. Any
royalties that Gilead receives before Product is sold to third parties are
recorded as deferred revenue until such third-party sales occur. At December 31,
1998, the Company has recorded on its balance sheet approximately $3.3 million
of Pharmacia & Upjohn deferred revenue ($2.1 million at December 31, 1997). The
Company recognized royalty revenue of $1.7 million and $0.7 million in 1998 and
1997, respectively, from sales of VISTIDE outside of the United States by
Pharmacia & Upjohn.
15
HOFFMANN-LA ROCHE
In September 1996, Gilead and Roche entered into a collaboration agreement
("Roche Agreement") to develop and commercialize therapies to treat and prevent
viral influenza. Under the Roche Agreement, Roche received exclusive worldwide
rights to Gilead's proprietary influenza neuraminidase inhibitors. In October
1996, Roche made an initial license fee payment to Gilead of $10.3 million,
which the Company reported as contract revenue. Upon achieving certain
developmental milestones, in both the second and fourth quarters of 1997, Gilead
earned cash payments of $3.0 million per quarter, for a total of $6.0 million.
As of December 31, 1998, Gilead is entitled to additional cash payments of up to
$34.0 million upon achieving additional developmental and regulatory milestones.
If any commercial products are developed under the collaboration, Roche will pay
Gilead royalties based on net product sales.
Under the Roche Agreement, Roche reimburses the Company for its related R&D
costs under this program by funding such costs quarterly and generally in
advance, based on an annual budget. Reimbursements are included in contract
revenue as the Company incurs the related R&D costs. Amounts incurred by the
Company in excess of amounts funded may also be reimbursed, subject to Roche's
approval. In this event, revenue is not recognized until such approval has been
obtained. Conversely, if amounts funded by Roche exceed the Company's related
R&D costs, the Company may be required to repay such excess funding to Roche.
For the years ended December 31, 1998, 1997 and 1996, the Company recorded
approximately $16.4 million, $8.2 million and $1.1 million, respectively, of
R&D reimbursement revenue related to the Roche Agreement, which is reported
as contract revenue in the accompanying supplemental consolidated statements
of operations. The $16.4 million recorded as revenue during 1998 includes
$5.2 million attributable to R&D expenses incurred in the fourth quarter of
1997, which were subject to Roche's approval as of December 31, 1997. Such
expenses were approved for reimbursement and recognized in contract revenue
in 1998. Except for this $5.2 million, R&D costs related to the Roche
Agreement approximate the reimbursement revenue in each year presented and
are included in R&D expenses.
At December 31, 1998, the Company has recorded an accrued liability of $5.0
million, which represents 1998 R&D funding from Roche in excess of actual 1998
R&D costs. In addition, the Company and Roche were in the process of finalizing
the 1999 budget at December 31, 1998 and, as a result, the Company did not
receive advance funding for estimated 1999 R&D spending under the Roche
Agreement. At December 31, 1997, deferred revenue includes $7.2 million,
representing Roche's advance reimbursement of budgeted R&D costs for the first
quarter of 1998.
In September 1996, Gilead and Roche Laboratories, Inc. ("Roche Labs") entered
into an agreement to co-promote Roche's Roferon-A for the treatment of chronic
hepatitis C infection in the United States. Roche Labs paid Gilead a $0.2
million one-time fee in 1996 in connection with the signing of this agreement.
Beginning in 1997, Roche Labs was required to pay Gilead a royalty based on the
net product sales. The Company recognizes these royalties when received. During
1998, Gilead received $0.6 million, which is reported as royalty revenue. This
co-promotion agreement concluded at the end of 1998. While the Company has
received transition payments under the agreement in 1999, such amounts were not
significant.
SCHERING A.G.
In 1993, the Company entered into a collaborative research agreement
("Schering Research Agreement") and license agreement ("Schering License
Agreement") with Schering A.G. Under the Schering Research Agreement,
Schering A.G. has funded research at Gilead for the discovery and development
of aptamers as IN VIVO diagnostic agents. The level of funding under this
agreement has varied over the five-year term, from $1.0 million to $2.4 million
annually. In March 1999, Schering A.G. agreed to fund $0.3 million under the
Schering Research Agreement for the first half of 1999, with an option to
continue funding an additional $0.3 million in 1999 and $0.5 million annually
thereafter. Under the Schering Research Agreement, Gilead is presently
developing aptamers for thromboembolic disease diagnosis and tumor diagnosis.
Under the Schering License Agreement, Schering A.G. has the right to develop and
commercialize aptamers as IN VIVO diagnostic agents or radiotherapeutics
discovered and developed under the Schering Research Agreement. Schering A.G. is
required to make milestone and royalty payments to the Company upon
commercialization and sale
16
of any products developed under the collaboration with the Company. The
milestone payments for any one product total $6.0 million and are triggered
by the filing of an IND, the initiation of Phase III clinical trials, the
filing of an NDA and approval of a product for commercial sale. The Schering
License Agreement permits the Company to develop and commercialize aptamers
discovered under the Schering Research Agreement outside the field of IN VIVO
diagnostic agents or radiotherapeutics, subject to royalty payments to
Schering A.G.
GLAXO WELLCOME
In May 1998, the Company entered into a three-part collaboration with Glaxo
Wellcome Inc. ("Glaxo") in which (a) Glaxo received a non-exclusive right to use
the Company's proprietary SELEX process for target validation; (b) the Company
received the exclusive rights to develop and commercialize NX 211, a liposomal
formulation of Glaxo's proprietary topoisomerase I inhibitor (lurtoctecan); and
(c) Glaxo acquired 364,257 shares of the Company's common stock for $10.0
million in a private offering.
In July 1990, the Company entered into a collaborative research agreement
with Glaxo. Concurrent with the signing of the agreement, Glaxo made an $8.0
million equity investment in the Company and holds 889,911 shares of the
Company's outstanding common stock at December 31, 1998 as a result of this
transaction. Under the terms of the Glaxo agreement, as amended over time,
the Company received $1.8 million in 1998, and $3.0 million in both 1997 and
1996, to fund research, which is reported as contract revenue in the
accompanying supplemental consolidated statements of operations. The R&D
costs reimbursed by Glaxo approximate the related revenue and are included in
R&D expense. This agreement and the related funding were terminated in June
1998.
BAUSCH & LOMB
In August 1994, the Company entered into a license and supply agreement with
Bausch & Lomb Incorporated (formerly Storz Instrument Company, a subsidiary of
American Home Products Corporation), to develop and market an eyedrop
formulation of cidofovir for the potential treatment of topical ophthalmic
viruses. The Company received a $0.3 million annual fee under this agreement in
each of the years ended December 31, 1997 and 1996, which is reported as
contract revenue. If specified milestones are achieved, the Company may receive
up to $3.0 million in milestone payments. The Company also may be entitled to
receive future royalties on product sales under the agreement.
ISIS PHARMACEUTICALS
In December 1998, Gilead and Isis Pharmaceuticals, Inc. ("Isis") entered into
an agreement under which Gilead sold Isis its antisense patent estate,
including patents and patent applications covering antisense chemistry and
antisense drug delivery systems. Under the terms of the agreement, Isis is
required to pay Gilead a total of $6.0 million in four nonrefundable
installments. The first $2.0 million was paid in December 1998, and the
remaining $4.0 million is payable in three additional payments (one payment
of $1.0 million in both 1999 and 2000, and one payment of $2.0 million in
2001). The total sale price of $6.0 million is included in contract revenue
in the Company's supplemental consolidated statement of operations for the
year ended December 31, 1998. Gilead has no ongoing research or funding
obligations under the agreement.
5. INVENTORIES
Raw materials, work in process and finished goods inventories are recorded at
the lower of cost or market, with cost determined on a first-in, first-out
basis. Management periodically reviews the composition of inventory in order to
identify obsolete, slow-moving or otherwise unsaleable items. If such items are
observed and there are no alternate uses of the inventory, the Company will take
a write-down to net realizable value in the period that the units are identified
as impaired. Historically, inventory write-downs have been insignificant and
consistently within management's expectations.
Inventories are summarized as follows (in thousands):
17
December 31,
1998 1997
------------------------
Finished goods $ 3,672 $ 3,700
Work in process 5,962 8,377
Raw materials 6,916 5,333
------- -------
$16,550 $17,410
------- -------
------- -------
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
December 31,
1998 1997
-----------------------------
Building and building improvements $ 1,879 $ 1,831
Leasehold improvements 42,821 43,102
Laboratory and manufacturing equipment 26,568 23,609
Office furniture and equipment 5,312 4,185
Computer equipment 9,442 6,872
Capitalized software 4,215 3,218
Capitalized leased equipment 17,385 22,818
Construction in progress 639 763
--------- ---------
108,261 106,398
Less accumulated depreciation and amortization (57,242) (51,307)
--------- ---------
$ 51,019 $ 55,091
--------- ---------
--------- ---------
7. INVESTMENT IN UNCONSOLIDATED AFFILIATE
In late 1997, the Company established its NeXstar Technology Products division
which included the Company's proprietary technology called Product Anchored
Sequential Synthesis ("PASS"), a method of synthesizing the oligonucleotides
that are the basis for the products being developed using the SELEX process. In
July 1998, the Company established Proligo L.L.C., a Delaware limited liability
company ("Proligo"), as a wholly-owned subsidiary and transferred all of the
assets of the NeXstar Technology Products division to Proligo. On August 15,
1998, the Company sold a 51% interest (the "Interest") in Proligo to SKW
Americas, Inc. ("SKW"). As payment for the Interest, the Company received $15
million in cash and a 49% interest in PerSeptive Biosystems GmbH, a company in
Hamburg, Germany (the "Hamburg Company"), which specializes in the manufacture
of nucleoside phosphoramidite monomers. The 49% interest of the Hamburg Company
had a fair market value of approximately $5.5 million. In addition, SKW
agreed to pay the Company $3.0 million in guaranteed payments (discounted at
8.5% for gain recognition purposes) and up to $20.5 million in
performance-based milestones over the next five years. As part of the
transaction, the Company contributed $4.9 million and its 49% interest in the
Hamburg Company to Proligo. SKW contributed $5.1 million and the remaining
51% interest in the Hamburg Company to Proligo. The Company and Proligo have
agreed that Proligo will manufacture oligonucleotides required by the Company
at cost plus a fixed percentage. The Company recorded a $22.1 million gain in
connection with this sale.
18
The Company accounts for its investment in Proligo using the equity method
and the net book value of the investment at December 31, 1998 was
approximately $10.3 million. The investment is reported in other noncurrent
assets on the Company's supplemental consolidated balance sheets. In 1998,
the Company recorded $1.1 million as its equity in the loss from Proligo
representing its 49% share of losses from August 15 through November 30,
1998, the Proligo fiscal year end. The Proligo operating loss for December
1998 was approximately $1.6 million, of which the Company will recognize its
49% share (approximately $0.8 million) in 1999. In the event Proligo needs
additional capital in 1999 and 2000 of up to $5.0 million in each year
("Additional Capital"), Gilead has agreed to contribute its proportionate
share of such Additional Capital based on its percentage ownership interest
in Proligo.
Proligo is in the business of supplying nucleic acid and Peptide synthesis
products to the pharmaceutical and biopharmaceutical industry for sale and use
as laboratory research reagents and in therapeutic and diagnostic products.
8. INVESTMENT IN LIFE SCIENCE ENTERPRISE
At December 31, 1996, the Company recorded a $1.2 million write down of an
investment in a life science enterprise accounted for under the cost method due
to a permanent decline in value. In June 1997, the Company sold all of its
holdings in the enterprise for $2.7 million following that company's initial
public offering. As a result of the sale, the Company recorded an immaterial
loss in 1997.
9. PURCHASED TECHNOLOGY
In 1992, the Company and Vical, Incorporated ("Vical") entered into an agreement
under which the Company purchased for $3.0 million exclusive rights to develop
applications of Vical's lipid conjugate technology for a limited number of
applications. This agreement was expanded in 1993 to grant the Company exclusive
rights to Vical's entire portfolio of lipid conjugate technologies for all
potential therapeutic applications for an additional $1.5 million. The cost of
such technology was capitalized. Effective January 1, 1995, the Company began
amortizing the remaining value of the technology over a four-year period. The
Company evaluated the carrying amount of the technology for impairment at least
quarterly by, among other things, reviewing the status of applicable ongoing
development activities, as well as the progress of patent applications and
issuances. In September 1997, the Company determined that it would no longer
pursue this technology and expensed the remaining $1.3 million of unamortized
purchased technology.
10. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
December 31,
1998 1997
----------------------------
Capital lease obligations: Interest payable monthly at
6.89% to 13.91% $ 7,901 $ 9,789
Adjustable rate debt: Quarterly installments through
2000; unsecured; interest payable quarterly based on
applicable LIBOR rates 1,313 2,814
Fixed rate debt: Monthly installments through 2003;
secured by equipment; interest payable monthly at
9.69% to 12.62% 4,511 4,353
--------- --------
Total long-term obligations 13,725 16,956
Less current portion (4,842) (7,298)
--------- --------
Long-term obligations due after one year $ 8,883 $ 9,658
--------- --------
--------- --------
Maturities of all long-term obligations, including capital lease obligations,
due subsequent to December 31, 1998 are as follows (in thousands):
Year Amount
---- ------
1999 $4,842
2000 3,734
2001 2,993
2002 1,855
2003 301
19
The terms of the various debt agreements require the Company to comply with
certain financial and operating covenants. At December 31, 1998, the Company was
in compliance with all such covenants.
11. CONVERTIBLE SUBORDINATED DEBENTURES
During the third quarter of 1997, the Company sold $80.0 million of 6.25%
Debentures due 2004 in a private offering to SBC Warburg Inc. and
Oppenheimer & Co., Inc., which resold the Debentures to a group of private
investors. The Debentures were issued pursuant to an indenture and are
convertible into a total of up to 1,794,844 shares of the Company's common
stock at $44.57 per share, which was greater than the fair market value of
the Company's common stock at the time the Debentures were issued. The
Company has reserved 1,794,844 shares of its authorized common stock for
shares that may be issued upon conversion of the Debentures. The Debentures
are redeemable in whole or in part, at the option of the Company, at any time
on or after August 10, 2000, at specified redemption prices plus accrued
interest.
12. COMMITMENTS AND CONTINGENCIES
LEASES AND FINANCING AGREEMENTS
The Company has entered into long-term noncancelable operating leases for
facilities in Boulder, Colorado, Foster City, California and San Dimas,
California. The leases contain the following terms:
Location Termination Date Renewal Options
- -------- ---------------- ---------------
Boulder, CO October 2001 Two five-year terms
Boulder, CO July 2003 None
Foster City, CA March 2006 Two five-year terms
San Dimas, CA November 2003 Two five-year terms
San Dimas, CA May 2003 Two five-year terms
Rent expense net of sublease income under the Company's operating leases totaled
approximately $6.8 million, $6.8 million and $5.6 million for the years ended
December 31, 1998, 1997 and 1996, respectively.
The Company has entered into certain financing and sale-leaseback
transactions and related equipment and facilities improvement master lease
agreements for manufacturing equipment, general laboratory and scientific
equipment, office equipment, furniture, fixtures and facilities improvements.
Title to assets acquired under the Company's lease lines of credit resides
with the lessor. The Company has the option to purchase the assets at the end
of the lease terms at fair market value. The leases have terms ranging from
three to five years. At December 31, 1998, no amounts were available under
such agreements.
20
At December 31, 1998, the aggregate noncancelable future minimum rental payments
under operating and capital leases, net of aggregate future minimum rentals
to be received by the Company under noncancelable subleases, are as follows (in
thousands):
Operating Leases, Net of
Years ending December 31, Noncancelable Subleases Capital Leases
------------------------- ------------------------ ---------------
1999 $ 6,811 $ 2,954
2000 6,081 2,522
2001 5,683 2,393
2002 5,323 1,245
2003 4,694 -
Thereafter 8,450 -
-------- -------
$ 37,042 9,114
--------
--------
Less amount representing interest (1,213)
--------
Total capital lease obligations 7,901
Less current portion (2,376)
--------
Capital lease obligations due after one year $ 5,525
--------
--------
The Company has in place a letter of credit agreement from a bank, which secures
the aggregate future payments under one of its facilities leases. At December
31, 1998, a total of $0.5 million was secured under this letter of credit
arrangement.
CONTINGENT LIABILITY
In connection with the August 1998 sale of a majority interest in its
subsidiary, Proligo, (see Note 7 -Investment in Unconsolidated Affiliate), the
Company transferred certain property and equipment with a net book value of $4.5
million to Proligo. The majority of such property and equipment is financed or
leased by the Company in accordance with the aforementioned sale-leaseback
transactions and financing arrangements. As part of this transaction, the
Company transferred the underlying debt to Proligo pursuant to various Sublease,
Consent and Assignment Agreements (collectively referred to as the "Sublease
Agreements"). As a result, the Company is required to pay the debt financing and
lease liabilities to the financial institutions directly for Proligo's share of
the liabilities and Proligo is required to reimburse the Company for these
amounts and is bound by the same terms and conditions as the Company's
agreements with financial institutions and lessors. In the event that Proligo
were to default on its obligations under the Sublease Agreements, the Company
would continue to be liable for amounts outstanding as of the date of the
default. At December 31, 1998, Proligo was current with respect to its
reimbursements to the Company and the balance of Proligo's lease and debt
liabilities under the Sublease Agreements was $2.8 million. Such liabilities are
not included in the Company's Consolidated Balance Sheets.
Additionally, the Company and Proligo entered into Assignment, Assumption and
Consent Agreements ("Agreements") with the landlords of two laboratory
facilities Proligo occupies. Under the Agreements, Proligo has assumed the
obligations to the landlords, but the Company remains liable in the event of
default. The total unpaid amount of such operating lease commitments as of
December 31, 1998 was approximately $0.6 million.
In the event Proligo defaults on any payments under the Sublease Agreements and
the Company is required to cure such default on behalf of Proligo, SKW is
obligated to reimburse the Company 51% of any amounts paid by the Company.
LOAN RECEIVABLE
The Company owns a 13.9% equity interest in Phytogen Life Sciences Inc. ("PLS"),
a Canadian corporation incorporated in British Columbia. In June 1996, the
Company's holdings in connection with PLS were restructured. Pursuant to the
restructuring, the Company gave up its right to convert a Canadian $4.5 million
loan ("Loan") (approximately $3.3 million at the time of conversion and
approximately $3.3 million at December 31, 1995), which it made to PLS, into a
49.9% interest in PLS; converted Canadian $1.0 million (approximately $0.7
million at the
21
time of conversion) of the Loan into 235,714 preference shares in PLS; and
converted the Loan to a United States Dollar-based loan. In addition, PLS
issued a warrant to the Company to acquire up to 300,000 PLS common shares
for $3 per share and repaid the Company approximately $0.7 million in
connection with the Loan. During 1997, PLS repaid the Company $0.8 million in
connection with the Loan. The face amount of the Loan at December 31, 1997
was $1.7 million with an outstanding allowance for loan loss of $1.7 million.
In March 1998, the Company received $0.6 million as full settlement of the
loan.
SHORT-TERM BORROWINGS
In March 1997, the Company entered into an agreement with a domestic bank
pursuant to which the Company and certain of its subsidiaries could borrow up to
$15.0 million, with the borrowings being collateralized by certain of the
non-U.S. accounts receivable of the Company and its subsidiaries. In September
1997, the Company simultaneously terminated this agreement and entered into an
unsecured line of credit with the same bank for $10.0 million (the "Credit
Agreement"). Under the terms of the Credit Agreement, the Company is required to
maintain certain financial ratios and there are limitations on the Company's
ability to incur additional debt or to engage in certain significant
transactions. The Credit Agreement, which includes a foreign exchange facility,
expires November 1, 1999. The short-term borrowings outstanding under the Credit
Agreement at December 31, 1997 were $1.8 million. There were no amounts
outstanding under this agreement as of December 31, 1998.
In May 1996, the Company's Spanish subsidiary entered into an agreement to
borrow up to 500 million Spanish Pesetas (approximately $3.3 million on December
31, 1997) with such borrowing being secured by the subsidiary's accounts
receivable in Spain. In February 1997, the agreement was amended to increase the
amount that the subsidiary could borrow to 750 million Spanish Pesetas
(approximately $4.9 million on December 31, 1997). In connection with the
agreement, the Company had to maintain $2.0 million in an unrestricted account.
As of December 31, 1997, the subsidiary had borrowings of 500 million Spanish
Pesetas (approximately $3.3 million on December 31, 1997) under the agreement.
On April 1, 1998, the Company's Spanish subsidiary terminated the loan as to new
borrowings and the balance of the loan was paid in full in September 1998.
Additionally, the $2.0 million in the unrestricted accounts was returned to the
Company.
The weighted average interest rate on short-term borrowings as of December 31,
1997 was 6.89%.
PATENT MATTERS
On August 11, 1997, the Company and The Liposome Company, Inc. ("TLC") reached
a settlement in which the two companies agreed to dismiss all legal
proceedings involving TLC's reexamined U.S. Patent No. 4,880,635 ("TLC
'635 Patent") and U.S. Patent No. 5,578,320 ("TLC '320 Patent") and their
international counterparts. The legal proceedings related to whether
AmBisome, the Company's liposomal formulation of amphotericin B, infringed
TLC's patents because of the manner in which it is freeze dried
(lyophilized). In the settlement agreement between the parties, TLC granted
the Company immunity from suit in connection with the worldwide production
and sales of AmBisome and a worldwide right to use the TLC '635 Patent and
the TLC '320 Patent. Under the terms of the Settlement Agreement, the
Company made an initial payment to TLC of $1.75 million and is required to
make payments which began in 1998 based on AmBisome sales over the next
several years. Because the payments are subject to certain minimum and
maximum amounts, the Company recorded accounting charges in 1997 of $11.8
million, of which $10.0 million represented the net present value of all
future minimum payments it is required to make (utilizing an 8.5% discount
rate) and $1.8 million represented the initial cash payment. Beginning in
1998, the Company is recording an expense each quarter related to the
difference between all future minimum payments and the expense recorded in
1997. In addition, beginning in 1998, the Company is expensing the
difference between the minimum and maximum payments, if any. The Company
does not expect the difference between its future minimum and maximum
payments to TLC to be material.
LEGAL PROCEEDINGS
The Company is involved, from time to time, in legal proceedings arising in the
ordinary course of its business. In the opinion of management, after
consultation with legal counsel, none of these matters, based on factors
currently known to management, is expected to have a material adverse effect on
the financial position of the Company.
13. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company has 5,000,000 shares of authorized preferred stock issuable in
series. The Company's Board of Directors ("Board") is authorized to determine
the designation, powers, preferences and rights of any such series. The
Company has reserved 400,000 shares of preferred stock for potential issuance
under the Preferred Share Purchase Rights Plan.
In June 1997, the Company issued 1,133,786 shares of Series B Convertible
Preferred Stock ("Preferred Stock") to Pharmacia & Upjohn for approximately
$40.0 million, or $35.28 per share. The Preferred Stock will automatically
convert into the Company's common stock if the average of the closing prices
of such common stock over any 30 consecutive trading days exceeds $49.39, or
140% of the original issue price of the Preferred Stock of $35.28 per share.
See Note 20, Subsequent Events.
22
EMPLOYEE STOCK PURCHASE PLAN
Under Gilead's Employee Stock Purchase Plan ("ESPP"), employees can purchase
shares of Gilead common stock based on a percentage of their compensation. The
purchase price per share must equal at least the lower of 85 percent of the
market value on the date offered or the date purchased. A total of 1,250,000
shares of common stock are reserved for issuance under the ESPP. As of December
31, 1998, 794,049 shares had been issued under the ESPP (694,167 shares as of
December 31, 1997).
NeXstar had an ESPP ("NeXstar ESPP"), which was terminated on June 30, 1999
in anticipation of the Merger. Since its inception, 0.1 million
Gilead-equivalent shares of NeXstar stock have been issued under the NeXstar
ESPP. In 1998, 1997 and 1996, the total number of Gilead-equivalent shares
issued under this plan were not significant.
Emerging Issues Task Force ("EITF") Issue No. 97-12, ACCOUNTING FOR INCREASED
SHARE AUTHORIZATIONS IN AN IRS SECTION 423 EMPLOYEE STOCK PURCHASE PLAN UNDER
APB OPINION NO. 25, provides that new shares authorized under existing Section
423 employee stock purchase plans may give rise to compensation expense under
circumstances specified in that accounting standard. During 1998, Gilead
recognized compensation expense of $0.4 million related to an ESPP share
authorization approved in 1998 in accordance with the provisions of EITF Issue
No. 97-12. In future years, the Company will not be required to recognize
additional compensation expense related to the 1998 share authorization.
STOCK OPTION PLANS
In December 1987, Gilead adopted the 1987 Incentive Stock Option Plan and the
Supplemental Stock Option Plan for issuance of common stock to employees,
consultants and scientific advisors. In April 1991, the Board approved the
granting of certain additional nonqualified stock options with terms and
conditions substantially similar to those granted under the 1987 Supplemental
Stock Option Plan. At the grant date, none of the options described above had
exercise prices that were less than the fair value of the underlying stock on
that date. The options vest over five years pursuant to a formula determined
by the Board and expire after ten years. No shares are available for grant of
future options under any of these plans.
In November 1991, Gilead adopted the 1991 Stock Option Plan ("1991 Plan") for
issuance of common stock to employees and consultants. Options issued under
the 1991 Plan shall, at the discretion of the Board, be either incentive
stock options or nonqualified stock options. In May 1998, the 1991 Plan was
amended such that the exercise price of all stock options must be at least
equal to the fair value of Gilead's common stock on the date of grant. The
options vest over five years pursuant to a formula determined by the Board
and expire after ten years. At December 31, 1998, 958,380 shares were
available for grant of future options.
In November 1995, Gilead adopted the 1995 Non-Employee Directors' Stock Option
Plan ("Directors' Plan") for issuance of common stock to non-employee Directors
pursuant to a predetermined formula. The exercise price of options granted under
the Directors' Plan must be at least equal to the fair value of Gilead's common
stock on the date of grant. The options vest over five years from the date of
grant in quarterly 5 percent installments and expire after ten years. At
December 31, 1998, 85,000 shares were available for grant of future options
under the Directors' Plan.
23
The following table summarizes activity under all Gilead stock option plans for
each of the three years in the period ended December 31, 1998. All option grants
presented in the table had exercise prices not less than the fair value of the
underlying stock on the grant date (shares in thousands):
Year Ended December 31,
1998 1997 1996
-----------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
Outstanding,
beginning of year 4,117 $19.39 4,651 $14.96 4,144 $10.55
Granted 1,128 27.69 923 29.21 1,239 25.89
Forfeited (241) 27.11 (266) 20.51 (231) 13.70
Exercised (569) 12.06 (1,191) 9.42 (501) 6.15
------ ------- ------
Outstanding,
end of year 4,435 $22.16 4,117 $19.39 4,651 $14.96
------ ------- ------
------ ------- ------
Exercisable,
end of year 1,885 $16.66 1,673 $13.83 2,025 $10.23
------ ------- ------
------ ------- ------
Weighted Average Fair
Value of Options
Granted $15.90 $17.14 $15.17
NeXstar's stock plans include the 1988 Stock Option Plan, the 1993 Incentive
Stock Plan, and the 1995 Director Option Plan. Options pursuant to the 1988
Stock Option Plan and the 1993 Incentive Stock Plan that were issued and
outstanding as of July 29, 1999 have been converted into options to purchase
Gilead common stock as a result of the Merger and remain subject to their
original terms and conditions. Options outstanding under the 1995 Director
Option Plan became fully vested at the close of the Merger and are exercisable
for a period of 24 months thereafter. The following table shows activity under
the NeXstar plans, adjusted to Gilead equivalent shares (shares in thousands):
Year Ended December 31,
1998 1997 1996
---------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
Outstanding,
beginning of year 1,129 $33.17 918 $31.99 829 $25.88
Granted 300 26.76 340 34.63 248 50.71
Forfeited (137) 38.40 (67) 40.31 (49) 47.31
Exercised (71) 9.17 (62) 15.69 (110) 21.34
----- ------ ------
Outstanding,
end of year 1,221 $32.44 1,129 $33.17 918 $31.99
----- ------ ------
----- ------ ------
Exercisable,
end of year 633 $31.99 517 $27.58 413 $23.11
----- ------ ------
----- ------ ------
Weighted Average Fair
Value of Options
Granted $13.18 $14.79 $27.42
The following is a summary of Gilead and NeXstar (on an equivalent basis)
combined options outstanding and options exercisable at December 31, 1998
(options in thousands):
24
Options Outstanding Options Exercisable
----------------------------------------- --------------------------------
Weighted
Average Weighted
Range of Remaining Average Weighted
Exercise Options Contractual Exercise Options Average
Prices Outstanding Life in Years Price Exercisable Exercise price
-------- ----------- ------------- -------- ----------- --------------
$0.24 - $16.51 1,333 4.32 $10.56 1,158 $10.57
$16.84-$22.88 1,480 7.83 $20.49 450 $18.92
$23.00-$39.01 1,561 7.61 $27.57 427 $27.83
$32.13-$66.03 1,282 6.67 $38.86 483 $39.34
----- -----
Total 5,656 6.69 $24.38 2,518 $20.51
----- -----
----- -----
PRO FORMA DISCLOSURES
The table below reflects the combined net loss and basic and diluted loss per
common share if compensation cost for both Gilead's and NeXstar's stock
option plans had been determined based on their estimated fair values at the
grant dates for awards under those plans. Since pro forma compensation cost
is amortized over the vesting periods of the related awards, and because SFAS
No. 123 is applicable only to options granted or shares issued subsequent to
December 15, 1994, its pro forma effect will not be fully reflected until
1999.
Year ended December 31,
1998 1997 1996
----------------------------------------------------
Pro forma net loss (in thousands) $ (61,444) $ (87,393) $ (56,567)
Pro forma basic and diluted loss per share $ (1.50) $ (2.22) $ (1.50)
Fair values of the options granted under the stock option plans were estimated
at grant dates using a Black-Scholes option pricing model. The Company used the
multiple option approach with the following weighted average assumptions:
1998 1997 1996
--------------------------------------------------------------
Expected life in years (from vesting
date)--Gilead and NeXstar stock options 1.44 to 1.78 1.00 to 1.75 1.23 to 1.54
Expected life in years--Gilead ESPP 1.51 0.75 1.54
Interest rate--Gilead and NeXstar stock options 4.7% to 5.5% 5.6 % to 6.2% 5.5% to 6.0%
Interest rate--Gilead ESPP 5.2% 5.6% 6.0%
Volatility (1) 66% 66% 69%
Expected dividend yield 0% 0% 0%
(1) NeXstar's volatility rates for 1998, 1997 and 1996 were 61%, 52% and 72%,
respectively.
The weighted average estimated fair value of each Gilead ESPP option granted for
the years ended December 31, 1998, 1997 and 1996 was $11.97, $9.57 and $5.49,
respectively.
WARRANTS
Outstanding common stock warrants are summarized as follows:
Range of Shares Expiration
Warrants Exercise Prices Reserved Dates
-------- --------------- -------- -----------
Outstanding, December 31, 1997 and 1998 97,029 $10.80 - $85.95 97,029 1999-2003
In 1990, the Company issued to Warburg, Pincus Capital Partners, L.P. ("WPCP"),
which at that time was a beneficial owner of more than 5% of NeXstar's common
stock, a warrant to purchase 391,962 shares of the
25
Company's common stock at an exercise price of $12.76 per share, which
was issued in connection with the sale of certain equity securities of
NeXstar. In April 1995, WPCP's warrant was amended to change the expiration
date to December 31, 1997. On September 30, 1997, WPCP exercised its warrant
for 391,962 shares in a net exercise and received 285,304 shares of the
Company's common stock.
In March 1997, Warburg, Pincus Investors, L.P. ("WPI"), which was an owner of
more than 5% of NeXstar's common stock, received a warrant to acquire 47,325
shares of the Company's common stock at a purchase price of $33.02 per share in
return for an affiliate of WPI guaranteeing a credit line entered into by the
Company ("Credit Line"). Under the Credit Line, which was terminated in July
1997, the Company was permitted to borrow up to $15.0 million.
PREFERRED SHARE PURCHASE RIGHTS PLAN
In November 1994, the Company adopted a Preferred Share Purchase Rights Plan
(the "Plan"). The Plan provides for the distribution of a preferred stock
purchase right (a "Right") as a dividend for each share of Gilead common
stock held of record at the close of business on December 14, 1994. The
Rights are not currently exercisable. Under certain conditions involving an
acquisition or proposed acquisition by any person or group of 15% or more of
the Company's common stock, the Rights permit the holders (other than the 15%
holder) to purchase Gilead common stock at a 50% discount from the market
price at that time, upon payment of an exercise price of $60 per Right. In
addition, in the event of certain business combinations, the Rights permit
the purchase of the common stock of an acquirer at a 50% discount from the
market price at that time. Under certain conditions, the Rights may be
redeemed by the Board in whole, but not in part, at a price of $.01 per
Right. The Rights have no voting privileges and are attached to and
automatically trade with Gilead common stock. The Rights expire on November
21, 2004.
14. COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted SFAS No. 130, REPORTING COMPREHENSIVE
INCOME, which establishes new requirements for reporting and displaying
comprehensive income (loss) and its components. The adoption of SFAS No. 130
has no impact on the Company's net loss or total stockholders' equity. This
new accounting standard requires net unrealized gains or losses on the
Company's available-for-sale securities and foreign currency translation
adjustments to be reported as accumulated other comprehensive income (loss).
Prior year financial statements have been reclassified to conform to the
requirements of SFAS No. 130.
The following reclassification adjustments are required to avoid double-counting
net realized gains on sales of securities that were previously included in
comprehensive income prior to the sales of the securities (in thousands):
Year Ended December 31,
1998 1997 1996
---------------------------------------
Net gains on sales of securities included in
interest income $ 473 $ 87 $ 305
----- ----- -----
----- ----- -----
Other comprehensive income:
Net unrealized gain arising during the year $ 172 $ 342 $ 227
Reclassification adjustment (473) (87) (305)
----- ----- -----
Net unrealized gain (loss) reported in
other comprehensive income $(301) $ 255 $ (78)
----- ----- -----
----- ----- -----
15. EMPLOYEE RELATED EXPENSES AND OTHER CHARGES
26
In August 1998, NeXstar entered into a separation agreement with Patrick J.
Mahaffy upon his resignation as NeXstar's President, Chief Executive Officer and
Director of the Company and recorded a selling, general and administrative
expense of $0.8 million.
In August 1998, NeXstar announced its intentions to evaluate the possible spin
off of its drug discovery business into a separate publicly traded company to be
known as Iterex Technologies, Inc. ("Iterex"). In 1998, NeXstar incurred $0.7
million of selling, general and administrative expenses related to the potential
Iterex spin-off. On February 28, 1999, NeXstar announced a Merger Agreement with
Gilead, which was consummated in July 1999. As a result, the Iterex spin-off
will not occur and NeXstar's drug discovery business will remain part of the
Company.
In August 1998, the Company granted retention bonuses to certain key
employees (the "August Retention Bonuses") totaling $1.6 million. The August
Retention Bonuses were paid in April 1999 and expensed over the period from
August 1998 through March 31, 1999. In 1998, the Company recorded $0.4
million and $0.5 million of R&D expenses and selling, general and
administrative expenses, respectively, in connection with the August
Retention Bonuses. In January 1999, the Company granted additional retention
bonuses to certain key employees (the "January Retention Bonuses") totaling
$0.8 million. The January Retention Bonuses were paid on July 31, 1999. The
January Retention Bonuses were expensed over the period beginning on the date
the January Retention Bonuses were granted through July 1999.
In October 1998, the Company reduced its workforce by 75 employees (the
"Workforce Reduction"). As a result of the Workforce Reduction, the Company
recorded an R&D expense of $1.6 million related to severance packages for 47
discharged R&D employees and selling, general and administrative expense of
$0.6 million related to severance packages for 28 discharged selling, general
and administrative employees.
16. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("Statement No. 131").
Statement No. 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. The Company has determined that it only has one reportable segment
because management has organized the business along its functional lines.
Product sales revenues consisted of the following (in thousands):
Year ended December 31,
1998 1997 1996
--------------------------------------------
AmBisome $101,616 $ 82,020 $ 75,344
DaunoXome 6,486 7,132 4,809
VISTIDE 6,074 11,735 8,477
-------- -------- --------
$114,176 $100,887 $ 88,630
-------- -------- --------
-------- -------- --------
The following is a summary of revenues from external customers by geographic
areas:
27
REVENUES FROM EXTERNAL CUSTOMERS AND COLLABORATIVE PARTNERS(a)
Year ended December 31,
1998 1997 1996
--------------------------------------------
United States ................... $ 28,826 $ 19,962 $ 20,173
Germany ......................... 20,029 14,780 15,096
United Kingdom .................. 17,241 17,794 17,222
Switzerland ..................... 16,400 14,200 11,410
Italy ........................... 13,420 10,993 8,432
Spain ........................... 11,934 8,880 7,156
Sweden .......................... 1,696 10,802 10,000
Other European countries ........ 30,333 26,820 28,526
Other foreign countries ......... 11,240 8,027 4,106
-------- -------- --------
Consolidated total .............. $151,119 $132,258 $122,121
-------- -------- --------
-------- -------- --------
(a) Revenues are attributed to countries based on the location of the customer
or collaborative partner.
At December 31, 1998, the net book value of the Company's property, plant and
equipment was approximately $51.0 million. Approximately 92% of such assets
were located in the United States. At December 31, 1997, the net book value
of the Company's property, plant and equipment was approximately $55.1
million. Approximately 93% of such assets were located in the United States.
MAJOR CUSTOMER
In 1998, 1997 and 1996, sales to one distributor accounted for approximately
13%, 14% and 16% of product revenues, respectively.
17. INCOME TAXES
For financial reporting purposes, loss before provision for income taxes and
equity in loss of unconsolidated affiliate includes the following components
(in thousands):
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
---- ---- ----
United States $(42,886) $(69,784) $(43,523)
Foreign 88 (2,787) (1,165)
-------- -------- --------
$(42,798) $(72,571) $(44,688)
-------- -------- --------
-------- -------- --------
The current provision for income and withholding taxes includes the following
(in thousands):
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
---- ---- ----
Federal income taxes $160 $ -- $--
State income taxes 21 -- --
Foreign income taxes 378 305 226
Foreign withholding taxes 300 17 700
---- ---- ----
Total $859 $322 $926
---- ---- ----
---- ---- ----
The difference between the Company's current provision for income taxes and the
federal statutory rate of 34% is reconciled as follows (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
---- ---- ----
Statutory rate applied to income before income taxes and
equity in loss of unconsolidated affiliate $(14,552) $(24,675) $(15,194)
State income taxes, net of federal benefit 21 -- --
Tax effect of foreign subsidiary losses 116 1,114 553
Difference in foreign income tax rates 232 87 49
Alternative minimum taxes 160 -- --
Net operating loss unused, net of operating loss
carryforwards utilized 14,582 23,546 14,653
Foreign withholding taxes 300 17 700
Other -- 233 165
-------- -------- --------
$ 859 $ 322 $ 926
-------- -------- --------
-------- -------- --------
28
At December 31, 1998, the Company had net operating loss and tax credit
carryforwards available to reduce future taxable income. Utilization of these
losses and credits may be subject to substantial annual limitations due to
the ownership change limitations provided by the Internal Revenue Code of
1986. The annual limitation may result in the expiration of the net operating
losses and credits before utilization. Tax loss and tax credit carryforwards
are as follows (in thousands):
NET NET R&D
OPERATING R&D OPERATING AND OTHER
EXPIRES LOSS CREDITS LOSS CREDITS
- ------- --------- ------------ --------- ---------
FEDERAL STATE
------- -----
1999 $ -- $ -- $ 8,788 $ --
2000 -- -- 5,341 --
2001 2,581 -- 8,380 --
2002 3,993 -- 4,546 --
2003 8,061 104 3,490 642
2004 10,494 185 -- 271
2005 9,802 102 -- 317
2006 6,866 206 2,364 98
2007 18,868 1,075 8,002 --
2008 37,546 5,682 11,858 1,397
2009 34,839 1,912 5,284 --
2010 46,210 949 2,029 371
2011 44,820 1,134 2,592 500
2012 67,310 3,990 5,311 300
2013 -- -- -- 4,003
2018 64,948 2,755 -- --
-------- ------- ------- ------
$356,338 $18,094 $67,985 $7,899
-------- ------- ------- ------
-------- ------- ------- ------
The components of the Company's deferred tax asset and related valuation
allowance as of December 31, 1998 and 1997 are as follows (in thousands):
DECEMBER 31,
------------
1998 1997
---- ----
Net operating loss carryforwards
Federal $ 121,154 $ 99,817
State 4,285 2,413
Tax credit carryforwards
Federal 18,094 16,258
State 6,891 2,574
Capitalized R&D for California 11,200 13,049
Other--net 8,987 2,300
--------- ---------
170,611 136,411
Valuation allowance (170,611) (136,411)
--------- ---------
Deferred tax asset recognized $ -- $ -
--------- ---------
--------- ---------
18. RETIREMENT SAVINGS PLAN
NeXstar maintains a retirement savings plan pursuant to which eligible
employees may defer compensation for income tax purposes under Section 401(k)
of the Internal Revenue Code of 1986 ("Savings Plan"). Employee contributions
are discretionary, but may not exceed 15% of eligible annual compensation.
The Savings Plan includes a Company match of 50% of employee contributions up
to a maximum of 6% of eligible annual compensation. For the years ended
December 31, 1998, 1997, and 1996, the Company recorded expenses related to
the Savings Plan of approximately $0.5 million, $0.6 million and $0.5
million, respectively. At December 31, 1998, approximately $0.7 million,
29
representing 29,264 shares of the Company's common stock, was held by the
Savings Plan in trust for plan participants. Effective February 1995,
contributions to the Savings Plan may not be invested in the Company's common
stock.
19. RELATED PARTY TRANSACTIONS
During 1998, Gilead paid an aggregate of $2.6 million to Pharma Research
Corporation, a contract research organization, for services rendered in
connection with clinical studies. A member of the Board is the managing
director of an investment fund that owns a controlling interest in Pharma
Research Corporation.
20. SUBSEQUENT EVENTS (UNAUDITED)
STOCKHOLDERS' EQUITY
On January 26, 1999, the Board authorized an additional 200,000 shares of common
stock as available for grant under the Directors' Plan. On March 30, 1999, the
Board approved an amendment to Gilead's restated certificate of incorporation to
increase the authorized shares of common stock to 100 million shares, approved
an amendment to the 1991 Plan increasing the number of shares reserved for
issuance by 3.5 million to a total of 10.0 million shares, and approved an
amendment to the ESPP increasing the number of shares reserved for issuance by
330,000 to a total of 1.58 million shares. These amendments and increases were
approved by the Company's stockholders at its annual stockholders' meeting in
July 1999.
CONVERSION OF PREFERRED STOCK
On July 15, 1999, the average of the closing price of the Company's common
stock for the thirty days then ended was $49.79, which triggered the
automatic conversion of the Preferred Stock owned by Pharmacia & Upjohn into
the Company's common stock. Accordingly, the Preferred Stock converted into
1,133,786 shares of common stock at the original issue price of $35.28 per
share on July 16, 1999.
21. QUARTERLY RESULTS (UNAUDITED)
The following table is in thousands, except per share amounts:
1998 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
Total revenues $ 41,513 $ 35,289 $ 31,866 $ 42,451
Total costs and expenses 55,309 57,628 53,583 64,513
Net income (loss) (10,066) (18,287) 2,202 (18,609)
Basic and diluted income (loss) per share (.25) (.45) .05 (.45)
1997
Total revenues $ 25,995 $ 42,452 $ 28,605 $ 35,207
Total costs and expenses 47,788 51,716 62,282 55,872
Net income (loss) (17,957) (5,717) (32,512) (16,706)
Basic and diluted income (loss) per share (.46) (.15) (.82) (.42)
All amounts have been restated to reflect the business combination with NeXstar
Pharmaceuticals, Inc. which has been accounted for as a pooling of interests.
30
GILEAD SCIENCES, INC.
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
BALANCE AT ---------------------------- BALANCE AT
BEGINNING OF CHARGED TO CHARGED TO END OF
PERIOD EXPENSE OTHER ACCOUNTS DEDUCTIONS PERIOD
-----------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
Allowance for doubtful accounts $ 1,883 $ (294)(1) - $ 109 $ 1,480
Allowance for other noncurrent assets 1,737 (550)(2) - 1,187(2) -
Valuation allowance for deferred tax
assets 136,411 - 34,200(3) - 170,611
--------- --------- --------- --------- ---------
$ 140,031 $ (844) $ 34,200 $ 1,296 $ 172,091
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
YEAR ENDED DECEMBER 31, 1997
Allowance for doubtful accounts $ 2,002 $ 306 $ - $ 425 $ 1,883
Allowance for other noncurrent assets 1,737 - - - 1,737
Valuation allowance for deferred tax
assets 106,380 - 30,031(3) - 136,411
--------- --------- --------- --------- ---------
$ 110,119 $ 306 $ 30,031 $ 425 $ 140,031
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
YEAR ENDED DECEMBER 31, 1996
Allowance for doubtful accounts $ 505 $ 1,497 $ - $ - $ 2,002
Allowance for other noncurrent assets 2,430 - - 693(4) 1,737
Valuation allowance for deferred tax
assets 86,944 - 19,436(3) - 106,380
--------- --------- --------- --------- ---------
$ 89,879 $ 1,497 $ 19,436 $ 693 $ 110,119
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
(1) In August 1996, a major customer of the Company filed for bankruptcy
protection under Chapter 11 of the U.S. Bankruptcy Code. The total
receivable outstanding from that customer as of December 31, 1996 of
$0.6 million was reserved. In 1997, the Company collected approximately
$0.1 million of this amount by assigning its claim to a third party. In
1998, the Company reversed that portion of the allowance for doubtful
accounts which was no longer deemed necessary.
(2) The Company accepted $550,000 in full settlement of an outstanding note
receivable that was fully-reserved on the balance sheet.
(3) Charged to deferred tax benefit.
(4) Relates to restructuring of a note receivable in default.
31