<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999 Commission file number 0-19373
--------------------
BIOMATRIX, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware (201) 945-9550 13-3058261
<S> <C> <C>
(State of other jurisdiction of (Registrant's telephone number, (IRS Employer
incorporation or organization) including area code) Identification No.)
</TABLE>
65 Railroad Avenue
Ridgefield, N.J. 07657
(Address of principal executive offices) (Zip Code)
--------------------
Securities registered pursuant to Section 12(b) of the Act:
Common Stock. $.0001 Par Value
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
None
Name of exchange on which registered shares are traded: New York Stock
Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act 1934
during preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No_______
Indicate by check mark if disclosure of delinquent filers pursuant to
Item-405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of March 1, 2000, was approximately $533.8 million, based
upon the last reported sales price of the registrant's Common Stock on the New
York Stock Exchange.
At March 1, 2000 there were 23,291,671 shares of the registrant's
Common Stock outstanding.
--------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the Meeting of Shareholders
to be held during the second quarter of 2000 are incorporated by reference into
Part III of this report. Other documents incorporated by reference are listed in
the Exhibit Index.
<PAGE>
BIOMATRIX, INC.
1999 ANNUAL REPORT - FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item No. Page
Part I
<S> <C> <C>
1. Business..........................................................................................1
Overview........................................................................................1
Recent Developments.............................................................................2
Therapeutics....................................................................................3
Therapeutics In Development.....................................................................5
Dermaesthetics (Skin Care Products).............................................................6
Distribution Agreements.........................................................................7
Manufacturing...................................................................................8
Human Resources.................................................................................9
Research and Development Expenditures...........................................................9
Sales by Geographic Area and Significant Customer Data..........................................9
Risk Factors....................................................................................9
2. Properties.......................................................................................12
3. Legal Proceedings................................................................................12
4. Submission of Matters to a Vote of Security Holders..............................................12
Executive Officers...............................................................................13
Part II
5. Market for the Registrant's Common Equity and Related Shareholder Matters........................14
6. Selected Financial Data..........................................................................15
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................................16
7a. Quantitative and Qualitative Disclosures About Market Risk.......................................21
8. Financial Statements and Supplementary Data......................................................21
9. Changes In and Disagreements with Accountants on Accounting and Financial
Disclosure.......................................................................................21
Part III
10. Directors and Executive Officers of the Registrant...............................................21
11. Executive Compensation...........................................................................21
12. Security Ownership of Certain Beneficial Owners and Management...................................21
13. Certain Relationships and Related Transactions...................................................22
Part IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..................................22
</TABLE>
<PAGE>
PART I
Item 1. Business
Overview
Biomatrix, Inc., together with its subsidiaries in Canada, Europe and
Asia, develops, manufactures, markets and sells a series of proprietary
viscoelastic products called hylans that are used in therapeutic medical
applications and skin care. Hylans are biological polymers that are chemically
modified forms of the naturally occurring substance called hyaluronan, also
known as hyaluronic acid or sodium hyaluronate. Hylans are the second generation
of viscoelastics used in medicine. Their physical properties, such as
elasticity, viscosity and pseudoplasticity, have properties that are
significantly improved over those of hyaluronan, from which the first generation
viscoelastics were made. The discovery of hylans has allowed Biomatrix to
develop a range of patented products in the forms of fluids, gels and solids,
all having superior viscoelastic properties.
Biomatrix was founded in 1981. The majority of our research and
development and manufacturing is conducted at our corporate headquarters in
Ridgefield, New Jersey that was established in 1983. In 1998, we completed
construction of a new manufacturing plant in Ridgefield, New Jersey and began
manufacturing operations at that plant. In the fourth quarter of 1998, Biomatrix
received ISO 9001/EN46001 certification of our quality control system for
manufacturing viscoelastic medical therapeutics. This certification permits us
to manufacture and ship our products from the New Jersey facility to the 19
countries of the European Economic Area and a number of countries in Latin
America and Asia. During the first quarter of 1999, we received FDA approval to
ship our product called Synvisc(R) within the United States from our New Jersey
facility.
A significant portion of our research and development, manufacturing,
marketing and sales activities are conducted outside the United States through
various wholly-owned subsidiaries. From 1987 through 1995, Biomatrix conducted
research and development work in Europe through our wholly-owned subsidiary,
Biomatrix Svenska AB, in Uppsala, Sweden. In 1991, we formed Biomatrix Medical
Canada to manufacture and market various medical products in Canada. In 1997, we
formed subsidiaries in the United Kingdom, Switzerland and Hong Kong to market
and sell certain medical products in those regions. These subsidiaries are
called Biomatrix U.K. Limited, Biomatrix Switzerland GmbH and Biomatrix Hong
Kong Limited. In 1998, we established subsidiaries in France and Germany,
Biomatrix France SARL and Biomatrix Germany GmbH, to assist in marketing various
products in those countries. In 1999 we formed Biomatrix Belgium BVBA to market
and sell various medical products in Belgium.
We believe that Biomatrix is distinguished from other companies in the
field by our association with Dr. Endre A. Balazs. Dr. Balazs is a co-founder
and current Chief Executive Officer and Chief Scientific Officer of Biomatrix,
and is also the author of numerous publications on the medical applications of
hyaluronan-based viscoelastic products. Before co-founding Biomatrix, Dr. Balazs
invented the use of hyaluronan in medicine and developed the first generation
hyaluronan-based viscoelastics used in medicine worldwide. These products were
based on a highly purified fraction of the unmodified, naturally occurring
hyaluronan.
Under Dr. Balazs' leadership, we have developed a new class of
biopolymers called hylans. Hylans are polysaccharide molecules that are derived
by a chemical modification of hyaluronan. Our hylan products are highly
biocompatible like the naturally occurring hyaluronan, which allows hylans to be
used in the body without causing allergic or foreign body reactions. We believe
that products made of hylans are superior to the products made of first
generation hyaluronan due to the enhanced physical or rheological properties,
such as elasticity, viscosity and pseudoplasticity, and the prolonged residence
time in tissues.
Using its patented technology, Biomatrix has developed clear
elastoviscous fluids, transparent viscoelastic semi-solid gels, solid particles,
sheaths, tubes and other useful configurations. This broad spectrum of
proprietary products is manufactured through several patented chemical
modifications and cross-linking processes.
1
<PAGE>
Our business is to develop, manufacture, market and sell viscoelastics
to be used as medical therapeutic devices. The medical use of viscoelastics
during the past decades has created several new medical therapeutic modalities
including:
o Viscoaugmentation, the use of viscoelastic gels for tissue
augmentation to provide (1) a scaffolding for tissue regeneration or
(2) an inert elastic filler in applications such as augmentation of
dermal tissue for the correction of facial wrinkles and depressed
scars and the augmentation of the sphincter muscle in urinary
incontinence.
o Viscoprotection, the use of elastoviscous fluids and viscoelastic
gels to shield and protect sensitive tissue surfaces, such as those
of the eye, from dryness and noxious environmental conditions.
o Viscoregulation, the use of the rheological properties of
elastoviscous fluids and viscoelastic gels to regulate cell activity,
such as the targeted delivery of drugs.
o Viscoseparation, the use of viscoelastic gels, membranes and fluids
to separate tissues, prevent adhesions, and cover internal and
external wounds to facilitate wound healing and decrease scar
formation.
o Viscosupplementation, the use of elastoviscous solutions and
viscoelastic gels in disease conditions to replace tissues and body
fluids.
o Viscosurgery, the use of elastoviscous fluids to facilitate surgical
procedures in ophthalmology, orthopedics and neurosurgery. The
viscoelastic acts as a surgical tool or implant to protect,
manipulate and separate delicate tissues.
Viscoelastic devices are ideally made from the body's own molecules
that are found in the intercellular matrix, the highly organized structure that
separates cells and integrates them into functional tissues. In medicine,
viscoelastic products are used to supplement or replace various surgical
procedures. The products are introduced to the intercellular matrix to augment,
regulate and manipulate the healing and regenerative processes of the body, and
to restore the equilibrium, known as homeostatis, of the intercellular matrix.
Therefore, the use of viscoelastics for therapeutic purposes, such as
engineering of the intercellular matrix, is called matrix engineering.
Recent Developments
On March 6, 2000, Genzyme Corporation ("Genzyme"), a Massachusetts
corporation, Seagull Merger Corporation, a Massachusetts corporation and
wholly-owned subsidiary of Genzyme ("Merger Sub"), and Biomatrix entered into an
Agreement and Plan of Merger (the "Merger Agreement") pursuant to which the
parties will effect a business combination through a merger of Biomatrix with
and into Merger Sub (the "Merger"). In connection with the Merger, Genzyme will
form a new division, the Genzyme Biosurgery division, and will create a new
series of common stock designated as "GZBX division Common Stock," $0.01 par
value per share ("GZBX Stock"), which will be issued to the holders of Biomatrix
common stock, $.0001 par value per share ("Biomatrix Common Stock"), in the
Merger. The currently proposed terms of the GZBX Stock are set forth as an
exhibit to the Merger Agreement. In connection with the Merger, Genzyme's Tissue
Repair Division and Surgical Products Division will become part of the Genzyme
Biosurgery division and the Genzyme Tissue Repair Common Stock ("GTR Stock")
series and Genzyme Surgical Products Common Stock ("GSP Stock") series will be
exchanged for GZBX Stock (the "Genzyme Reorganization"). The transaction, which
will be accounted for using the purchase method of accounting, is expected to
close in the second quarter of 2000.
Under the terms of the Merger Agreement, each outstanding share of
Biomatrix Common Stock will be converted, at the option of the holder, into
either (i) $37.00 in cash or (ii) one share of GZBX Stock (the "Merger
Consideration"). Based on the cash election price and the number of shares of
Biomatrix Common Stock outstanding, Biomatrix expects that the cash portion of
the transaction will be approximately $245 million. Under the Merger Agreement,
28.38% of the shares of Biomatrix Common Stock outstanding at the effective time
of the Merger will be exchanged for cash and the remaining 71.62% of the shares
of Biomatrix Common Stock outstanding at the time of the Merger will be
converted into shares of GZBX Stock at a conversion rate of one share of GZBX
Stock for each share of Biomatrix Common Stock. However, the number of shares of
GZBX Stock to be issued in the Merger is subject to an upward adjustment if the
value of the GZBX Stock to be issued in the Merger on the effective date of the
Merger is less than 45% of the total Merger Consideration in order to preserve
the status of the Merger as a tax-free reorganization.
2
<PAGE>
Under the terms of the Merger Agreement, each outstanding share of GSP
Stock will convert into 0.6060 shares of GZBX Stock and each share of GTR Stock
will convert into 0.3352 shares of GZBX Stock. Based on the number of common
shares outstanding for each entity at the signing date, the Genzyme Biosurgery
division is expected to have approximately 35.2 million shares outstanding.
Consummation of the Merger is subject to the adoption of the Agreement
and Plan of Merger by the Biomatrix stockholders, the approval of the issuance
of GZBX Stock in the Merger and the necessary amendments of Genzyme's charter by
the Genzyme stockholders, including the approval of the exchange of GSP Stock
for GZBX Stock by GSP stockholders and the exchange of GTR Stock for GZBX Stock
by GTR stockholders, the receipt of regulatory approvals and certain other
customary closing conditions.
Certain officers of Biomatrix holding an aggregate of approximately 34%
of the outstanding shares of Biomatrix Common Stock have agreed to vote their
shares of Biomatrix Common Stock in favor of the Merger until the earlier to
occur of the completion of the Merger or 5 days after the termination of the
Merger Agreement. In addition, in connection with the Merger, Biomatrix has
granted Genzyme an option to purchase 4.6 million shares of Biomatrix Common
Stock under certain circumstances.
Therapeutics
The following discussion addresses our medical therapeutic products,
some of which, as noted below, are on the market in some countries; other
products are in late stage development. See "Business-Government Regulation."
Synvisc(R)
Synvisc(R) is an elastoviscous device made of patented hylan
biopolymers. It is used to treat osteoarthritis of the knee to reduce pain and
improve joint mobility. Synvisc treatment involves a series of injections into
the affected joint. It supplements the elastoviscosity of the synovial fluid of
the arthritic joint, and is regarded as a liquid prosthesis for the joint
because it replaces the pathologically low elastoviscous fluid with a supplement
of fluid with enhanced elastoviscous properties. This medical treatment modality
is called viscosupplementation. Synvisc is administered over a fifteen-day
period and involves a series of three injections into the arthritic joint.
We have completed thirteen clinical studies for Synvisc involving
approximately 1,726 patients. These studies were carried out and completed in
the United States, Germany, the United Kingdom, Sweden and Canada. The results
of these studies indicate that Synvisc is a safe and effective treatment for
osteoarthritis of the knee.
We received approval to market Synvisc to treat osteoarthritis of the
knee joint in Canada in 1992 and in Sweden in 1995. In late 1995, we obtained
the CE Mark for Synvisc, which permits us to market the product in the 19
countries of the European Economic Area. In March 1997, we received approval
from the People's Republic of China to register Synvisc, allowing us to import
and sell Synvisc as a medical device in every province in China. In August 1997,
we received FDA approval to use Synvisc to treat osteoarthritis of the knee in
the United States. Additionally, we received approvals in October 1997 and
December 1997 to market Synvisc in Hong Kong and Israel. During 1998, we
received approvals in the following countries to market Synvisc: Czech Republic,
Malaysia, Brazil, Singapore, Chile, Argentina, Slovenia, Guatemala, Mexico,
Thailand, Australia and Peru. During 1999, we received approval to market
Synvisc in the following countries: Dominican Republic, Ecuador, El Salvador,
Jamaica, Paraguay, Uruguay, Latvia, South Africa, Colombia, Estonia, Hungary,
Jordan, New Zealand, Nicaragua, Panama, Russia, Slovak Republic, Trinidad,
Tobago and Venezuela. During the first quarter of 2000, we received approval to
market Synvisc in Turkey. As a result of these approvals, Synvisc is approved in
fifty-seven of the eighty-five countries that are covered under marketing
agreements.
Biomatrix began marketing Synvisc in Canada with our own sales force in
early 1993. In 1995, we signed a distribution agreement with Rhone-Poulenc Rorer
Canada Inc. to share the marketing effort, and in September 1995 began marketing
Synvisc jointly in Canada. In December 1999, we terminated the agreement with
Rhone-Poulenc and now sell Synvisc directly to the Canadian market through our
subsidiary Biomatrix Medical Canada. In June 1995, Roche AB, a subsidiary of F.
Hoffmann-La Roche Ltd., began to sell Synvisc in Sweden and obtained the
distribution rights for Synvisc in South Africa. In the first quarter of 1999,
Biomatrix and Roche launched Synvisc in South Africa. In December 1996, we
entered into an agreement with Boehringer Ingelheim France, S.A. to distribute
3
<PAGE>
Synvisc in France. The product was officially launched in France in October
1997. In February 1997, we entered into an agreement with Wyeth-Ayerst
Laboratories, a division of American Home Products, to distribute Synvisc in the
United States, Germany, Austria, Spain, Portugal, Greece and various countries
in the Middle East and Central Europe. Synvisc was launched in Germany, Austria
and the United States in 1997, and in Spain, Portugal, and Greece in 1998.
During 1999, Wyeth launched Synvisc in the Czech Republic. In April 1997, we
entered into an agreement with Bayer AG to distribute Synvisc in Australia,
Indonesia, Israel, Malaysia, New Zealand, Singapore, Taiwan and Thailand.
Synvisc was launched in Israel during 1998 and in Malaysia, New Zealand,
Singapore, Thailand, and Australia during 1999. In February 1998, we entered
into an agreement with Novartis Pharma AG to distribute Synvisc in Latin America
and the Caribbean. Synvisc was launched in Argentina, Brazil, Chile, Peru and
Panama during 1998. During 1999, Novartis launched Synvisc in Mexico, Colombia,
Venezuela and Guatemala. We are currently seeking and negotiating with potential
marketing partners to distribute Synvisc in other European and Asian countries.
During the fourth quarter of 1999, we announced that a clinical trial
has commenced in which Synvisc will be evaluated for the treatment of
osteoarthritis of the hip. An open label study is being conducted in France.
During the first quarter of 2000, we announced that we filed an
investigational device exemption application with the FDA for review and
approval to initiate a pivotal clinical trial for Synvisc as a treatment for the
pain and discomfort associated with temporomandibular joint disease (TMJ).
Additional clinical studies evaluating Synvisc in other joints are
planned for the future.
Hylaform(R)
Hylaform(R) is a patented viscoelastic device made of hylan that is
used for viscoaugmentation of dermal tissue to correct facial wrinkles and
depressed scars by injection directly into the dermal tissue. In late 1995, we
received the CE mark and were approved to market this product as a medical
device in the 19 countries of the European Economic Area. In June 1996, we
entered into an agreement with Inamed Corporation, formerly called Collagen
Aesthetics, Inc., to distribute Hylaform in Europe, Canada, Japan, Australia and
other select countries worldwide. Inamed began marketing Hylaform in various
European countries in November 1996 and completed the launch of Hylaform
throughout Europe during 1997. During 1997 we received approval to market
Hylaform in Canada, Israel, and Chile. We received approval to market Hylaform
in Argentina in 1998 and in Australia and China in 1999. In 1998, Inamed
launched Hylaform in Canada and Israel. In 1995 and 1996, we filed a Pre-Market
Approval application for Hylaform with the FDA, which we subsequently withdrew
in December 1997. We have also entered into a distribution agreement with Inamed
for Hylaform in the United States. Under this agreement, Inamed has the
exclusive distribution rights to Hylaform in the United States, subject to an
additional payment and FDA approval. The Company is in discussion with the FDA
to start a new trial in the United States in order to obtain U.S. approval for
Hylaform.
Gelvisc(R)Vet
Gelvisc(R)Vet is an elastoviscous device made of hylan biopolymers.
Biomatrix developed this product as a viscosupplementation device to treat
traumatic arthritis and osteoarthritis in animals. In 1995 and 1996, we received
approval to market this product in Sweden and France. Equinord has the right to
sell GelviscVet itself in Sweden and through Boehringer Ingelheim in France.
Hylashield(R), Hylashield(R) Nite and i.com(TM)
Hylashield(R), Hylashield(R)Nite and i.com(TM) are sterile,
preservative-free, elastoviscous eye drops used to protect, lubricate and
moisten the surface of the eye. They are used by patients who experience
discomfort or pain associated with dryness, noxious environmental conditions and
other common ocular symptoms including itching, burning and foreign body
sensation. In Canada, Hylashield and Hylashield Nite have been marketed through
I-MED Pharma Inc. since 1993. In 1999, i.com was launched in certain European
countries by Medical Device Laboratories Europe (MDLE).
HsS(TM)
HsS(TM) is a sterile, preservative-free, viscoelastic, clear corneal
eye drop that is presented in a single-use container. HsS provides prolonged
moisture control and protection to corneal surfaces during surgery. HsS reduces
the need to frequently apply saline solution on the corneal surface, which
allows for safer and more efficient surgery. We were approved to market the
product in Canada, and we are currently planning its commercial launch.
Hylashield(R) CL
Hylashield(R) CL is a sterile, preservative-free, elastoviscous shield
applied to the surface of the eye for use with gas permeable rigid contact
lenses to enhance comfort and contact lens duration of use. During the first
quarter of 2000, we received Section 510(K) pre-market notification approval
from the FDA for Hylashield CL.
4
<PAGE>
HylaSine(TM)
HylaSine(TM) is a viscoelastic proprietary hylan device used in
viscoseparation to heal mucous membranes following various sinus surgeries. It
is designed to prevent excessive scar formation and adhesions between mucous
membranes which could cause occlusion (stenosis) of vital air passageways.
During the first quarter of 2000, we received Section 510(K) pre-market
notification approval from the FDA for HylaSine.
Therapeutics In Development
The following discussion addresses our medical therapeutic products
that are in development. Preclinical studies have been completed for these
products, and some have been tested in exploratory clinical trials. None of
these products have been submitted to regulatory agencies for marketing approval
anywhere in the world. We analyze our therapeutics in development according to
the following categories: anti-adhesion, ophthalmic and other.
Anti-Adhesion
Hylagel(R)
Hylagel(R) is a proprietary hylan product used in viscoseparation. The
product is a resorbable, injectable treatment that inhibits scar formation in
patients undergoing various types of lumbar surgical procedures. We have
received approval for an Investigational Device Exemption we filed with the FDA
for this product.
Hylafilm(R)
Hylafilm(R) is a proprietary hylan product in the form of films and
membranes to be used in viscoseparation. We have planned clinical trials to
address the prevention of postsurgical adhesions after gynecological surgery,
Hylafilm(R)GYN, and abdominal surgery, Hylafilm(R)ABD. We also intend to explore
the use of Hylafilm in cardiac, neurological and orthopedic surgical procedures
for preventing adhesions between tissue surfaces.
Ophthalmic
Hylasol(TM)
Hylasol(TM) is a proprietary elastoviscous hylan solution designed for
various ophthalmic surgical indications, including contemporary surgical
techniques associated with cataract removal and intraocular lens implantation.
Hylagel(R) Eye
Hylagel(R)Eye is a proprietary viscoelastic hylan device. We developed
this product as a viscosupplementation replacement of the vitreus in retinal
detachment surgery. Based on the results of exploratory clinical trials, we are
redesigning this product to meet newly emerged therapeutic needs.
Other
Hylagel(R) VASC
Hylagel(R) VASC is a proprietary viscoelastic hylan device for
viscoregulation. It was developed to facilitate the delivery of blood
coagulating agents and drugs to targeted sites in arteriovenous malformations
and vascular tumors. We have completed exploratory human clinical trials on this
product. The cost of these trials was partially supported by a grant from the
Orphan Products Division of the FDA. We are planning to extend and continue
these clinical trials.
Hylagel(R)URO
Hylagel(R)URO is a proprietary hylan polymer device. It was developed
to act as a long-lasting viscoelastic tissue implant for viscoaugmentation. Its
primary use is to enhance the function of the urinary sphincter muscle by acting
as a filler between weakened muscle tissue and the mucosa in cases of urinary
incontinence. We received FDA approval to begin multicenter pilot clinical
trials for HylagelURO. These pilot trials have been successfully completed and
we are preparing pivotal studies to be carried out in U.S. and Europe.
5
<PAGE>
Hylagel(R)VOC
Hylagel(R)VOC is a proprietary hylan B product designed to be used in
vocal cord augmentation. Clinical trials are in progress in Europe using this
product in tissue augmentation after vocal cord dysfunction.
Hylarad(R)
Hylarad(R) is a hylan-based cream for the relief of skin irritation
after sunburn and similar skin inflammation. We are testing this product
clinically.
Dermaesthetics (Skin Care Products)
We have developed and manufacture viscoelastic products also known as
specialty intermediates for the skin care industry. Our skin care intermediates
are proprietary hyaluronan or hylan products, and their enhanced rheological
properties, such as viscosity, elasticity and pseudoplasticity, make them
superior to low molecular weight hyaluronan products. These highly elastoviscous
formulations of hyaluronan and hylan are unique in their high water-binding,
free radical-scavenging and space-filling properties.
The following specialty intermediates are marketed directly by
Biomatrix:
Biomatrix(R)
Biomatrix(R) is a patented, cosmetic-grade highly elastoviscous complex
of hyaluronan, dermal lipids and proteins. Biomatrix(R) is used as a component
in several cosmetic products introduced into the market in the early 1980s.
Hyladerm(R)
Hyladerm(R) is a patented cosmetic-grade hylan polymer in the form of a
highly elastoviscous solution. Its high molecular weight enables it to be used
at relatively low concentrations in skin care formulations.
Hylasome(R)
Hylasome(R) is a patented viscoelastic, cosmetic grade, water-insoluble
hylan B gel of non-animal origin. This product, acting as a molecular sponge, is
able to entrap various substances and to act as a vehicle for the controlled
release of cosmetic ingredients.
Hylasome(R) LA-50
Hylasome(R) LA-50 is a viscoelastic, cosmetic grade, water-insoluble
hylan B gel of non-animal origin and lactic acid. This product delivers lactic
acid slowly to the skin.
The following specialty intermediates are marketed worldwide by
Amerchol, a subsidiary of Union Carbide Corp:
Biocare(R) HA-24
Biocare(R) HA-24 is a patented elastoviscous polymer complex, formed
between Hyladerm(R) a polycation, that anchors hylan to skin and hair in a way
that resists wash-off. This product augments hylan's moisturizing and smoothing
benefits and enables hylan to last for a long period.
Biocare(R) HA-24-Bio
Biocare(R) HA-24 Bio is a patented elastoviscous polymer complex
similar to Biocare(R) HA-24 in all respects, but using hyaluronan of non-animal
origin.
Biocare(R) BHA-10
Biocare(R) BHA-10 is the first product available to the personal care
industry that enhances the utility of a bacteria-derived hyaluronan product by
greatly increasing its rheological properties. Biocare(R) BHA-10 is
approximately ten-fold more elastoviscous and more substantive than the
bacterial hyaluronan from which it is prepared.
Biocare(R) SA
Biocare(R) SA is a patented elastoviscous combination of albumin,
dextran sulfate and hylan. Biocare(R) SA is designed to create a
light-reflecting layer that diminishes the appearance of surface imperfections.
6
<PAGE>
Relief Line(TM)
Relief Line(TM) consists of six different skin care formulations
developed during 1999, containing as active ingredients hyaluronan and hylan
polymers.
Distribution Agreements
We have entered into distribution agreements with various marketing
partners for our medical products. The distribution agreements generally provide
that we manufacture and supply our products for a contractual percentage of the
marketing partner's sales price, or a minimum price, whichever is greater. We
have entered into the following agreements:
Wyeth-Ayerst. In February 1997, we entered into two distribution
agreements with Wyeth, a division of American Home Products. The agreements
provide Wyeth with exclusive marketing rights to Synvisc in the United States,
Germany, Austria, Spain, Portugal, Greece and certain countries in the Middle
East and Central Europe. In 1997, Biomatrix received non-refundable payments
totaling $17.0 million. Biomatrix also received a milestone payment of $6.0
million during the first quarter of 1999 and a milestone payment of $7.0 million
in the third quarter of 1999. Biomatrix could receive additional payments in the
future if sales reach certain levels. Additionally, Wyeth reimburses Biomatrix,
up to a fixed amount and for a certain period of time, for our costs of
maintaining a team of area business consultants to assist in selling Synvisc in
Europe and the United States. During 1997, Wyeth launched Synvisc in the United
States, Germany and Austria. During 1998, Wyeth launched Synvisc in Spain,
Portugal and Greece. During 1999, Wyeth launched Synvisc in the Czech Republic.
We are currently in discussion with Wyeth concerning its marketing rights for
Synvisc in certain foreign countries.
Bayer AG. In April 1997, we entered into a distribution agreement with
Bayer. The agreement provides Bayer with exclusive marketing rights to Synvisc
in Australia, Indonesia, Israel, Malaysia, New Zealand, Singapore, Taiwan and
Thailand. In return, we received an up-front non-refundable payment of $3.0
million and could receive a milestone payment of $2.0 million upon certain
approvals or if sales reach a certain level. Additionally, Bayer will reimburse
Biomatrix, up to a fixed amount and for a certain period of time, for our costs
of maintaining a team of area business consultants to assist in selling Synvisc
in various countries under the agreement. Bayer launched Synvisc in Israel
during 1998 and in Australia, New Zealand, Singapore, Thailand and Malaysia in
1999.
Novartis Pharma AG. In February 1998, we entered into a distribution
agreement with Novartis. The agreement provides Novartis with the exclusive
marketing rights to Synvisc in Latin America and the Caribbean. In return, we
received an up-front non-refundable payment of $1.5 million and received an
additional non-refundable $1.6 million in the third quarter of 1999.
Additionally, Novartis will reimburse Biomatrix for our costs of maintaining
several area business consultants to assist in selling Synvisc in various
countries. During 1998, Novartis launched Synvisc in Argentina, Brazil, Chile,
Peru and Panama. During 1999, Novartis launched Synvisc in Mexico, Colombia,
Venezuela and Guatemala.
F. Hoffmann-La Roche Ltd. In 1995, pursuant to the amendment of
previous distribution agreements with Syntex, Roche maintained exclusive
marketing rights to Synvisc in Sweden and South Africa. Roche began selling
Synvisc in Sweden in June 1995 and launched Synvisc in South Africa in 1999. We
are currently in discussions with Roche concerning its marketing rights in
Sweden beyond 2000.
Rhone-Poulenc Rorer Canada Inc. In September 1995, Biomatrix, through
Biomatrix Medical Canada, entered into a distribution agreement with
Rhone-Poulenc. The agreement provided Rhone-Poulenc with exclusive marketing
rights for Synvisc in Canada. In return, we received an up-front non-refundable
payment of $3.5 million. Rhone-Poulenc began selling Synvisc in Canada in
November 1995. We terminated the agreement with Rhone-Poulenc on December 31,
1999. Biomatrix now sells Synvisc directly to the Canadian market through
Biomatrix Medical Canada.
Inamed Corporation, formerly Collagen Aesthetics, Inc. In June 1996, we
entered into a distribution agreement with Inamed. The agreement provides Inamed
with exclusive marketing rights for Hylaform in Europe, Canada, Japan, Australia
and other select countries. In return, we received an up-front, non-refundable
payment of $5.0 million and are entitled to receive a royalty based upon sales
of Inamed's dermal augmentation products, as well as an additional royalty based
on the growth of Inamed's total dermal augmentation business. We have also
entered into a distribution agreement with Inamed for Hylaform in the United
States. Under the latter agreement, Inamed has exclusive distribution rights for
Hylaform in the United States subject to an additional payment and FDA approval.
Inamed began selling Hylaform in various European countries in November 1996 and
successfully completed the launch in every country of the European Economic Area
during 1997. In addition, Inamed launched Hylaform in Canada and Israel during
1998.
7
<PAGE>
Boehringer Ingelheim France, S.A. In December 1996, we entered into a
distribution agreement with Boehringer Ingelheim. The agreement provides
Boehringer Ingelheim with exclusive marketing rights for Synvisc in France. In
return, we received an up-front non-refundable payment of $1.0 million and could
receive milestone payments if sales reach certain levels. Additionally,
Boehringer Ingelheim reimburses Biomatrix, up to a fixed amount and for a
certain period of time, for our costs of maintaining a team of area business
consultants to assist in selling Synvisc in France. Boehringer Ingelheim began
selling Synvisc in France during 1997.
Protesekompagniet A/S. In June 1999, we entered into a distribution
agreement with Protesekompagniet A/S to market Synvisc in Denmark.
OY Baltrade Consulting Ltd. In September 1999, we entered into a
distribution agreement with OY Baltrade to market Synvisc in Finland and Russia.
RX Medical BV. In May 1999, we entered into a distribution agreement
with RX Medical BV to market Synvisc in the Netherlands, Netherlands Antilles,
and Aruba.
Ortomedic AS. In May 1999, we entered into a distribution agreement
with Ortomedic AS to market Synvisc in Norway.
I-MED Pharma Inc. In October 1995, we entered into a distribution
agreement in Canada with I-MED for three ophthalmic viscoprotection products.
Farmila Farmaceutici Milano S.r.1. In December 1995, we entered into a
distribution agreement in Italy with Farmila for two ophthalmic viscoprotection
products. We received a non-refundable up-front payment and will manufacture and
supply the two products for an agreed-upon percentage of Farmila's sales price.
We also licensed to Farmila the formulations for four of our six Relief Line(TM)
products with distribution rights for Italy, France and Spain.
Medical Device Laboratories Europe GmbH (MDLE). In April 1999, we
entered into a non-exclusive distribution agreement with MDLE for i.com(TM).
MDLE will sell i.com(TM) worldwide except in North America and Japan.
Equinord KB. We have entered into a distribution agreement with
Equinord for the distribution of Gelvisc(R)Vet in the veterinary market in
Sweden and France. Under the agreement, Equinord obtained the necessary
regulatory approvals and will advertise and promote the product in these
countries. Equinord has the right to sell GelviscVet itself in Sweden and
through Boehringer Ingelheim in France.
Euroderm S.R.L. During 1999, we entered into a licensing and supply
agreement with Euroderm to distribute certain dermaesthetic products in Europe.
Manufacturing
In 1991, Biomatrix Medical Canada acquired a manufacturing facility in
Canada. It began to manufacture medical devices made from hylan biopolymers in
the second half of 1992. During 1993, the Canadian facility was certified by the
Health Protection Branch of the Canadian Ministry of Health as meeting good
manufacturing practices for the manufacture of small volume injectable products.
The facility also qualified as meeting good manufacturing practices by the FDA
and also received an ISO 9001/EN46001 certification. During 1997 and 1998, we
increased the production capacity of the Canadian facility.
In 1998, we completed construction of our New Jersey manufacturing
facility and began production of various products. We received an ISO
9001/EN46001 certification of our quality system for manufacturing viscoelastic
medical therapeutics in the fourth quarter of 1998. This certification permits
Biomatrix to manufacture and ship our products from the New Jersey facility to
the 19 countries of the European Economic Area and a number of countries in
Latin America and Asia. During the first quarter of 1999, we received FDA
approval to ship Synvisc within the United States from our New Jersey facility.
8
<PAGE>
Human Resources
As of December 31, 1999, Biomatrix and our subsidiaries employed 384
full-time and 4 part-time employees. Of these employees, 24 hold doctoral
degrees (M.D., Ph.D.), 51 hold other advanced degrees and 150 hold bachelor's
degrees. 47 of our full-time employees are engaged in research and development,
199 are engaged in manufacturing, quality control and quality assurance, and 138
are engaged in sales, marketing, finance and administration. We consider our
employee relations to be good.
Research and Development Expenditures
For the years ended December 31, 1999, 1998 and 1997, we expended $9.1
million, $10.3 million and $5.9 million, respectively, on research and
development relating primarily to new product development, development of our
manufacturing process, preclinical and clinical studies and regulatory expenses
in the United States and abroad. The decrease in 1999 research and development
expenditures is primarily related to one-time process development costs incurred
during 1998 that were associated with our new U.S. manufacturing facility.
Sales by Geographic Area and Significant Customer Data
The information required is incorporated herein by reference to the
footnotes to our consolidated financial statements.
Risk Factors
Investing in Biomatrix Securities involves risks. You should not
purchase Biomatrix Securities unless you can bear a loss of your investment. You
should carefully consider the following factors, in addition to the other
information in this prospectus.
The effect of government regulation of our products and facilities could cause
significant delays and increased costs
The FDA and foreign regulatory agencies regulate the commercial
distribution of our medical products. The regulatory process can delay marketing
new products for long periods and can add substantial costs. In addition,
changes in governmental rules and regulations could affect us in ways we cannot
predict. Changes in regulation could affect products already approved for
marketing, products that have not yet been approved, or the approval process
itself. Regulatory delays and costs could significantly lower our profitability.
The regulatory approval process is costly, complex, and time-consuming,
and it is possible that approvals could be delayed or never granted. The FDA
classifies medical products as either medical devices or drugs/biologicals.
Currently, the FDA and most foreign regulatory agencies consider most of our
medical products to be medical devices. Some of our products are currently being
reviewed for approval by various regulatory agencies.
The FDA and foreign regulatory agencies also inspect our manufacturing
facilities both before and after giving their approval to market a product.
Additionally, if a material change is made to the manufacturing process,
equipment, or location after receiving approval for marketing from regulatory
agencies, additional regulatory review may be necessary. The expenses and delays
that can surround the regulatory review process for manufacturing facilities
could significantly lower our profitability.
Changes in reimbursement policies could significantly reduce our ability to sell
our products
The availability of reimbursement by Medicare, Medicaid, private health
insurers, and other organizations may affect sales of our products. Limitations
on reimbursement may negatively impact sales of our medical products. In the
United States, the Health Care Finance Administration, also known as HCFA, and
many private health insurance organizations currently provide reimbursement for
Synvisc. Synvisc is currently reimbursed by all of the Medicare regional
insurance carriers. Synvisc is also on the list of government-reimbursable
products in Sweden and the United Kingdom. Currently, Synvisc has not been
approved for reimbursement by the Canadian provincial governments; however,
several Canadian private insurance companies do provide reimbursement for
Synvisc. In addition, we are currently discussing reimbursement for Synvisc with
European government agencies. We do not expect insurance companies to pay for
Hylaform, another of our products. Changes in reimbursement policies could
significantly reduce our ability to sell our products.
9
<PAGE>
If we cannot maintain or replace our marketing partners, there may be short-term
disruptions in sales associated with restructuring our distribution arrangements
We have entered into many distribution agreements for marketing and
distributing some of our products, including Synvisc and Hylaform. As a result,
we are dependent on our marketing partners for sales of our product in countries
in which we have marketing and distribution agreements. It is possible that we
will not be able to maintain or replace these marketing partners. If this
happens, there may be short-term disruptions in sales associated with
restructuring our distribution arrangements.
If we are unable to protect our intellectual property and proprietary rights, we
could lose our technological advantage
In order to protect our core hylan technology, we have obtained patents
on our technologies and on our products in key countries. We currently have 22
issued or allowed patents and 1 patent pending in the United States, and 88
issued or allowed patents and over 68 patents pending in foreign countries. We
cannot be sure that any patents pending or patent applications we may file in
the future will result in issued patents. Any patents we have now, or that may
be issued in the future, trade secrets or know-how may not be enough to protect
our business against competitors with similar technologies or processes. Others
might still infringe upon or design around our issued patents. In addition,
others might develop proprietary technologies or processes on their own which
are the same as or substantially equivalent to ours. It could be very expensive
if we have to defend against patent infringement suits brought against us or if
we choose to sue others to protect our patents against infringement.
In addition to patent protection, we rely on trade secrets, proprietary
know-how and continuing technological developments. We generally try to protect
this information by entering into confidentiality agreements with our business
partners, employees and consultants. Certain people might break the promises
they make in these agreements. If they do, we may not be able to remedy the
damage they cause to our business. Even if everyone honors these agreements, our
competitors might still discover our trade secrets on their own.
Our market share could decrease if other products become more accepted by
doctors and health insurance companies
Our industry is driven by technological innovation. Although we believe
our patents on hylans make it more difficult for others to develop and sell
products made from similar substances, a number of our potential competitors are
trying to develop substances that could perform as well or better than ours.
Other substances or technologies may be, now or in the future, the basis of
competitive products that could render our technology obsolete or
non-competitive. If this happens, our sales could be reduced significantly.
We believe that our superior technology and our longstanding know-how
and experience give us our primary advantages over our competitors. Competition
for our product, Synvisc, consists primarily of products based on earlier
technology. These products include, in the United States, the FDA-approved
Hyalgan(R), produced by Fidia S.p.A. and marketed in the United States by
OrthoLogic Corp. Another product based on earlier technology is Orthovisc(R),
which failed in 1998 to receive approval from the FDA for marketing in the
United States but is marketed in Canada and in certain other countries.
Orthovisc is produced by Anika Therapeutics, Inc. and marketed by Zimmer, Inc.
In Europe, the primary competitive products are Hyalgan and Artz(R), a Japanese
product. To the best of our knowledge, there are no other viscosupplementation
products on the market, or in development, which, like Synvisc, have the
physical properties of viscosity, elasticity or molecular weight that are
comparable to the physical properties of healthy, young synovial fluid.
Our ability to compete depends primarily upon product acceptance by
doctors and other customers and whether or not health insurance will pay for
treatment with our products, as opposed to those of our competitors. If other
products become more accepted by doctors, other customers and health insurance
companies, our sales could be significantly reduced.
10
<PAGE>
Changes in our manufacturing capabilities could significantly reduce our ability
to deliver our products
Biomatrix faces manufacturing risks. Our manufacturing process is
highly complex and is regulated by the government. It is possible that we will
have problems maintaining or expanding our facilities in the future. These
problems could cause delays in production or delivery delays. Any significant
disruption in our manufacturing operations could significantly hurt our
business, results of operations, and financial condition.
Our recent expansion might not bring the increased profitability we expect
Over the past two years, we more than doubled the number of employees.
Also, we now operate and have employees in twelve countries. This expansion
requires that we spend a significant amount of money to support what we hope
will be increased demand for our products. This strategy involves risks, which
include supporting higher levels of operating expenses, attracting and retaining
employees, and dealing with other management difficulties that arise from rapid
growth.
A loss of key personnel could impede our ability to efficiently implement our
business plans
Our future success is highly dependent on the members of our management
and scientific staff because of the highly specialized and technical nature of
our business. The experience of our key employees with our products and
processes makes them difficult to replace, and the loss of one or more of our
key employees could impede our ability to efficiently implement our business
plans. We do not maintain any key person life insurance policies with respect to
any of our employees. We have entered into employment agreements with Dr. Endre
A. Balazs, our Chief Executive Officer and Chief Scientific Officer and Rory B.
Riggs, our President. These agreements restrict Dr. Balazs and Mr. Riggs from
engaging in certain activities that are competitive with Biomatrix. We have
entered into similar agreements with most but not all of our employees.
Product liability claims could significantly harm our financial condition and
our reputation
Producing and selling health-care products can lead to allegations of
product liability, and it is possible that product liability claims could be
brought against us. Although we carry product liability insurance in an amount
that we consider sufficient, we cannot be sure that the amount of coverage that
we currently hold, or will hold in the future, will be adequate. If our
insurance coverage is not sufficient, we may not be able to satisfy liability
claims out of our other assets. If we attempt to obtain additional insurance in
the future, we may not be able to do so on acceptable terms or at an acceptable
cost, and any additional insurance we do obtain may not provide adequate
coverage against asserted claims. Additionally, allegations of product
liability, whether or not proven, could interfere with our ability to sell our
products and thereby reduce our revenues.
Our stock price has been volatile in the past and its price may drop
precipitously in the future and our stock price may be affected by the stock
prices of Genzyme Surgical Products and Genzyme Tissue Repair
The market price of our common stock, like that of the securities of
many other biomedical and medical device companies, has fluctuated over a wide
range, and the market price of the shares of our common stock or other
securities could be highly volatile in the future. The price of our common stock
as reported by the New York Stock Exchange has ranged from a high of $45.00 to a
low of $18.13 in the 52 weeks ended December 31, 1999. Factors including, but
not limited to, fluctuation in our operating results or our failure to meet the
expectations of the investment community, our ability to manufacture our
products, demand for our products, announcements of technological innovations or
new commercial products by us or our competitors, governmental regulation,
changes in insurance reimbursement policies, developments or disputes concerning
patent or other proprietary rights, public concern as to the safety of devices
or other products developed by us or our competitors, and general market
conditions may from time to time have a significant effect on the market price
of our common stock or other securities.
11
<PAGE>
In addition, as a result of our agreement to merge with Genzyme, the
price of our stock is expected to trade at prices that correlate to the value of
the consideration our stockholders will receive in the merger, which is part
cash and part stock in Genzyme's newly created tracking stock. The merger is
subject to various shareholder approvals of both companies. If the merger is not
approved and does not close it may have a negative impact on our stock price.
Fluctuating operating results could cause decreased revenues
We have planned our operating expenses on the assumption that revenues
from sales will continue to grow. If these revenues do not grow as we have
projected, our operating results for a particular period may be lower than
expected. A revenue shortfall could result from a number of factors, including
but not limited to those described in this Form 10-K, lower than expected demand
for our products; fewer purchases of our products by our distribution partners;
inability to collect from those who owe us money, goods, or services;
manufacturing interruptions; and overall economic conditions.
Item 2. Properties
Our executive, administrative and research and development facilities
are located in Ridgefield, New Jersey in leased premises of approximately 66,000
square feet. During 1999, we purchased the 93,000 square foot facility in
Ridgefield, NJ which houses our U.S. manufacturing facility and some of our
laboratories and offices. Biomatrix Medical Canada owns a 28,000 square foot
manufacturing facility in Pointe-Claire, Quebec, Canada. Biomatrix's other
subsidiaries also lease small administrative offices in their respective
countries.
Item 3. Legal Proceedings
In August 1990, we received a notice filed by the Pennsylvania
Department of Environmental Protection that we could be one of approximately
1,000 potentially responsible parties that may have clean-up responsibility at
the Industrial Solvents and Chemical Company site in York Haven, Pennsylvania.
During the late 1980s, we used a licensed waste disposal transport company to
ship industrial solvents to that site, which was operating as a recycling
facility at the time. The Department of Environmental Protection reviewed
hazardous waste found at the site, as well as their own records, to identify
additional participants and to quantify each participant's contribution.
Biomatrix is a member of a steering committee that consists of many
participants. As of December 31, 1997, we had a reserve of $0.7 million related
to this matter. During the fourth quarter of 1998, the Department of
Environmental Protection selected a final clean-up remedy, and Biomatrix settled
out of the matter with a buy-out proposal prepared by the steering committee and
reversed the reserve associated with this matter. Therefore, on December 31,
1999 and 1998 Biomatrix no longer had a reserve for any potential litigation
regarding this matter.
In October 1996, Michael Jarcho filed suit against Biomatrix in the
United States District Court for the Southern District of California seeking to
recover damages and declaratory judgment for our alleged breach of Jarcho's
consulting agreement with Biomatrix, dated December 2, 1988. The agreement
provides that Biomatrix is to pay royalties to Jarcho for products that result
from his consultancy. Jarcho contends that Hylaform resulted from his
consultancy and seeks a royalty on our past and future net sales of Hylaform as
well as punitive damages and recovery of attorney fees. We disagree with
Jarcho's claims and do not believe that we owe Jarcho any royalties as a result
of Hylaform sales. On January 10, 1997, the court dismissed Jarcho's case on the
grounds that the agreement requires such disputes to be brought exclusively in
New Jersey state court. Jarcho moved for a partial reconsideration of the
decision, which we opposed, and his motion was denied. On June 16, 1997, Jarcho
filed suit in New Jersey state court. A tentative trial date has been set for
May 2000. We have been defending this matter vigorously. In accordance with our
policy on contingencies, a provision has been made in the accompanying
consolidated financial statements for estimated legal fees expected to be
incurred in defending the matter vigorously. We have not made any provisions for
any liability that might result from the claims made by Jarcho.
Item 4. Submission of Matters to a Vote of Security Holders
During the last quarter of its fiscal year ended December 31, 1999 we
did not submit any matters to be voted on by our shareholders.
12
<PAGE>
Executive Officers
Our Executive Officers have furnished the following information about
their background and positions:
<TABLE>
<CAPTION>
Name Age Position(s) with Biomatrix
---- --- --------------------------
<S> <C> <C>
Endre A. Balazs, M.D. .........................80 Chief Executive Officer and Chief Scientific Officer; Director
Rory B. Riggs....................................46 President; Director
Janet L. Denlinger, Ph.D. .......................54 Executive Vice President; Director
Wesley M. Domareki...............................50 President, ORLO Division
Beatrice Morales.................................50 Vice President, Quality Assurance and Quality Control
Richard S. Romasz, Ph.D..........................50 Vice President, Clinical Affairs
Maxine Seifert...................................46 Vice President, Finance and Chief Financial Officer
Donald E. Woodhouse..............................53 Vice President, Manufacturing
</TABLE>
Endre A. Balazs, M.D., Chief Executive Officer, Chief Scientific
Officer and Director. Dr. Balazs is a co-founder of Biomatrix. He became Chief
Executive Officer and Chief Scientific Officer of Biomatrix in February 1987,
having served as President from Biomatrix's inception until that time. He has
also served as a director from the inception of Biomatrix to the present. He is
the Malcolm P. Aldrich Research Professor Emeritus at the College of Physicians
and Surgeons, Columbia University. Before joining Columbia in 1975, he taught at
Harvard Medical School for 25 years. During the same time he was also
co-founder, research director and president of The Retina Foundation and the
Boston Biomedical Research Institute. From 1968 to 1978, Dr. Balazs was
president and owner of Biotrics, Inc., which developed and manufactured the
first hyaluronan therapeutic products used in medicine. He is the author of more
than 300 scientific articles and patents. Dr. Balazs received an M.D. degree
from the University of Budapest, Hungary. He is married to Dr. Denlinger.
Rory B. Riggs, President and Director. Mr. Riggs was elected President
of Biomatrix on April 1, 1996 and served as the acting Chief Financial Officer
from September 1996 to January 1998. He has been a Director of Biomatrix since
October 1990. Since 1991, he has been affiliated with ITIM Corp. and
Pharmaceutical Partners LLC, investment advisory and venture capital firms
specializing in pharmaceutical and biotechnology investments. From 1991 to 1994,
he was President and Chief Executive Officer of RF&P Corporation, a company
wholly owned by the Virginia Retirement System. Until 1990, Mr. Riggs was a
Managing Director in the Mergers and Acquisitions Department at PaineWebber
Incorporated, where he was employed for more than nine years. He is a graduate
of Middlebury College and Columbia University's Graduate School of Business. Mr.
Riggs is a member of the Board of Directors of Spartan, Inc. and FibroGen, Inc.
Janet L. Denlinger, Ph.D., Executive Vice President and Director. Dr.
Denlinger is a co-founder of Biomatrix. She has been Executive Vice President of
Biomatrix since 1989 and a Vice President and Director of Biomatrix since its
inception. She was Dr. Balazs' research associate for 20 years at the Boston
Biomedical Research Institute and then at the Department of Ophthalmology,
College of Physicians and Surgeons, Columbia University. She has authored
numerous publications in physiology, biochemistry and biological activity and
metabolism of hyaluronan. Dr. Denlinger received a Ph.D. degree in biochemistry
from the University of Lille, France. She is married to Dr. Balazs.
Wesley M. Domareki, President, ORLO Division. Mr. Domareki joined
Biomatrix in January 1991 as Vice President, International Marketing and
Business Development. In 1994, he was appointed President of Biomatrix's
Otorhinolaryngology and Ophthalmology Division. Before joining Biomatrix, Mr.
Domareki was employed by Pharmacia Inc. for 17 years. By 1989, as Vice
President, International Marketing and Business Development for Pharmacia
Ophthalmics, he had been involved in the successful commercialization and
marketing of Healon(R)in the United States, Japan, Australia and various
European countries. Mr. Domareki received a B.S. degree in business
administration from Villanova University and holds an M.B.A. degree in
pharmaceutical marketing and economics from Fairleigh Dickinson University.
Beatrice Morales, Vice President, Quality Assurance and Quality
Control. Ms. Morales joined Biomatrix in 1981 as Assistant Scientist, and became
Director of Quality Control and Quality Assurance in 1986. In 1991, she was
promoted to her present position. Before joining Biomatrix, Ms. Morales served
on Dr. Balazs' research staff at the Department of Ophthalmology of Columbia
University. Ms. Morales received a B.S. degree in Biology from the City College
of New York.
13
<PAGE>
Richard S. Romasz, Ph.D., Vice President, Clinical Affairs. Dr. Romasz
joined Biomatrix in November 1995 as Vice President, Clinical Affairs. Prior to
joining Biomatrix, Dr. Romasz was employed for over 19 years with Pharmacia Inc.
in its Clinical Research Department. His last position was as Vice
President-Clinical Research, Pharmacia Inc., Ophthalmics. Dr. Romasz was
intensely involved with the clinical trials and regulatory proceedings related
to Healon(R)and Hylartin V(R)in the United States, the first hyaluronan products
ever marketed worldwide. Healon and Hylartin were developed by Dr. Balazs and
were licensed to Pharmacia in 1972. Dr. Romasz received a Ph.D. in nutrition
from Rutgers University.
Maxine Seifert, Vice President, Finance and Chief Financial Officer.
Ms. Seifert joined Biomatrix in January 1998. Before joining Biomatrix, Ms.
Seifert was employed for over thirteen years with Colgate-Palmolive Company in a
variety of senior financial positions, most recently as Vice President,
Financial Business Development. Her prior experiences include positions with
Deloitte & Touche, a public accounting firm. Ms. Seifert received a B.S.B.A. in
Accounting from Georgetown University and holds an MBA from the Harvard
University Graduate School of Business Administration.
Donald E. Woodhouse, Vice President, Manufacturing. Mr. Woodhouse
joined Biomatrix in May 1991. Before joining Biomatrix, Mr. Woodhouse was
employed for seven years with Sterling Drug, Inc. in a variety of manufacturing
and engineering positions, most recently as Director of Pharmaceutical
Engineering. His prior experience includes positions with Bausch & Lomb,
American Hospital Supply (Critical Care Division) and Merck, Sharp & Dohme in
manufacturing, engineering and general management over a 15-year period. Mr.
Woodhouse received a B.S. degree in biology from Hampden-Sydney College and has
completed graduate business courses at Temple University.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Market Information
On July 23, 1998 Biomatrix's common stock began trading on the New York
Stock Exchange under the symbol "BXM." Biomatrix's common stock had previously
been traded in the Nasdaq National Market under the symbol "BIOX." The following
table sets forth the range of high and low last sale prices per share for
Biomatrix's common stock on the New York Stock Exchange and Nasdaq National
Market for 1999 and 1998. The prices stated below are reflective of Biomatrix's
two-for-one stock split that was in the form of a 100% stock dividend issued to
shareholders on April 26, 1999.
Year Ended December 31, 1999 High Low
---------------------------- ------ ------
Fourth Quarter........................................ $27.00 $18.13
Third Quarter......................................... 29.25 18.75
Second Quarter........................................ 45.00 20.25
First Quarter......................................... 30.86 22.81
Year Ended December 31, 1998 High Low
---------------------------- ------ ------
Fourth Quarter........................................ $29.13 $12.50
Third Quarter......................................... 28.78 18.63
Second Quarter........................................ 20.50 14.57
First Quarter......................................... 17.35 14.00
Holders
As of March 1, 2000, there were approximately 350 shareholders of
record. This does not reflect beneficial shareholders who hold their stock in
nominee or "street" name through various brokerage firms.
Dividends
Biomatrix has not paid any cash dividends on the Common Stock to date
and does not anticipate any cash dividends in the foreseeable future.
14
<PAGE>
Item 6. Selected Financial Data
The following is a summary of Biomatrix's selected historical financial
data. The data for each of the three years in the period ended December 31, 1999
have been derived from and should be read in conjunction with our audited
consolidated financial statements, included in Item 8 of this Report.
<TABLE>
<CAPTION>
(in millions, except share and per share data)
Years Ended December 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Consolidated Operating Data:
Net Sales................................... $72.0 $37.8 $11.7 $5.0 $3.6
Income from license fees, royalties,
research contracts and grants............. 7.7 9.8 20.8 10.6 7.5
--- --- ---- ---- -----
Total Revenues ............................. 79.7 47.6 32.5 15.6 11.1
Costs and Expenses:
Cost of Goods Sold........................ 21.1 9.1 3.6 2.6 1.9
Research and Development.................. 9.1 10.3 5.9 5.5 5.1
Selling, General and Administrative....... 18.5 14.5 7.8 5.3 5.0
---- ---- --- ---- -----
Total Costs and Expenses.................... 48.7 33.9 17.3 13.4 12.0
---- ---- ---- ---- -----
Income (Loss) from Operations............... 31.0 13.7 15.2 2.2 (0.9)
Other Income, net........................... 0.0 0.4 1.1 0.7 0.7
Provision for Income Taxes.................. (12.4) (2.0) (0.6) (0.1) -
----- ----- ----- ---- -----
Net Income (Loss)........................... $18.6 $12.1 $15.7 $2.8 ($0.2)
===== ===== ===== ==== =====
Net Income (Loss) per Share - Basic......... $0.81 $0.54 $0.72 $0.14 ($0.01)
Net Income (Loss) per Share - Diluted....... $0.76 $0.51 $0.69 $0.13 ($0.01)
Shares used in computing
Net Income (Loss) per Share:
Basic..................................... 22,959,394 22,450,398 21,789,538 20,868,460 19,753,174
========== ========== ========== ========== ==========
Diluted................................... 24,349,952 23,703,758 22,654,412 21,790,052 19,753,174
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
(in millions)
Years Ended December 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Working Capital.......................... $46.9 $27.0 $21.9 $13.8 $10.1
Total Assets............................. 99.0 83.3 43.9 26.0 17.4
Long-Term Debt and Capital Lease
Obligations (Excluding Current Portion) 11.9 17.6 5.6 5.8 0.7
Total Shareholders' Equity.............. 77.2 51.4 34.3 17.7 14.1
</TABLE>
15
<PAGE>
The following is a table setting forth quarterly financial data for
Biomatrix's two most recent fiscal years:
<TABLE>
<CAPTION>
(in millions, except per share data)
For the Quarter Ended,
-------------------------------------------------------------------
Q499 Q399 Q299 Q199 Q498 Q398 Q298 Q198
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales................................... $19.3 $18.1 $18.1 $16.5 $12.6 $11.4 $9.2 $4.6
Income from license fees, royalties,
and research contracts.................... 0.3 0.2 7.1 0.1 6.2 0.2 0.5 2.9
--- --- --- --- --- --- --- ---
Total Revenues ............................. 19.6 18.3 25.2 16.6 18.8 11.6 9.7 7.5
Costs and Expenses:
Cost of Goods Sold........................ 5.5 5.5 5.2 4.9 2.7 2.7 2.2 1.5
Research and Development.................. 2.5 2.4 2.0 2.2 2.9 2.7 2.5 2.2
Selling, General and Administrative....... 5.2 4.8 4.6 3.9 4.0 4.1 3.5 2.9
--- --- --- --- --- --- --- ---
Total Costs and Expenses.................... 13.2 12.7 11.8 11.0 9.6 9.5 8.2 6.6
Income from Operations...................... 6.4 5.6 13.4 5.6 9.2 2.1 1.5 0.9
Other Income (Expense)...................... 0.1 0.2 (0.2) (0.1) (0.3) 0.3 0.1 0.3
(Provision for) Benefit From Income Taxes... (2.2) (2.5) (5.5) (2.2) (1.5) 0.4 (0.5) (0.4)
----- ------ ----- ----- ----- --- ----- -----
Net Income.................................. $4.3 $3.3 $7.7 $3.3 $7.4 $2.8 $1.1 $0.8
==== ==== ==== ==== ==== ==== ==== ====
Net Income per Share - Basic................ $0.18 $0.14 $0.34 $0.14 $0.33 $0.12 $0.05 $0.04
Net Income per Share - Diluted.............. $0.18 $0.14 $0.31 $0.13 $0.31 $0.11 $0.05 $0.03
</TABLE>
The sum of the earnings per share for the four quarters in 1999 does
not equal the total for the year due to the greater dilution in the second
quarter calculation from the effect of the convertible debt using the
if-converted method. The convertible debt was anti-dilutive for the first
quarter, third quarter, fourth quarter and the year and therefore was not
included in those calculations. The sum of the earnings per share for the four
quarters in 1998 does not equal the total for the year due to the greater
dilution in the fourth quarter calculation from the effect of the convertible
debt using the if-converted method. The convertible debt was anti-dilutive for
the second quarter, third quarter and the year and therefore was not included in
those calculations. In addition, the sum of the earnings per share for the four
quarters in 1999 and 1998 does not equal the total for each year due to the
change in the weighted average number of shares from quarter to quarter and the
change in the dilutive effect of stock options included in the calculations for
each reporting period.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
We have been principally engaged in the research and development,
manufacturing and commercialization of proprietary viscoelastic biological
polymers, called hylans, for use in therapeutic medical applications and skin
care. During the past five years, a significant source of our revenue has been
from certain up-front payments relating to corporate license and distribution
agreements.
Our business is subject to significant risks. Forward-looking comments
included in this discussion and throughout this report are subject to and should
be read in conjunction with the "Risk Factors" section of this Form 10-K. A
portion of our future revenues may be based on payments from corporate license
and distribution agreements. Our total revenues and net income will fluctuate
from quarter to quarter. Some of these fluctuations may be significant and, as a
result, quarter to quarter comparisons may not be meaningful. As of December 31,
1999, Biomatrix's retained earnings were $10.9 million, as compared to an
accumulated deficit of $7.7 million as of December 31, 1998.
16
<PAGE>
Results of Operations For the Years Ended December 31, 1999 and 1998
Revenues. Total revenues for the year ended December 31, 1999 were
$79.7 million, representing an increase of $32.1 million or 67% over total
revenues in 1998. Net product sales for the year ended December 31, 1999 were
$72.0 million, representing an increase of $34.2 million or 90% over 1998. The
increase in product sales was due primarily to increased sales of Synvisc in the
United States and Europe and the launch of Synvisc in Australia. Income from
licenses, royalties, and research contracts was $7.7 million in 1999, a decrease
of $2.1 million or 21% from 1998, and represented 10% of total revenues in 1999
as compared to 21% of 1998 total revenues. The $7.7 million recorded in 1999
includes a $7.0 million non-refundable milestone payment by Wyeth, which was
earned because Wyeth achieved end-user Synvisc sales in the United States of
$100 million over a rolling twelve-month period. The $9.8 million recorded in
1998 includes $3.1 million of up-front non-refundable fees from Novartis and a
$6.0 million non-refundable milestone fee from Wyeth, which was recorded on the
one-year anniversary of the launch of Synvisc in the United States. The up-front
and milestone non-refundable fees that Biomatrix recorded in 1999 and 1998
contained no future performance obligations. During the second quarter of 2000,
we are planning to adopt Staff Accounting Bulletin No. 101, "Revenue
Recognition", which will impact the way we record up-front and milestone
non-refundable license fees.
Costs and Expenses. Total costs and expenses were $48.7 million for the
year ended December 31, 1999, representing an increase of $14.8 million or 44%
over 1998. Cost of goods sold for the years ended December 31, 1999 and 1998
were $21.1 million and $9.1 million, respectively, resulting in gross margin
percentages of 71% and 76%, respectively. This decrease in gross margin
percentage is a result of shipments from our new U.S. manufacturing facility
which has higher costs because it is operating below capacity. Research and
development expenses were $9.1 million for the year ended December 31, 1999,
representing a decrease of $1.2 million or 12% over the prior year. The decrease
in research and development expenses is primarily related to the inclusion of
non-recurring process development costs associated with the Company's new U.S.
manufacturing facility in 1998. Selling, general and administrative expenses for
the year ended December 31, 1999 were $18.5 million, representing an increase of
$4.0 million or 28% over the prior year. The increase in selling, general and
administrative expenses was due primarily to increased personnel costs
associated with establishing the infrastructure required to market our products
globally. During the fourth quarter of 1998, we reversed a reserve of $0.7
million related to an environmental issue that was settled and also established
a litigation reserve of $0.4 million for legal fees related to pending
litigation.
Interest and Miscellaneous Income. Interest expense was $1.5 million
for the year ended December 31, 1999, which represented an increase of $0.5
million over the prior year. This increase in interest expense is attributable
to the full year of interest expense on the convertible debt instrument that
Biomatrix issued in May 1998, and a full year of interest expense related to the
$2.3 million of equipment financing entered into in December 1998. Interest and
miscellaneous income for the year ended December 31, 1999 was $1.5 million,
representing an increase of $0.1 million over the prior year.
Results of Operations For the Years Ended December 31, 1998 and 1997
Revenues. Total revenues for the year ended December 31, 1998 were
$47.6 million, representing an increase of $15.1 million or 46% over total
revenues in 1997. Net product sales for the year ended December 31, 1998 were
$37.8 million, representing an increase of $26.1 million or 223% over 1997. The
increase in product sales was due primarily to increased sales of Synvisc in the
United States and Europe and the launch of Synvisc in certain Latin American
countries. Income from licenses, royalties, and research contracts was $9.8
million in 1998, a decrease of $11.0 million or 53% from 1997, and represented
21% of total revenues in 1998 as compared to 64% of 1997 total revenues. The
$9.8 million recorded in 1998 includes $3.1 million of up-front non-refundable
fees from Novartis and a $6.0 million non-refundable milestone fee from Wyeth,
which was recorded on the one year anniversary of the launch of Synvisc in the
United States. The decrease from 1997 was due primarily to the fact that 1997
included non-refundable up-front and non-refundable milestone payments from
Wyeth of $17.0 million and Bayer of $3.0 million. The up-front and milestone
non-refundable fees recorded in 1998 and 1997 contained no future performance
obligations. During the second quarter of 2000, we are planning to adopt Staff
Accounting Bulletin No. 101, "Revenue Recognition", which will impact the way we
record up-front and milestone non-refundable license fees.
17
<PAGE>
Costs and Expenses. Total costs and expenses were $33.9 million for the
year ended December 31, 1998, representing an increase of $16.6 million or 96%
over 1997. Cost of goods sold for the years ended December 31, 1998 and 1997
were $9.1 million and $3.6 million, respectively, resulting in gross margin
percentages of 76% and 69%, respectively. Research and development expenses were
$10.3 million for the year ended December 31, 1998, representing an increase of
$4.4 million or 75% over the prior year, due nearly entirely to process
development costs associated with our new U.S. manufacturing facility. Selling,
general and administrative expenses for the year ended December 31, 1998 were
$14.5 million, representing an increase of $6.7 million or 86% over the prior
year. The increase in selling general and administrative expenses resulted
primarily to increased personnel costs associated with establishing the
infrastructure required to manufacture and market our products globally. During
the fourth quarter of 1998, we reversed a reserve of $0.7 million related to an
environmental issue and also established a litigation reserve of $0.4 million
for legal fees related to pending litigation.
Interest and Miscellaneous Income. Interest expense was $1.0 million
for the year ended December 31, 1998, which represented an increase of $0.9
million over the prior year. This increase in interest expense is attributable
to the convertible debt instrument Biomatrix issued in May 1998 and the fact
that we ceased capitalizing interest related to the new manufacturing facility
in July 1998, after the facility was completed. Interest and miscellaneous
income for the year ended December 31, 1998 was $1.4 million, representing an
increase of $0.2 million over the prior year.
Income Taxes
In 1999, 1998 and 1997, we recorded tax provisions totaling $12.4
million, $2.0 million and $0.6 million, respectively, primarily for federal and
state taxes. The effective rate for 1999 was 40% which approximated the combined
statutory federal and state rates. The 1998 provision of $2.0 million is net of
a one-time benefit of approximately $1.8 million related to recognizing certain
net deferred tax assets during 1998. We expect our effective tax rate to
approximate the combined statutory federal and state rate in 2000. The effective
rate could potentially exceed the combined statutory federal and state rate in
the future depending on the impact of certain foreign operations and
non-deductible items.
As of December 31, 1999 we had $0.5 million of net deferred tax assets
included in other long term assets and $0.7 million of net deferred tax assets
included in other short term assets on our balance sheet. It is probable that
Biomatrix will realize the benefit of these net assets. However, we have
provided a full valuation allowance on certain foreign related deferred tax
assets due to the uncertainty of their realization.
Liquidity and Capital Resources
Biomatrix had cash and cash equivalents of $35.0 million at December
31, 1999. It is our policy to invest excess cash in U.S. government securities
and, accordingly, any security purchased with a maturity of less than three
months is classified as cash and cash equivalents. As of December 31, 1999 all
of Biomatrix's cash and cash equivalents were held in operating and money market
accounts.
Our operations and capital growth over the past three years have been
financed primarily from non-refundable up-front and milestone license fee
payments from corporate partners, the utilization of our cash and investments,
and the private placement of debt and equity securities. Over the past three
years, we have received funding of $19.8 million from the private placement of
debt and equity securities and $36.4 million from non-refundable license fee and
milestone payments.
For the year ended December 31, 1999, Biomatrix had cash inflows from
operations of $30.9 million. This amount primarily related to cash inflows from
increased sales levels of Synvisc and the $7.0 million milestone payment from
Wyeth related to the achievement of a sales level milestone for Synvisc. In 1999
Biomatrix invested $9.2 million in property, plant and equipment, primarily
associated with building its laboratories in the United States. During 1999,
Biomatrix purchased the 93,000 square foot building in New Jersey where our
manufacturing facility resides. The purchase price was approximately $4.6
million. Additionally, in 1999 Biomatrix received $1.0 million from the exercise
of Biomatrix stock options and $1.2 million from the tax benefit related to
stock options.
During 2000, we expect to incur higher expenses from developing our
internal infrastructure to support the administration of our expanded global
operations and increased clinical activity. We believe that our higher operating
expenses will be supported by our operations, existing cash position, and
milestone payments from existing corporate partners and existing financing
arrangements.
18
<PAGE>
In May 1998, Biomatrix issued $15.0 million of subordinated convertible
debt to a third party. The debt has a five-year term and a coupon rate of 6.9%
with interest payable on a semi-annual basis. The debt contains a conversion
feature that allows the third party to convert the debt into common shares at
$20 per share after one year. Biomatrix can also call the debt at par after
three years or after two years upon certain conditions. During the fourth
quarter of 1999, the debt holder converted one-third of the debt, or $5.0
million, into 250,000 shares of common stock. Therefore, at December 31, 1999,
the outstanding balance of convertible debt was $10.0 million. The agreement
includes certain financial covenants with which we have complied.
In December 1998, Biomatrix entered into a $2.3 million equipment loan
with GE Capital. The debt has a five-year term and a coupon rate of 7.4%. The
debt is repayable in equal monthly payments over the five-year term. The
agreement includes certain financial covenants with which we have complied.
In August 1999, Biomatrix secured a revolving line of credit from
Merrill Lynch Business Financial Services, Inc. in the amount of $10.0 million.
Funds can be borrowed against the line at an interest rate equal to the 30-Day
Commercial Paper Rate, as defined in the agreement, plus 1.99%. To the extent
the Company draws down on this line, the borrowed amount will be collateralized
by the U.S. manufacturing facility. There were no borrowings against this line
at December 31, 1999.
We also have a $0.4 million credit agreement with a Canadian bank with
an interest rate at prime plus 0.5%. There were no borrowings outstanding at
December 31, 1999 and 1998.
Year 2000
We did not incur any significant unanticipated expenses nor any
disruption of business operations as a result of the transition to Year 2000.
Our final operating cost to modify our systems for the Year 2000 was
approximately $0.3 million.
Recent Developments
On March 6, 2000, Genzyme Corporation ("Genzyme"), a Massachusetts
corporation, Seagull Merger Corporation, a Massachusetts corporation and
wholly-owned subsidiary of Genzyme ("Merger Sub"), and Biomatrix entered into an
Agreement and Plan of Merger (the "Merger Agreement") pursuant to which the
parties will effect a business combination through a merger of Biomatrix with
and into Merger Sub (the "Merger"). In connection with the Merger, Genzyme will
form a new division, the Genzyme Biosurgery division, and will create a new
series of common stock designated as "GZBX division Common Stock," $0.01 par
value per share ("GZBX Stock"), which will be issued to the holders of Biomatrix
common stock, $.0001 par value per share ("Biomatrix Common Stock"), in the
Merger. The currently proposed terms of the GZBX Stock are set forth as an
exhibit to the Merger Agreement. In connection with the Merger, Genzyme's Tissue
Repair Division and Surgical Products Division will become part of the Genzyme
Biosurgery division and the Genzyme Tissue Repair Common Stock ("GTR Stock")
series and Genzyme Surgical Products Common Stock ("GSP Stock") series will be
exchanged for GZBX Stock (the "Genzyme Reorganization"). The transaction, which
will be accounted for using the purchase method of accounting, is expected to
close in the second quarter of 2000.
Under the terms of the Merger Agreement, each outstanding share of
Biomatrix Common Stock will be converted, at the option of the holder, into
either (i) $37.00 in cash or (ii) one share of GZBX Stock (the "Merger
Consideration"). Based on the cash election price and the number of shares of
Biomatrix Common Stock outstanding, Biomatrix expects that the cash portion of
the transaction will be approximately $245 million. Under the Merger Agreement,
28.38% of the shares of Biomatrix Common Stock outstanding at the effective time
of the Merger will be exchanged for cash and the remaining 71.62% of the shares
of Biomatrix Common Stock outstanding at the time of the Merger will be
converted into shares of GZBX Stock at a conversion rate of one share of GZBX
Stock for each share of Biomatrix Common Stock. However, the number of shares of
GZBX Stock to be issued in the Merger is subject to an upward adjustment if the
value of the GZBX Stock to be issued in the Merger on the effective date of the
Merger is less than 45% of the total Merger Consideration in order to preserve
the status of the Merger as a tax-free reorganization.
Under the terms of the Merger Agreement, each outstanding share of GSP
Stock will convert into 0.6060 shares of GZBX Stock and each share of GTR Stock
will convert into 0.3352 shares of GZBX Stock. Based on the number of common
shares outstanding for each entity at the signing date, the Genzyme Biosurgery
division is expected to have approximately 35.2 million shares outstanding.
19
<PAGE>
Consummation of the Merger is subject to the adoption of the Agreement
and Plan of Merger by the Biomatrix stockholders, the approval of the issuance
of GZBX Stock in the Merger and the necessary amendments of Genzyme's charter by
the Genzyme stockholders, including the approval of the exchange of GSP Stock
for GZBX Stock by GSP stockholders and the exchange of GTR Stock for GZBX Stock
by GTR stockholders, the receipt of regulatory approvals and certain other
customary closing conditions.
Certain officers of Biomatrix holding an aggregate of approximately 34%
of the outstanding shares of Biomatrix Common Stock have agreed to vote their
shares of Biomatrix Common Stock in favor of the Merger until the earlier to
occur of the completion of the Merger or 5 days after the termination of the
Merger Agreement. In addition, in connection with the Merger, Biomatrix has
granted Genzyme an option to purchase 4.6 million shares of Biomatrix Common
Stock under certain circumstances.
Impact of the Adoption of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS 133 is effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999 (January 1, 2000 for the Company). SFAS 133 requires that
all derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. SFAS 133 is not expected to have an impact on our consolidated
results of operations, financial position or cash flows.
In December 1999, the staff of the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin No. 101, Revenue Recognition, which was
amended on March 24, 2000 to delay the implementation date for registrants with
fiscal years that begin between December 16, 1999 and March 15, 2000 until no
later than their second fiscal quarter of the fiscal year beginning after
December 15, 1999. To the extent the guidance in SAB 101 differs from the
generally accepted accounting principles previously utilized by an SEC
registrant, SAB 101 indicates that the SEC staff will not object to reporting
the cumulative effect of a change in accounting principle.
Prior to promulgation of SAB 101, we had reported non-refundable
up-front and milestone fees received pursuant to distribution agreements in the
period earned, which was deemed to be the date when all related material
commitments had been satisfied and no future consideration was required. While
we believe the pricing under these agreements entered into with our various
marketing partners provides for arms-length pricing of product sales, SAB 101
requires that we review all of our non-refundable fees to determine if they
should be linked to supply arrangements and reported as additional revenue from
product sales made pursuant to those arrangements.
We are currently in the process of evaluating the impact of SAB 101 on
our accounting policy for non-refundable fees received pursuant to distribution
agreements with our marketing partners. We are in the process of reviewing each
of our many distribution agreements to assess whether non-refundable, up-front
license fees and/or milestone payments should be deferred in accordance with SAB
101. Accordingly, we anticipate that a change in our accounting policy will
result in a cumulative effect adjustment for a change in accounting principle.
The total cumulative effect of the non-cash, after-tax charge is preliminarily
estimated to range from $13.0 million to $20.0 million. Such amount would be
recorded as deferred revenue and recognized as product revenue in future
periods. We intend to implement changes resulting from SAB 101 in the second
quarter of 2000.
20
<PAGE>
Contingent Liability
In August 1990, we were notified by the Pennsylvania Department of
Environmental Protection that we could be one of approximately 1,000 potentially
responsible parties that may have clean-up responsibility at the Industrial
Solvents and Chemical Company site in York Haven, Pennsylvania. During the late
1980s, we used a licensed waste disposal transport company to ship industrial
solvents to the site, which was operating as a recycling facility at that time.
The Department of Environmental Protection reviewed hazardous waste found at the
site, as well as its own records, to identify additional participants and to
quantify their volumetric contributions. Biomatrix was a member of a steering
committee that consisted of many participants. As of December 31, 1997 Biomatrix
had a reserve of $0.7 million related to this matter. During the fourth quarter
of 1998, the final remedy was selected by the Department of Environmental
Protection selected its final clean-up remedy and Biomatrix, settled out of the
matter through a buy-out proposal prepared by the steering committee. At this
time, Biomatrix reversed its reserve associated with this matter. Therefore, at
December 31, 1999 and 1998 Biomatrix no longer had a reserve for any potential
claims regarding this matter.
In October 1996, Michael Jarcho filed suit against Biomatrix in the
United States District Court for the Southern District of California seeking to
recover damages and declaratory judgment for our alleged breach of Jarcho's
consulting agreement with Biomatrix, dated December 2, 1988. The agreement
provides that Biomatrix is to pay royalties to Jarcho for products that result
from his consultancy. Jarcho contends that Hylaform resulted from his
consultancy and seeks a royalty on our past and future net sales of Hylaform as
well as punitive damages and recovery of attorney fees. We disagree with
Jarcho's claims and do not believe that we owe Jarcho any royalties as a result
of Hylaform sales. On January 10, 1997, the court dismissed Jarcho's case on the
grounds that the agreement requires such disputes to be brought exclusively in
New Jersey state court. Jarcho moved for a partial reconsideration of the
decision, which we opposed, and his motion was denied. On June 16, 1997, Jarcho
filed suit in New Jersey state court. A tentative trial date has been set for
May 2000. We have been defending this matter vigorously. In accordance with our
policy on contingencies, a provision has been made in the accompanying
consolidated financial statements for estimated legal fees expected to be
incurred in defending the matter vigorously. We have not made any provisions for
any liability that might result from the claims made by Jarcho.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Because we currently have operations outside the U.S.A., we are exposed
to market risk from changes in foreign exchange rates. To reduce the risk from
fluctuations in foreign currencies, we have structured our various distribution
agreements in United States dollars. Approximately 2% of 1999 total revenues
were generated in foreign currencies. As of December 31, 1999, 9% of our total
assets were located outside of the United States, and no single country had a
significant concentration of cash.
Item 8. Financial Statements and Supplementary Data
See page F-1 of this Report, which includes an index to the
consolidated financial statements.
Item 9. Changes In and Disagreements With Accountants and Financial Disclosure
Not applicable
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) Directors. The information with respect to directors required by
this item is incorporated herein by reference to Biomatrix's Proxy Statement
relating to Biomatrix's Meeting of Shareholders to be held during the second
quarter of 2000 (the "Proxy Statement").
(b) Executive Officers. The information with respect to executive
officers required by this item is set forth in Part I of the Report.
(c) Reports of Beneficial Ownership. The information with respect to
reports of beneficial ownership required by this item is incorporated herein by
reference to Biomatrix's Proxy Statement.
21
<PAGE>
Item 11. Executive Compensation
Information required under this Item is incorporated herein by
reference to Biomatrix's Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required under this Item is incorporated herein by
reference to Biomatrix's Proxy Statement.
Item 13. Certain Relationships and Related Transactions
Information required under this Item is incorporated herein by
reference to Biomatrix's Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
List of Financial Statements
See page F-1 of this Report, which includes an index to consolidated
financial statements.
List of Financial Statement Schedules
None.
List of Exhibits (numbered in accordance with Item 601 of Regulations S-K)
2.1 Agreement and Plan of Merger, dated as of March 6, 2000, among
Genzyme Corporation, Seagull Merger Corporation and Biomatrix,
Inc. as filed as an exhibit to current report in Form 8-K dated
March 15, 2000, and incorporated herein by reference thereto.
2.2 Form of Voting Agreement, dated as of March 6, 2000, between
Genzyme Corporation and Certain Holders of Biomatrix, Inc. Common
Stock as filed as an exhibit to current report in Form 8-K dated
March 15, 2000, and incorporated herein by reference thereto.
2.3 Stock Option Agreement, dated as of March 6, 2000, between Genzyme
Corporation and Biomatrix, Inc. as filed as an exhibit to current
report in Form 8-K dated March 15, 2000, and incorporated herein
by reference thereto.
3.1 Amended and Restated Certificate of Incorporation of Biomatrix,
Inc. as filed as an Exhibit to Registration No. 33-41424, and
incorporated herein by reference thereto.
3.2 Amendment to Amended and Restated Certificate of Incorporation to
reflect the increase in authorized shares.
3.3 Amended and Restated Bylaws of Biomatrix as filed as an Exhibit
to Registration No. 33-41424, and incorporated herein by
reference thereto.
4 Specimen Stock Certificate.
10.1 Technology License Agreement dated as of June 21, 1991 between
Biomatrix, Inc. and Biomatrix Medical Canada Inc. as filed as an
Exhibit to Registration No. 33-41424, and incorporated herein by
reference thereto.
10.2 Management Services Agreement dated as of June 21, 1991 between
Biomatrix, Inc. and Biomatrix Medical Canada Inc. as filed as an
Exhibit to Registration No. 33-41424, and incorporated herein by
reference thereto.
10.3 Employment Agreement dated February 29, 2000 between Biomatrix,
Inc. and Endre A. Balazs, M.D. Management contract or compensatory
plan required to be filed as an exhibit to this form pursuant to
Item 14(c) of this report.
10.4 Development Agreement by and among Biomatrix, Inc., Biomatrix
Svenska AB and OA Investor KB (Up-Will) dated February, 1990 as
filed as an Exhibit to Registration No. 33-41424, and incorporated
herein by reference thereto.
22
<PAGE>
10.5 1984 Stock Option Plan (as amended), and forms of Incentive and
Non-Statutory Stock Option Agreements as filed as an Exhibit to
Registration No. 33-41424, and incorporated herein by reference
thereto. Management contract or compensatory plan required to be
filed as an exhibit to this form pursuant to Item 14(c) of this
report.
10.6 Forms of Employment and Confidentiality Agreements, as filed as an
Exhibit to Registration No. 33-41424, and incorporated herein by
reference thereto.
10.7 License Agreements dated as of May 21, 1982 by and between
Biomatrix, Inc. and each of Drs. Endre A. Balazs, Janet L.
Denlinger and Gerald S. Lazarus, as filed as an Exhibit to
Registration No. 33-41424, and incorporated herein by reference
thereto.
10.8 Amendment to Employment Agreement dated December 30, 1988 between
Biomatrix, Inc. and Endre A. Balazs, M.D., as filed as an Exhibit
to the 1992 annual report on Form 10-K, and incorporated herein by
reference thereto. Management contract or compensatory plan
required to be filed as an exhibit to this form pursuant to Item
14(c) of this report.
10.9 Retirement Plan Agreement dated July 1, 1992 between Biomatrix,
Inc. and the trustees of Biomatrix, as filed as an Exhibit to the
1992 annual report on Form 10-K, and incorporated herein by
reference thereto. Management contract or compensatory plan
required to be filed as an exhibit to this form pursuant to Item
14(c) of this report.
10.10 Consulting Agreement dated June 1, 1993 between Biomatrix, Inc.
and Julius A. Vida, Ph.D., as filed as an Exhibit to the quarterly
report on Form 10-Q for the quarter ended June 30, 1993, and
incorporated herein by reference thereto. Management contract or
compensatory plan required to be filed as an exhibit to this form
pursuant to Item 14(c) of this report.
10.11 Agreement dated August 29, 1995, between Biomatrix, Inc. and Rory
B. Riggs, as filed as an Exhibit to the quarterly report on Form
10-Q for the quarter ended September 30, 1995, and incorporated
herein by reference thereto. Management contract or compensatory
plan required to be filed as an exhibit to this form pursuant to
Item 14(c) of this report.
10.12 Amendment dated July 10, 1995, to the Consulting Agreement dated
June 1, 1993 between Biomatrix, Inc. and Julius A. Vida, as filed
as an Exhibit to the quarterly report on Form 10-Q for the quarter
ended September 30, 1995, and incorporated herein by reference
thereto. Management contract or compensatory plan required to be
filed as an exhibit to this form pursuant to Item 14(c) of this
report.
10.13 1994 Stock Option Plan. Filed as an exhibit to Biomatrix's proxy
statement filed pursuant to Rule 14a-6 dated June 7, 1994, as
filed as an Exhibit to the 1995 annual report on Form 10-K, and
incorporated herein by reference thereto. Management contract or
compensatory plan required to be filed as an exhibit to this form
pursuant to Item 14(c) of this report.
23
<PAGE>
10.14 Non-employee director stock option plan. Filed as an exhibit to
Biomatrix's proxy statement filed pursuant to Rule 14a-6 dated May
23, 1995, as filed as an Exhibit to the 1995 annual report on Form
10-K, and incorporated herein by reference thereto. Management
contract or compensatory plan required to be filed as an exhibit
to this form pursuant to Item 14(c) of this report.
10.15 United States Distribution Agreement dated June 14, 1996 between
Biomatrix, Inc. and Collagen Corporation, as filed as an Exhibit
to the quarterly report on Form 10-Q for the quarter ended June
30, 1996 and incorporated herein by reference thereto.
(Confidential portions have been omitted and filed separately with
the Commission.)
10.16 International Distribution Agreement, dated June 14, 1996, between
Biomatrix, Inc. and Collagen Corporation, as filed as an Exhibit
to the quarterly report on Form 10-Q for the quarter ended June
30, 1996, and incorporated herein by reference thereto.
(Confidential portions have been omitted and filed separately with
the Commission.)
10.17 Agreement of Lease, dated April 18, 1996, between Ridgefield
Associates and Biomatrix, Inc., as filed as an Exhibit to the
quarterly report on Form 10-Q for the quarter ended June 30, 1996,
and incorporated herein by reference thereto. (Confidential
portions have been omitted and filed separately with the
Commission.)
10.18 Employment Agreement, dated April 2, 1996, between Biomatrix, Inc.
and Rory B. Riggs, as filed as an Exhibit to the quarterly report
on Form 10-Q for the quarter ended June 30, 1996, and incorporated
herein by reference thereto. Management contract or compensatory
plan required to be filed as an exhibit to this form pursuant to
Item 14(c) of this report.
10.19 Amendment dated March 31, 1996 to the Consulting Agreement, dated
June 1, 1993, between Biomatrix Inc. and Julius A. Vida, as filed
as and Exhibit to the quarterly report on Form 10-Q for the
quarter ended June 30, 1996, and incorporated herein by reference
thereto. Management contract or compensatory plan required to be
filed as an exhibit to this form pursuant to Item 14(c) of this
report.
10.20 United States Licensing Agreement dated February 7, 1997 between
Biomatrix, Inc. and American Home Products Corporation as filed as
an Exhibit to the quarterly report on Form 10Q for the quarter
ended March 31, 1997, and incorporated herein by reference
thereto. (Confidential portions have been omitted and filed
separately with the Commission.)
10.21 International Licensing Agreement dated February 7, 1997 between
Biomatrix, Inc. and American Home Products Corporation as filed as
an Exhibit to the quarterly report on Form 10Q for the quarter
ended March 31, 1997, and incorporated herein by reference
thereto. (Confidential portions have been omitted and filed
separately with the Commission.)
<PAGE>
10.22 Supply Agreement dated February 7, 1997 between Biomatrix, Inc.
and American Home Products Corporation as filed as an Exhibit to
the quarterly report on Form 10Q for the quarter ended March 31,
1997, and incorporated herein by reference thereto. (Confidential
portions have been omitted and filed separately with the
Commission.)
10.23 Trademark License Agreement dated February 7, 1997 between
Biomatrix, Inc. and American Home Products Corporation as filed as
an Exhibit to the quarterly report on Form 10Q for the quarter
ended March 31, 1997, and incorporated herein by reference
thereto. (Confidential portions have been omitted and filed
separately with the Commission.)
10.24 Form of Restricted Stock Purchase Agreement under Biomatrix's 1997
Restricted Stock Plan as filed as an Exhibit to the quarterly
report on Form 10Q for the quarter ended June 30, 1997, and
incorporated herein by reference thereto. Management contract or
compensatory plan required to be filed as an exhibit to this form
pursuant to Item 14(c) of this report.
10.25 Form of Secured Promissory Note under Biomatrix's 1997 Restricted
Stock Plan as filed as an Exhibit to the quarterly report on Form
10Q for the quarter ended June 30, 1997, and incorporated herein
by reference thereto. Management contract or compensatory plan
required to be filed as an exhibit to this form pursuant to Item
14(c) of this report.
10.26 Form of Stock Pledge Agreement under Biomatrix's 1997 Restricted
Stock Plan as filed as an Exhibit to the quarterly report on Form
10Q for the quarter ended June 30, 1997, and incorporated herein
by reference thereto. Management contract or compensatory plan
required to be filed as an exhibit to this form pursuant to Item
14(c) of this report.
21 List of Subsidiaries.
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants of
Biomatrix.
27.1 Financial Data Schedule
Reports on Form 8-K
2.4 Agreement and Plan of Merger among Genzyme Corporation and
Biomatrix, Inc., dated as of March 6, 2000.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
BIOMATRIX, INC.
By: /s/ ENDRE A. BALAZS
-----------------------------------------
(Endre A. Balazs)
Chief Executive Officer, Chief Scientific Officer, Director
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ ENDRE A. BALAZS
....................................................Chief Executive Officer, Chief March 30, 2000
(Endre A. Balazs) Scientific Officer, Director
(Principal Executive Officer)
/s/ MAXINE SEIFERT
....................................................Chief Financial Officer March 30, 2000
(Maxine Seifert) (Principal Finance and
Accounting Officer)
/s/ RORY B. RIGGS
....................................................President, Director March 30, 2000
(Rory B. Riggs)
/s/ JANET L. DENLINGER
....................................................Executive Vice President, March 30, 2000
(Janet L. Denlinger) Director
/s/ H. STUART CAMPBELL
....................................................Chairman of the Board of March 30, 2000
(H. Stuart Campbell) Directors
/s/ KURT MARK
....................................................Director March 30, 2000
(Kurt Mark)
/s/ JUSTIN P. MORREALE
....................................................Director March 30, 2000
(Justin P. Morreale)
/s/ JULIUS A. VIDA
....................................................Director March 30, 2000
(Julius A. Vida)
</TABLE>
25
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants..................................................... F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998.......................... F-3
Consolidated Statements of Operations for the years ended December 31,
1999, 1998 and 1997................................................................. F-4
Consolidated Statements of Changes in Shareholders' Equity for
the years ended December 31, 1999, 1998 and 1997.................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997................................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7 to F-21
</TABLE>
Financial statement schedules are omitted for the reason that they are not
applicable or the required information is included in the consolidated financial
statements or notes thereto.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of
Biomatrix, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity and cash flows
present fairly, in all material respects, the consolidated financial position of
Biomatrix, Inc. and its subsidiaries at December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
New York, New York
January 28, 2000, except for Note 18, as to which the date is March 7, 2000
F-2
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except share amounts)
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
---- ----
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents..................................... $ 35.0 $ 16.5
Accounts receivable, less allowance for doubtful accounts..... 10.1 8.9
Inventory, at lower of cost or market......................... 8.5 6.8
License fees receivable....................................... - 7.6
Prepaid expenses and other current assets..................... 3.2 1.5
------ ------
Total current assets.......................................... 56.8 41.3
Property, plant and equipment, net................................ 41.3 37.7
Other assets...................................................... 0.9 4.3
------ ------
Total assets........................................ $ 99.0 $ 83.3
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................. $ 1.3 $ 3.5
Accrued expenses.............................................. 8.0 5.6
Current portion of notes payable.............................. 0.6 0.6
Current portion of capital lease obligations.................. - 4.6
------ ------
Total current liabilities..................................... 9.9 14.3
Notes payable..................................................... 11.9 17.6
------ ------
Total liabilities................................... 21.8 31.9
====== ======
Commitments and contingent liabilities
Shareholders' equity:
Preferred stock, 3,000 shares authorized; none issued......... - -
Common stock, $.0001 par value: 60,000,000 authorized;
23,374,366 and 22,848,358 issued and 23,282,072
22,756,064 outstanding in 1999 and 1998, respectively....... 0.0 0.0
Additional paid-in capital........................................ 82.7 72.8
Notes receivable - related parties................................ (14.0) (10.6)
Retained earnings (accumulated deficit)........................... 10.9 (7.7)
Accumulated other comprehensive loss.............................. (1.5) (2.2)
Treasury stock, 92,294 shares of common stock, at cost............ (0.9) (0.9)
------ ------
Total shareholders' equity ......................... 77.2 51.4
------ ------
Total liabilities and shareholders' equity.......... $ 99.0 $ 83.3
====== ======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except share and per share data)
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net product sales................................ $ 72.0 $ 37.8 $ 11.7
Income from licenses, royalties
and research contracts...................... 7.7 9.8 20.8
------ ------ ------
Total revenues.............................. 79.7 47.6 32.5
------ ------ ------
Costs and expenses:
Cost of goods sold.......................... 21.1 9.1 3.6
Research and development expenses........... 9.1 10.3 5.9
Selling, general and administrative expenses 18.5 14.5 7.8
------ ------ ------
Total costs and expenses......................... 48.7 33.9 17.3
------ ------ ------
Income from operations........................... 31.0 13.7 15.2
Interest expense................................. (1.5) (1.0) (0.1)
Interest and miscellaneous income................ 1.5 1.4 1.2
------ ------ ------
Income before taxes.............................. 31.0 14.1 16.3
Provision for income taxes....................... 12.4 2.0 0.6
------ ------ ------
Net income ...................................... $ 18.6 $ 12.1 $ 15.7
====== ====== ======
Net income per share:
Basic...................................... $ 0.81 $ 0.54 $ 0.72
========== ========== ==========
Weighted average shares outstanding........ 22,959,394 22,450,398 21,789,538
========== ========== ==========
Diluted.................................... $ 0.76 $ 0.51 $ 0.69
========== ========== ==========
Diluted shares outstanding................. 24,349,952 23,703,758 22,654,412
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY (in millions, except
shares, per share amounts and par value)
<TABLE>
<CAPTION>
Capital stock $.0001 Par Value
---------------------------------
Common-voting Notes
------------------- Additional Receivable
Shares Par Paid-in Related
Issued Value Capital Parties
---------- ------ -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 10,587,615 $1,059 $56.7 ($ 2.6)
Sale of common stock to
related parties 133,000 13 2.3 (0.4)
Interest on related party (0.2)
notes
Purchase of treasury stock
Options exercised 292,420 29 0.8
Adjustments resulting from
translation adjustments
Net income - 1997
---------- ------ -------- ---------
Balance at December 31, 1997 11,013,035 1,101 59.8 (3.2)
Sale of common stock to
related parties 303,000 30 9.8 (9.8)
Interest on related party
notes (0.4)
Repayment of note and interest
from a related party
Issuance of common stock
in conversion for
subsidiary stock 38,462 4 -
Compensatory stock options 0.8
Unearned stock option
Compensation (0.6)
Options exercised 69,682 7 0.4
Adjustments resulting from
translation adjustments
Tax benefit from stock options 2.6
Net income - 1998
---------- ------ -------- ---------
Balance at December 31, 1998 11,424,179 1,142 72.8 (10.6)
Sale of common stock to
related parties -
pre-split 36,000 4 2.4 (2.4)
Options exercised - pre-split 43,229 4 0.4
Two for one stock split in
the form of a 100% dividend 11,503,408 1,150
Issuance of common stock
in conversion of debt 250,000 25 4.9
Compensatory stock options 0.2
Options exercised - post 107,550 11 0.6
split
Sale of common stock to a 10,000
related party - 1 0.2
post-split (0.2)
Interest on related party
notes (0.8)
Adjustments resulting from
translation adjustments
Tax benefit from stock 1.2
options
Net income - 1999
---------- ------ -------- ---------
Balance at December 31, 1999 23,374,366 $2,337 $ 82.7 ($14.0)
========== ====== ======== =========
</TABLE>
<PAGE>
[RESTUBBED]
<TABLE>
<CAPTION>
Comprehensive Income
-------------------------------------------
(Accumulated Accumulated
Deficit)/ Other Total Treasury Stock
Retained Comprehensive Comprehensive -----------------
Earnings Loss Income Shares Cost
------------ ------------- -------------- --------- -------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 ($35.5) ($1.0) 2,814 -
Sale of common stock to
related parties
Interest on related party
notes
Purchase of treasury stock 43,333 ($0.9)
Options exercised
Adjustments resulting from
translation adjustments (0.6)
Net income - 1997 15.7 $15.1
-------- --------- ------- ------
Balance at December 31, 1997 (19.8) (1.6) 46,147 (0.9)
Sale of common stock to
related parties
Interest on related party
notes
Repayment of note and interest 2.8
from a related party
Issuance of common stock
in conversion for
subsidiary stock
Compensatory stock options
Unearned stock option
Compensation
Options exercised
Adjustments resulting from
translation adjustments (0.6)
Tax benefit from stock options
Net income - 1998 12.1 $11.5
-------- --------- ------- -------
Balance at December 31, 1998 (7.7) (2.2) 46,147 (0.9)
Sale of common stock to
related parties -
pre-split
Options exercised - pre-split
Two for one stock split in
the form of a 100% dividend 46,147
Issuance of common stock
in conversion of debt
Compensatory stock options
Options exercised - post
split
Sale of common stock to a
related party -
post-split
Interest on related party
notes
Adjustments resulting from
translation adjustments 0.7
Tax benefit from stock
options
Net income - 1999 18.6 $19.3
-------- --------- ------- -------
Balance at December 31, 1999 $10.9 ($1.5) 92,294 ($0.9)
======== ========= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 18.6 $ 12.1 $ 15.7
------ ------ ------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization......................... 3.7 1.6 0.7
Stock option compensation............................. 0.2 0.2 0.1
Amortization of debt fees.............................. 0.1 0.1 -
Change in assets and liabilities:
Accounts receivable.................................... (1.1) (5.5) (2.4)
Inventory.............................................. (1.5) (3.9) (2.4)
Prepaid expenses and other current assets.............. 6.0 (7.3) (1.2)
Other assets........................................... 2.7 (4.2) (0.4)
Accounts payable and accrued expenses.................. 2.2 3.0 1.2
------ ------ ------
Total adjustments..................................... 12.3 (16.0) (4.4)
------ ------ ------
Net cash provided by (used in) operating activities........... 30.9 (3.9) 11.3
------ ------ ------
Cash flows from investing activities:
Capital expenditures..................................... (9.2) (19.5) (9.1)
Maturity of held-to-maturity investments................. - - 10.6
------ ------ ------
Net cash (used in) provided by investing activities........... (9.2) (19.5) 1.5
------ ------ ------
Cash flows from financing activities:
Payments of notes payable and capital leases............. (5.3) (0.2) (0.1)
Proceeds from issuance of debt........................... - 17.3 -
Repayment of note by a related party..................... - 2.5 -
Stock options exercised.................................. 1.0 0.3 0.7
Income tax benefit related to stock options.............. 1.2 2.6 -
Repurchase of common stock............................... - - (0.9)
Sale of common stock ................................... - - 1.9
------ ------ ------
Net cash (used in) provided by financing activities........... (3.1) 22.5 1.6
------ ------ ------
Effect of exchange rate changes on cash....................... (0.1) 0.0 0.0
------ ------ ------
Net increase (decrease) in cash and cash equivalents.......... 18.5 (0.9) 14.4
Cash and cash equivalents at beginning of period.............. 16.5 17.4 3.0
------ ------ ------
Cash and cash equivalents at end of period.................... $ 35.0 $ 16.5 $ 17.4
====== ====== ======
Supplemental cash flow data:
Interest paid, net of capitalized interest............... $ 1.4 $ 0.7 $ 0.1
Income taxes paid........................................ $ 9.4 $ 0.4 $ 0.2
Non-cash investing and financing:
Sale of common stock financed with note receivable....... $ 2.6 $ 9.8 $ 0.4
Issuance of common stock in conversion of debt........... $ 4.9 - -
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations
Biomatrix, Inc. (the "Company") was founded in 1981 to develop,
manufacture and commercialize a series of proprietary viscoelastic products made
of biological polymers called hylans for use in therapeutic medical applications
and skin care. Hylans are chemically modified forms of the naturally occurring
hyaluronan (also known as hyaluronic acid or sodium hyaluronate). Hylans are the
second generation of viscoelastics used in medicine, and are characterized by
significantly enhanced physical (rheological) properties (elasticity, viscosity
and pseudoplasticity) as compared to naturally occurring hyaluronan, from which
the first generation viscoelastics are made. The discovery of hylans has allowed
the Company to develop a range of patented products with superior viscoelastic
properties in the forms of fluids, gels and solids. The Company's operations
consist of therapeutic medical products, skin care intermediate products and
toxicity testing. The Company's business is subject to certain risks and
uncertainties, including but not limited to governmental regulation,
reimbursement, dependence on distribution relationships, patents, competition,
manufacturing, rapid growth, dependence on key personnel, fluctuation in
operating results and product liability.
2. Summary of Significant Accounting Policies
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Biomatrix Medical Canada Inc., Biomatrix UK
Ltd., Biomatrix France SARL, Biomatrix Switzerland GmbH, Biomatrix Svenska AB,
Biomatrix Germany GmbH, Biomatrix Belgium BVBA and its majority-owned
subsidiary, Biomatrix Limited Hong Kong. All significant intercompany accounts
and transactions have been eliminated in consolidation.
Property, Plant and Equipment and Capitalized Interest
Property, plant and equipment is recorded at cost. Interest related to
borrowings for a construction project with a term greater than one year is
capitalized. The interest is capitalized during the term of the project and
capitalization ceases when the project is completed. Building, research
laboratory equipment, office equipment and manufacturing equipment are
depreciated on the straight-line method over their estimated useful lives.
Capital leases and leasehold improvements are amortized on the straight-line
method over the estimated useful life of the property or the terms of the
related lease, whichever is shorter. Expenditures for additions, major renewals
and improvements are capitalized and expenditures for maintenance and repairs
are charged to expense as incurred. When assets are retired or otherwise
disposed of, the cost and accumulated depreciation are removed from the accounts
and the resulting gain or loss is recognized in income for the period.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be recoverable. If
the sum of the expected future undiscounted cash flows is less than the carrying
amount of the asset, a loss is recognized. There were no impaired long-lived
assets at December 31, 1999.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid short-term investments in
money market funds, at cost, and U.S. Government or Government Agency securities
purchased with a maturity of less than three months.
Fair Value of Financial Instruments
Cash, accounts receivable, notes receivable, accounts payable and accrued
liabilities are reflected in the financial statement at fair value because of
the short-term maturity of those instruments. The fair value of the Company's
notes payable and capital lease obligations (including current installments) are
estimated based on the current rate offered to the Company for debt of the same
remaining maturities. The estimated fair value of the Company's notes payable
and capital lease obligations approximates the carrying value at December 31,
1999 and 1998.
Inventory
Inventory is stated at the lower of cost or market and costs are removed
on a first-in first-out (FIFO) basis.
F-7
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. Summary of Significant Accounting Policies (Continued)
Investments
Investments, which typically consist of U.S. Government and Government
Agency Securities, are classified as held-to-maturity and are reported at
amortized cost, which approximates market.
Deferred Debt
Fees Deferred debt fees are included in other assets and are amortized
over the term of the corresponding debt.
Revenue Recognition
The Company's product revenue is recognized at the time the products are
shipped. Revenue from non-refundable up-front and milestone payments is
recognized in the period earned, which is when all related material commitments
have been satisfied and no future consideration is required. The Company is
planning to adopt Staff Accounting Bulletin No. 101, "Revenue Recognition,"
during the second quarter of 2000, which will impact the way the Company records
its non-refundable up-front and milestone payments. (See Note 17 for further
discussion). Research contract revenue is recognized at the time the service is
performed.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Contingencies
The Company accounts for contingencies in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 5, "Accounting for Contingencies."
As such when a loss is probable and reasonably estimable a reserve is
established and information regarding such reserve is disclosed in the notes to
the financial statements. In the event the Company plans to defend a legal
matter vigorously, and the costs of such defense are not covered by an insurance
policy, the Company will establish a reserve for future probable estimated legal
fees, if estimable.
Income Taxes
Deferred taxes are provided on the liability method, in accordance with
SFAS No. 109, "Accounting for Income Taxes," whereby deferred tax assets are
recognized for deductible temporary differences, and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Deferred tax assets are reduced by a valuation allowance,
when, in the opinion of management, it is more likely than not that some
portions or all of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment.
Foreign Currency Translation
The assets and liabilities of the Company's subsidiaries are translated
into U.S. dollars at year-end exchange rates and revenue and expense items are
translated at average rates of exchange prevailing during the year. Resulting
translation adjustments are a component of accumulated other comprehensive
income in shareholders' equity. Gains and losses resulting from foreign currency
transactions (transactions denominated in a currency other than the Company's
functional currency) are included in miscellaneous income.
Accounting for Stock-Based Compensation
In accordance with the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company applies Accounting Principles Board
Opinion No. 25 and related interpretations in accounting for its employee stock
option plans. See Note 11 for a summary of the pro forma effects on reported net
income and earnings per share for fiscal 1999, 1998, and 1997 based on the fair
value of options and shares granted as prescribed by SFAS No. 123.
F-8
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. Summary of Significant Accounting Policies (Continued)
Net Income Per Common Share
In 1998, the Company adopted SFAS No. 128, "Earnings per Share," which
requires the presentation of basic earnings per share and diluted earnings per
share. Basic net income per share is computed by dividing net income by the
weighted-average common shares outstanding for the period. Diluted net income
per share is reflective of all common share equivalents. The Company has
convertible debt which converts into 500,000 shares of common stock at December
31, 1999, and 750,000 shares of common stock at December 31, 1998. However, this
instrument has not been included in diluted earnings per share for 1999 and 1998
because its effect would be anti-dilutive. A reconciliation of weighted average
shares outstanding from basic to diluted is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Weighted average shares outstanding - Basic 22,959,394 22,450,398 21,789,538
Dilutive effect of stock options 1,390,558 1,253,360 864,874
--------- ---------- -----------
Weighted average shares outstanding - Diluted 24,349,952 23,703,758 22,654,412
========== ========== ==========
</TABLE>
Reclassification
Certain amounts in the 1998 and 1997 consolidated statements of operations
and the 1998 consolidated balance sheet have been reclassified in order to
conform to the 1999 presentation.
3. Inventories
Inventories at December 31, 1999 and 1998 consisted of:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Raw materials.................................................... $ 0.6 $ 1.5
Work-in-process.................................................. 7.2 4.8
Finished Goods................................................... 0.7 0.5
------ -------
$ 8.5 $ 6.8
====== =======
</TABLE>
4. Notes Receivable - Related Parties
Notes receivable - related parties relate to the acquisition of common
stock of the Company at fair market value by several officers and directors of
the Company during 1999, 1998, and 1997. The notes are with recourse and are
payable with simple interest upon maturity. The interest rates, which are
determined in accordance with Internal Revenue Service standards, on the notes
outstanding as of December 31, 1999 range from 5.30% to 7.18%. The amount of the
notes outstanding at December 31, 1999 and 1998 mature at the following dates:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C> <C>
May 2007......................................................... $ 0.5 $ 0.5
January 2008..................................................... 1.0 0.9
March 2008....................................................... 0.6 0.6
April 2008....................................................... 1.8 1.7
June 2008........................................................ 7.3 6.9
March 2009....................................................... 2.6 -
September 2009................................................... 0.2 -
------ -------
$ 14.0 $ 10.6
====== ======
</TABLE>
In August 1998, an officer of the Company repaid a note in the amount
of $2.8 million including interest. All notes issued during 1999, 1998 and 1997
have been for common stock issued pursuant to the Company's 1997 Restricted
Stock Plan.
F-9
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5. Property, Plant and Equipment
Property, plant and equipment at December 31, 1999 and 1998 consisted of:
<TABLE>
<CAPTION>
Estimated
1999 1998 Useful Life
---- ---- -----------
<S> <C> <C> <C>
Buildings................................................... $ 31.7 $ 22.4 25 years
Land ...................................................... 2.2 2.2 N/A
Construction in progress.................................... 0.2 4.9 N/A
Manufacturing equipment..................................... 8.5 7.7 5-10 years
Research laboratory equipment............................... 2.2 2.1 5-10 years
Office equipment............................................ 4.8 3.1 3-10 years
Leasehold improvements...................................... 1.2 1.1 1-5 years
------ ------
50.8 43.5
Less accumulated depreciation and amortization.............. (9.5) (5.8)
------ ------
$ 41.3 $ 37.7
====== ======
</TABLE>
Depreciation expense for the three years ended December 31, 1999, 1998 and
1997 was, $3.7 million, $1.6 million and $0.7 million, respectively. Capitalized
interest for the years ended December 31, 1998 and 1997 was $0.2 million and
$0.4 million, respectively. There was no capitalized interest for the year ended
December 31, 1999. Repairs and maintenance expenses for the three years ended
December 31, 1999, 1998 and 1997 were $0.8 million, $0.4 million and $0.1
million, respectively.
Assets recorded under capital leases of $4.6 million as of December 31,
1998 were included in land, buildings and construction in progress. The
accumulated depreciation of assets under capital leases was $0.1 million at
December 31, 1998. There were no assets under capital leases at December 31,
1999. Assets pledged under equipment financing at December 31, 1999 and 1998 are
included in manufacturing equipment in the amount of $3.7 million. Assets
mortgaged as of December 31, 1999 and 1998 are included in buildings in the
amount of $2.3 million and $2.1 million, respectively.
6. Accrued Expenses
Accrued expenses at December 31, 1999 and 1998 consisted of:
<TABLE>
<CAPTION>
Accrued Expenses: 1999 1998
---- ----
<S> <C> <C>
Taxes payable............................................... $ 2.0 $ 1.9
Accrued personnel expenses.................................. 1.8 1.5
Royalties................................................... 2.2 1.1
Other accrued expenses...................................... 2.0 1.1
----- -----
$ 8.0 $ 5.6
===== =====
</TABLE>
7. Long-Term Debt and Capital Lease Obligations
Long-Term Debt and Capital Lease Obligations at December 31, 1999 and 1998
consisted of:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Notes Payable:
Equipment loan.................................................. $1.9 $ 2.3
Mortgage note, payable in monthly installments through July 2001.. 0.3 0.3
Construction and equipment loan................................. 0.3 0.5
Capital lease obligations.......................................... - 4.7
Convertible subordinated debt...................................... 10.0 15.0
------ ------
Total ................................................ 12.5 22.8
Less current maturities......................................... (0.6) (5.2)
------ ------
Long term portion............................................... $ 11.9 $ 17.6
====== ======
</TABLE>
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. Long-Term Debt and Capital Lease Obligations (Continued)
In July 1996, the Company refinanced an outstanding mortgage on its
Canadian manufacturing facility with another mortgage that accrues interest at
an annual rate of 9.5% and has a final payment of $0.3 million due in June 2001.
The Company's majority-owned Canadian subsidiary obtained a $1.0 million
construction and manufacturing equipment loan from the Canadian government of
which $0.9 million and $0.1 million was funded in 1993 and 1994, respectively.
Interest on the loan accrues at the prevailing annual variable rate, which was
approximately 8.0% at December 31, 1999 and 8.25% at December 31, 1998. In
January 1996, the Company amended the repayment terms of the agreement, whereby
the Company will make quarterly principal payments and a final payment in 2001.
The principal payments shall correspond to 30% of the Canadian subsidiary's
quarterly net profit (excluding depreciation), with an annual maximum of $0.2
million and an annual minimum of $0.1 million. The loan agreement contains
covenants that require the maintenance of certain financial ratios by the
Canadian subsidiary, with which the Company has complied.
In September 1996, the Company entered into a capital lease of a building
and land where the Company's U.S. manufacturing facility is located. This lease
was accounted for as a capital lease and had an imputed interest rate of
approximately 9%. During 1999, the Company exercised its option to acquire this
building and purchased it at a price of approximately $4.6 million.
In May 1998, the Company issued $15.0 million of subordinated convertible
debt to a third party. The debt has a five-year term and a coupon rate of 6.9%
with interest payable on a semi-annual basis. The debt contains a conversion
feature that allows the third party to convert the debt into common shares at
$20 per share after one year. In addition, the Company can call the debt at par
after three years or after two years if certain conditions are satisfied. During
the fourth quarter of 1999, the debt holder converted one-third, or $5.0
million, of the debt into 250,000 shares of common stock. Therefore at December
31, 1999, there is $10.0 million of convertible debt outstanding. Debt fees
related to this transaction of $0.3 million and $0.6 million at December 31,
1999 and 1998 are included in other assets and are being amortized on a
straight-line basis over the five-year term of the debt. The debt contains
certain financial covenants, with which the Company has complied.
In December 1998, the Company obtained equipment financing from GE Capital
in the amount of $2.3 million. The debt has a five-year term, a coupon rate of
7.4%, and is payable in equal monthly installments. Certain of the Company's
machinery and equipment is pledged as collateral for this financing. The debt
contains certain financial covenants which the Company has complied with.
Future minimum payments due under the note payable and mortgage
obligations are as follows at December 31, 1999:
Year Amount
---- -------
2000....................................... $ 1.5
2001....................................... 1.7
2002....................................... 1.2
2003....................................... 10.9
------
Total minimum payments..................... $ 15.3
Less - amount representing interest........ (2.8)
------
Principal obligations...................... $ 12.5
Less - current portion..................... (0.6)
------
Long-Term portion.......................... $ 11.9
======
In August 1999, the Company secured a revolving line of credit from
Merrill Lynch Business Financial Services, Inc. in the amount of $10.0 million.
Funds can be borrowed against the line at an interest rate equal to the 30-Day
Commercial Paper Rate, as defined in the agreement, plus 1.99%. To the extent
the Company draws down on this line, the borrowed amount will be collateralized
by the U.S. manufacturing facility. There were no borrowings against this line
at December 31, 1999.
The Company also has a $0.4 million credit agreement with a Canadian bank
with an interest rate at prime plus 0.5%. There were no borrowings outstanding
at December 31, 1999 and 1998.
F-11
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
8. Capital Stock
In March 1995, the Company completed a private sale of 500,000 shares of
common stock to Recordati Industria Chimica e Farmaceutica S.p.A. ("Recordati").
Net proceeds to the Company related to this sale were $2.0 million. In July
1997, the Company repurchased 86,666 shares of common stock from Recordati. This
purchase required approximately $0.9 million of funds and these shares are
included at cost on the balance sheet as treasury stock.
In April 1996, the Company completed a private sale of 400,000 shares of
common stock at fair market value to an officer of the Company. The aggregate
purchase price of $2.5 million was financed in full with a full recourse
promissory note issued from the Company. In August 1998, the officer of the
Company repaid the note in full plus accrued interest.
In 1997, the Company completed sales of 266,000 shares of restricted
common stock to several officers and directors of the Company. The aggregate
purchase price of $2.3 million was financed with full recourse promissory notes
issued from the Company.
In 1998, the Company completed sales of 606,000 shares of restricted
common stock to several officers and directors of the Company. The aggregate
purchase price of $9.8 million was financed with full recourse promissory notes
issued from the Company.
In 1999, the Company completed sales of 82,000 shares of restricted common
stock to several officers and a consultant of the Company. The aggregate
purchase price of $2.6 million was financed with full recourse promissory notes
issued from the Company.
On April 6, 1999 the Company announced a two-for-one common stock split to
be distributed in the form of a 100% stock dividend (the "Stock Split"). As a
result of this action, on April 23, 1999, an additional 11,503,408 shares were
distributed to the shareholders of record on April 16, 1999, of which 46,147
shares represented treasury stock of the Company. The shares issued, outstanding
and in treasury of 11,424,179, 11,378,032 and 46,147 at December 31, 1998 have
been restated to 22,848,358, 22,756,064, and 92,294 to reflect the Stock Split.
Par value remains at $0.0001 per share. The par value of the additional shares
resulting from the Stock Split has been reclassified from additional paid-in
capital to common stock. All historical share and per share amounts in the
accompanying statements have been restated to reflect the Stock Split.
The 3,000 shares of authorized preferred stock are issuable by the Board
of Directors. The terms, designations and other criteria are determinable by the
Board of Directors upon issuance.
In June 1991, Biomatrix, Inc. capitalized Biomatrix Medical Canada
("BMC"). In connection with this transaction additional capital was raised
through a Canadian venture capital firm for which it received 62,500 shares of
Class A stock in BMC. In April 1998, the Canadian venture capital firm exercised
its right to convert the 62,500 shares of Class A stock in BMC into 76,924
shares of Biomatrix, Inc. common stock. As a result, BMC is now a wholly-owned
subsidiary of Biomatrix, Inc. No gain or loss was recognized on the conversion
of shares.
F-12
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
9. Income Taxes
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income (Loss) before income taxes:
Domestic................................... $ 31.0 $ 14.3 $ 17.2
Foreign.................................... (0.0) (0.2) (0.9)
------ ----- ------
$ 31.0 $ 14.1 $ 16.3
====== ====== ======
Income tax provision:
Domestic, Federal.......................... $ 10.7 $ 1.3 $ 0.4
Domestic, State............................ 1.6 0.7 0.2
Foreign.................................... 0.1 - -
------ ------ ------
$ 12.4 $ 2.0 $ 0.6
====== ====== ======
</TABLE>
A reconciliation of the United States federal statutory rate to the
Company's effective tax rate for the years ended December 31, 1999, 1998, and
1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory federal corporate rate................. 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit... 4.1 6.2 1.0
Foreign related items............................ 1.5 4.1 2.0
Research and development credits................. - (2.4) -
Benefit of net operating losses.................. (1.7) (6.0) (35.8)
Nondeductible items.............................. 0.9 1.6 -
Change in valuation allowance.................... - (27.2) (1.1)
Other ........................................... - 3.0 -
Alternative minimum tax.......................... - - 2.2
----- ----- -----
Effective tax rate............................... 39.8% 14.3% 3.3%
===== ===== =====
</TABLE>
<PAGE>
Temporary differences and carryforwards which give rise to deferred tax
assets are as follows:
<TABLE>
<CAPTION>
Deferred Tax Assets
-------------------
1999 1998
---- ----
<S> <C> <C>
Net operating losses........................................ $ 1.6 $ 1.9
Research credits............................................ 0.6 1.9
Depreciation................................................ 2.1 1.3
Alternative minimum tax credit.............................. - 0.4
Other....................................................... 1.2 1.1
----- -----
5.5 6.6
Valuation allowance...................................... (4.3) (3.8)
----- -----
Total deferred taxes............................... $ 1.2 $ 2.8
===== =====
</TABLE>
At December 31, 1999, approximately $0.7 million of the deferred tax
assets is included in prepaid expenses and other current assets, and $0.5
million.is included in other assets. At December 31, 1998, deferred tax assets
of $2.8 million were included in other assets. The Company's valuation allowance
of $4.3 million and $3.8 million in 1999 and 1998, respectively, was provided on
deferred tax assets, which were primarily foreign related items, due to the
uncertainty of realization.
The Company has foreign federal net operating loss carryforwards of
approximately $5.4 million of which $1.6 million expire at various times from
December 31, 2001 through December 31, 2006. Approximately $3.8 million of the
foreign federal net operating loss carryforwards will carryover indefinitely. In
addition, the Company has foreign tax credit carryovers at December 31, 1999 of
approximately $0.6 million of which $0.3 million expire at various times from
December 31, 2002 through December 31, 2007. Approximately $0.3 of the foreign
tax credits carryover indefinitely.
F-13
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
10. Commitments
Operating Lease
The Company occupies office and laboratory space under a lease expiring in
July 2004. Rent expense for operating leases charged to operations for the years
ended December 31, 1999, 1998 and 1997 approximated $0.7 million, $0.7 million
and $0.5 million, respectively. Future minimum operating lease payments for the
facility and other items are:
2000............................................ $ 1.0
2001............................................ 0.9
2002............................................ 0.8
2003............................................ 0.7
2004............................................ 0.7
Thereafter...................................... -
-----
Total minimum obligations....................... $ 4.1
=====
License Agreements
In November 1993 and June 1994, the Company entered into license and
distribution agreements with Syntex Pharmaceuticals International Limited
("Syntex") to market Synvisc in selected European countries and South Africa. In
return, for the exclusive marketing rights, Syntex paid up-front payments in
1993 and 1994 of $1.2 million, and $5.0 million, respectively. Subsequent to
these agreements, Syntex was acquired by Roche AB, ("Roche"), a subsidiary of F.
Hoffmann-LaRoche Ltd. Subsequent to the acquisition of Syntex by Roche, in the
fourth quarter of 1995 the Company signed an agreement with Roche reacquiring
the marketing rights to Synvisc for all countries identified in the previous
agreements, except for Sweden and South Africa. The Company received a
non-refundable initial payment in 1995 and a non-refundable final payment in
1996 in connection with the finalization of this agreement, which amounts have
been included in income from licenses in the respective years. We are currently
in discussions with Roche concerning its marketing rights in Sweden.
In September 1995, the Company entered into a distribution agreement with
Rhone-Poulenc Rorer Canada Inc. ("RPR"). The agreement provides RPR with
exclusive marketing rights for Synvisc in Canada. In return, in 1995, the
Company received an up-front non-refundable license fee payment of $3.5 million,
which has been included in income from licenses. The Company terminated this
agreement on December 31, 1999. The Company currently markets and sells Synvisc
to the Canadian market through our subsidiary Biomatrix Medical Canada Inc.
In June 1996, the Company entered into a distribution agreement with
Inamed Corporation ("Inamed"), formerly Collagen Aesthetics, Inc.. The agreement
provides Inamed with exclusive marketing rights for Hylaform in Europe, Canada,
Japan, Australia and other select countries. In return, the Company received an
up-front, non-refundable payment of $5.0 million in consideration of the costs
and expenses that have been incurred by the Company related to the research and
development of Hylaform. The Company is entitled to receive a royalty based upon
sales of Inamed's dermal augmentation products as well as an additional royalty
on the potential growth of Inamed's total dermal augmentation business.
Additionally, the Company manufactures and supplies Hylaform to Inamed for a
contractual percentage of Inamed's sales price. The Company has also entered
into a distribution agreement with Inamed for the United States. Under such
agreement, Inamed has the exclusive distribution rights to Hylaform in the
United States subject to an additional payment and FDA approval.
In December 1996, the Company entered into a distribution agreement with
Boehringer Ingelheim France, S.A. ("Boehringer Ingelheim"). The agreement
provides Boehringer Ingelheim with exclusive marketing rights for Synvisc in
France. In return, the Company received an up-front non-refundable payment of
$1.0 million, which has been included in income from licenses in 1996, and could
receive milestone payments of up to $7.0 million if sales reach certain levels.
The Company manufactures and supplies Synvisc to Boehringer Ingelheim for a
contractual percentage of Boehringer Ingelheim's sales price. Additionally,
Boehringer Ingelheim reimburses the Company, up to a fixed amount and for a
certain period of time, for its costs of maintaining a team of area business
consultants to assist in selling Synvisc in France.
F-14
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
10. Commitments (Continued)
In February 1997, the Company entered into distribution agreements with
Wyeth-Ayerst Laboratories ("Wyeth"), a division of American Home Products. The
agreements provide Wyeth with exclusive marketing rights to Synvisc in the
United States, Germany, Austria, Spain, Portugal, Greece and certain countries
in the Middle East and Central Europe. In 1997, the Company received various
non-refundable payments totaling $17.0 million. In 1998, the Company earned a
non-refundable milestone of $6.0 million; such payment was received in February
1999. In 1999, the Company earned a milestone payment of $7.0 million as
end-user sales reached a certain level. The Company could receive additional
payments in the future if sales reach certain levels. The Company manufactures
and supplies Synvisc to Wyeth for a contractual percentage of Wyeth's sales
price. Additionally, Wyeth reimburses the Company, up to a fixed amount and for
a certain period of time, for its costs of maintaining a team of area business
consultants to assist in selling Synvisc in Europe and the United States. We are
currently in discussions with Wyeth concerning its marketing rights for Synvisc
in certain foreign countries.
In April 1997, the Company entered into a distribution agreement with
Bayer AG ("Bayer"). The agreement provides Bayer with exclusive marketing rights
to Synvisc in Australia, Indonesia, Israel, Malaysia, New Zealand, Singapore,
Taiwan and Thailand. In return, the Company received an up-front non-refundable
payment of $3.0 million and could receive a milestone payment of $2.0 million
upon certain approvals or if sales reach a certain level. The Company
manufactures and supplies Synvisc to Bayer for a contractual percentage of
Bayer's sales price. Additionally, Bayer will reimburse the Company, up to a
fixed amount and for a certain period of time, for its costs of maintaining
several area business consultants to assist in selling Synvisc in certain
countries.
In February 1998, the Company entered into a distribution agreement with
Novartis Pharma AG ("Novartis"). The agreement provides Novartis with the
exclusive marketing rights to Synvisc in Latin America and the Caribbean. In
return, the Company earned a non-refundable payment of $3.1 million, of which
$1.5 million was paid up-front in 1998 and $1.6 million was paid during the
third quarter of 1999. The Company manufactures and supplies Synvisc to Novartis
for a contractual percentage of Novartis' sales price. Additionally, Novartis
will reimburse the Company for its costs of maintaining several area business
consultants to assist in selling Synvisc in certain countries.
Research and Development Agreements
In July 1991, the Company entered into an agreement with Pharmacia to
perform certain toxicity testing. The Company received $0.1 million, $0.6
million and $0.6 million of revenues relating to this testing for the years
ended December 31, 1999, 1998, and 1997, respectively. Such amounts have been
included in research contract revenue.
During February 1990, the Company and its wholly owned subsidiary,
Biomatrix Svenska AB, entered into an agreement with a Swedish Limited
Partnership, Up-Will Investor KB ("Up-Will"). Up-Will invested in Biomatrix
Svenska AB in order that the Company could pursue the obtainment of regulatory
approvals to manufacture and market Synvisc in Germany, France, Spain and the
United Kingdom. Up-Will provided Svenska AB with a total of approximately $1.5
million. In return, Up-Will receives a royalty from the Company equal to 6% of
all net sales of Synvisc in the countries referred to above, for a period of 10
years from the date of first commercial sale in each country, regardless of
whether the sales are made by the Company, Biomatrix Svenska AB or another
party. Two of the Company's officers hold convertible debt in Up-Will.
F-15
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
11. Stock Options
The Company has two fixed stock option plans which reserve shares of
common stock for issuance to executives, employees, consultants and directors.
The Company applies the provisions of Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees" and related
interpretations in accounting for its stock based compensation plans.
Accordingly, compensation expense has been recognized to the extent applicable
in the financial statements with respect to the two plans in accordance with APB
No. 25. Had compensation cost for the Company's two stock option plans been
determined based on the fair value at the grant date for awards in 1999, 1998
and 1997 consistent with the provisions of SFAS No. 123 "Accounting For Stock
Based Compensation," the Company's net earnings and earnings per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income - as reported........................ $18.6 $12.1 $ 15.7
Net income - pro forma.......................... 8.5 9.4 14.7
Net income per share - as reported (basic)...... 0.81 0.54 0.72
Net income per share - pro forma (basic)........ 0.37 0.42 0.68
Net income per share - as reported (diluted).... 0.76 0.51 0.69
Net income per share - pro forma (diluted)...... 0.35 0.39 0.65
</TABLE>
Since option grants awarded during 1999, 1998 and 1997 typically vest over
several years and additional awards are expected to be issued in the future, the
pro forma results shown above are not likely to be representative of the effects
on future years of the application of the fair value based method.
The fair market value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Dividend Yield N/A N/A N/A
Expected Volatility 70% 70% 70%
Risk-free Interest Rate 4.78% to 6.29% 4.31% to 5.84% 5.85% to 6.79%
Expected Option Life 6.0 6.0 6.0
</TABLE>
Under the amended plan approved by the shareholders in May 1997, the total
number of shares of common stock that may be granted is 6,000,000. In May 1995,
the shareholders approved a Stock Option Plan for Non-Employee Directors of the
Company. This plan authorizes the granting of options on 200,000 shares of
common stock to directors who are not employees of the Company, who will
automatically receive an option to acquire 5,000 shares upon election or
re-election to the Board.
F-16
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
11. Stock Options (Continued)
These plans provide that shares granted come from the Company's
authorized but unissued or reacquired common stock. The price of the options
granted pursuant to these plans is generally equal to the fair market value of
the shares on the date of grant. The options are generally exercisable over four
to five years. The options expire ten years from the grant date.
Information regarding these option plans for 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------- --------------------------- ----------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------------------------- --------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year...... 2,371,140 $9.20 1,854,714 $6.15 1,633,054 $ 3.06
Options exercised........... (194,008) 5.15 (139,364) 3.14 (584,840) 1.32
Options granted............. 632,016 26.08 728,740 15.79 821,600 8.84
Options canceled............ (77,800) 17.95 (72,950) 10.69 (15,100) 4.84
---------- --------- ---------
Options outstanding,
end of year............ 2,731,348 $13.15 2,371,140 $9.20 1,854,714 $ 6.15
Option price range at
end of year............ $0.50 to $40.00 $0.50 to $25.94 $0.50 to $16.00
Options exercisable,
end of year............ 1,150,789 $ 7.43 853,610 $5.18 638,814 $ 3.06
Option price range for
exercised shares....... $0.50 to $19.00 $0.50 to $8.63 $0.50 to $8.63
Options available for grant
at end of year......... 1,422,062 976,278 1,680,966
Weighted-average fair value
of options granted
during the year........ $15.09 $10.89 $5.99
</TABLE>
The following table summarizes information about stock options at
December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- -----------------------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
Range of Exercise Prices at 12/31/99 Life Price at 12/31/99 Price
- --------------------------- ----------------- ----------------- ---------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
$0.50 - $ 1.00 32,042 4.54 $ 0.98 32,042 $ 0.98
$2.31 - $ 5.63 728,760 5.72 $ 3.75 517,360 $ 3.00
$6.00 - $15.00 945,090 7.30 $10.86 464,840 $ 9.56
$15.44 - $25.94 508,480 8.59 $17.69 117,813 $ 16.74
$26.19 - $40.00 516,976 9.14 $26.85 18,734 $ 29.79
</TABLE>
Compensation expense of $0.2 million, $0.2 million and $0.1 million was
recorded for the years ended December 31, 1999, 1998 and 1997, respectively, in
accordance with APB No. 25.
F-17
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
12. Contingency
In August 1990, the Company received a notice from the Pennsylvania
Department of Environmental Protection ("DEP") that it is one of approximately
1,000 potentially responsible parties ("PRPs") that may have clean-up
responsibility at the Industrial Solvents and Chemical Company site in York
Haven, Pennsylvania (the "Site"). During the late 1980s, the Company, through a
licensed waste disposal transport company, shipped industrial solvents to the
Site, which was operating as a recycling facility. The DEP reviewed hazardous
waste found at the Site as well as the DEP's own records in order to identify
additional PRPs and to quantify each PRP's volumetric contributions. The Company
is a member of a steering committee that consists of many PRPs. As of December
31, 1997 the Company had a reserve of $0.7 million related to this matter.
During the fourth quarter of 1998, the final remedy was selected by the DEP and
the Company settled out of the matter pursuant to a buy-out proposal prepared by
the steering committee and reversed the reserve. Therefore, at December 31, 1999
and 1998 the Company no longer had a reserve for any potential litigation
regarding this matter.
Litigation
In October 1996, Michael Jarcho ("Jarcho") filed suit in the United
States District Court for the Southern District of California seeking to recover
damages and declaratory judgment for the alleged breach by the Company of
Jarcho's consulting agreement. A consulting agreement had been entered into
between the Company and Jarcho on December 2, 1988. The agreement contains
certain royalty provisions for products that result from Jarcho's consultancy.
Jarcho contends, inaccurately in the Company's view, that Hylaform resulted from
his consultancy. Jarcho seeks a royalty on the Company's past and future net
sales of Hylaform as well as punitive damages and recovery of attorney fees. The
Company believes that no royalties are owed Jarcho as a result of Hylaform
sales. Jarcho's case was dismissed on January 10, 1997, on the grounds that the
agreement requires such disputes to be brought exclusively in New Jersey state
court. Jarcho moved for a partial reconsideration of the decision, the Company
opposed that request, and the request was denied. On June 16, 1997 Jarcho filed
suit in New Jersey state court. A tentative trial date has been set for May
2000. The Company has been defending this matter vigorously. In accordance with
the Company's policy on contingencies, a provision has been made in the
accompanying consolidated financial statements for estimated legal fees expected
to be incurred in defending the matter vigorously. The Company has not made any
provisions for any liability that might result from the claims made by Jarcho.
13. Employee Benefit Plan
The Company adopted a defined contribution retirement savings plan
effective January 1, 1992. Pursuant to Section 401k of the Internal Revenue
Code, if a participant decides to contribute, a portion of the contribution can
be matched by the Company. Company contributions are discretionary and plan
expenses, which are immaterial, are paid by the Company on behalf of the plan.
Presently, the Company does not offer its employees postretirement or
postemployment benefits. Therefore, the Company is not impacted by the SFAS No.
106, "Employers' Accounting for Postretirement Benefits other than Pensions" or
SFAS No. 112, "Employers' Accounting for Postemployment Benefits."
14. Concentration of Credit Risk and Market Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and trade receivables. The Company's temporary cash investments consist
primarily of cash and money market funds. Concentration of credit risk with
respect to trade receivables exists due to the Company's dependence on a few
customers. However, the Company has not sustained any losses related to these
customers.
Because we currently have operations outside the U.S., we are exposed to
market risk from changes in foreign exchange rates. To reduce the risk from
fluctuations in foreign currencies, we have structured our various distribution
agreements in United States dollars. Approximately 2% of 1999 total revenues
were generated in foreign currencies. As of December 31, 1999, 9% of our total
assets were located outside of the United States, and no single country had a
significant concentration of cash.
F-18
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
15. Segment Data
In the fourth quarter of 1998 the Company adopted SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 requires a new basis of determining the reportable business segments using
the management reporting approach. The following data is utilized by the
Company's Executive Committee (the chief operating decision makers) when
analyzing the performance of the Company.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Product Sales:
Synvisc:
United States......................... $ 53.7 $ 28.5 $ 4.0
Rest of the World..................... 14.6 5.2 3.6
All Other Products...................... 3.7 4.1 4.1
------ ------ ------
Total Product Sales..................... $ 72.0 $ 37.8 $ 11.7
====== ====== ======
Identifiable Assets:
United States........................... $ 89.8 $ 73.9 $ 36.1
Rest of the World....................... 9.2 9.4 7.8
------ ------ ------
Total Assets............................ $ 99.0 $ 83.3 $ 43.9
====== ====== ======
</TABLE>
16. Major Customer and License Fee Data
A significant portion of the Company's products are sold to customers
under the terms of multiple-year marketing and distribution agreements. In many
cases, a customer has paid license fees to the Company for the exclusive rights
in the respective territory. Of the reported product sales for each of the years
ended December 31, 1999, 1998 and 1997, one customer accounted for 81% (Customer
A 81%), one customer accounted for 78% (Customer A 78%), and three customers
accounted for 64% (Customer A 40%, Customer B 14%, and Customer C 10%),
respectively. Of the reported income from licenses, royalties, and research
contracts for each of the years ended December 31, 1999, 1998 and 1997, one
corporate partner accounted for 91% (Partner A 91%), two corporate partners
accounted for 93% (Partner A 61% and Partner B 32%), and two corporate partners
accounted for 96% (Partner A 82% and Partner C 14%), respectively.
17. Impact of the Adoption of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 is
effective for all fiscal quarters of all fiscal years beginning after June 15,
1999 (January 1, 2000 for the Company). SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. SFAS 133 is
not expected to have an impact on the Company's consolidated results of
operations, financial position or cash flows.
In December 1999, the staff of the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin No. 101, Revenue Recognition ("SAB
101"), which was amended on March 24, 2000 to delay the implementation date for
registrants with fiscal years that begin between December 16, 1999 and March 15,
2000 until no later than their second fiscal quarter of the fiscal year
beginning after December 15, 1999. To the extent the guidance in SAB 101 differs
from the generally accepted accounting principles previously utilized by an SEC
registrant, SAB 101 indicates that the SEC staff will not object to reporting
the cumulative effect of a change in accounting principle.
F-19
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
17. Impact of the Adoption of Recently Issued Accounting Standards (continued)
Prior to promulgation of SAB 101, the Company had reported non-refundable
up-front and milestone fees received pursuant to distribution agreements in the
period earned, which was deemed to be the date when all related material
commitments had been satisfied and no future consideration was required. While
the Company believes the pricing under these agreements entered into with
various marketing partners provides for arms-length pricing of product sales,
SAB 101 requires that the Company reviews all of its non-refundable fees to
determine if they should be linked to the supply arrangements and reported as
additional revenue from product sales made pursuant to those arrangements.
The Company is currently in the process of evaluating the impact of SAB
101 on its accounting policy for non-refundable fees received pursuant to
distribution agreements with marketing partners. The Company is in the process
of reviewing each of its many distribution agreements to assess whether
non-refundable, up-front license fees and/or milestone payments should be
deferred in accordance with SAB 101. Accordingly, the Company anticipates that a
change in its accounting policy will result in a cumulative effect adjustment
for a change in accounting principle. The total cumulative effect of the
non-cash, after-tax charge is preliminary estimated to range from $13.0 million
to $20.0 million. Such amount would be recorded as deferred revenue and
recognized as product revenue in future periods. The Company intends to
implement changes resulting from SAB 101 in the second quarter of 2000.
18. Subsequent Events
On March 6, 2000, Genzyme Corporation ("Genzyme"), a Massachusetts
corporation, Seagull Merger Corporation, a Massachusetts corporation and
wholly-owned subsidiary of Genzyme ("Merger Sub"), and Biomatrix entered into an
Agreement and Plan of Merger (the "Merger Agreement") pursuant to which the
parties will effect a business combination through a merger of Biomatrix with
and into Merger Sub (the "Merger"). In connection with the Merger, Genzyme will
form a new division, the Genzyme Biosurgery division, and will create a new
series of common stock designated as "GZBX division Common Stock," $0.01 par
value per share ("GZBX Stock"), which will be issued to the holders of Biomatrix
common stock, $.0001 par value per share ("Biomatrix Common Stock"), in the
Merger. The currently proposed terms of the GZBX Stock are set forth as an
exhibit to the Merger Agreement. In connection with the Merger, Genzyme's Tissue
Repair Division and Surgical Products Division will become part of the Genzyme
Biosurgery division and the Genzyme Tissue Repair Common Stock ("GTR Stock")
series and Genzyme Surgical Products Common Stock ("GSP Stock") series will be
exchanged for GZBX Stock (the "Genzyme Reorganization"). The transaction, which
will be accounted for using the purchase method of accounting, is expected to
close in the second quarter of 2000.
Under the terms of the Merger Agreement, each outstanding share of
Biomatrix Common Stock will be converted, at the option of the holder, into
either (i) $37.00 in cash or (ii) one share of GZBX Stock (the "Merger
Consideration"). Based on the cash election price and the number of shares of
Biomatrix Common Stock outstanding, Biomatrix expects that the cash portion of
the transaction will be approximately $245 million. Under the Merger Agreement,
28.38% of the shares of Biomatrix Common Stock outstanding at the effective time
of the Merger will be exchanged for cash and the remaining 71.62% of the shares
of Biomatrix Common Stock outstanding at the time of the Merger will be
converted into shares of GZBX Stock at a conversion rate of one share of GZBX
Stock for each share of Biomatrix Common Stock. However, the number of shares of
GZBX Stock to be issued in the Merger is subject to an upward adjustment if the
value of the GZBX Stock to be issued in the Merger on the effective date of the
Merger is less than 45% of the total Merger Consideration in order to preserve
the status of the Merger as a tax-free reorganization.
F-20
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
18. Subsequent Events (continued)
Under the terms of the Merger Agreement, each outstanding share of GSP
Stock will convert into 0.6060 shares of GZBX Stock and each share of GTR Stock
will convert into 0.3352 shares of GZBX Stock. Based on the number of common
shares outstanding for each entity at the signing date, the Genzyme Biosurgery
division is expected to have approximately 35.2 million shares outstanding.
Consummation of the Merger is subject to the adoption of the Agreement and
Plan of Merger by the Biomatrix stockholders, the approval of the issuance of
GZBX Stock in the Merger and the necessary amendments of Genzyme's charter by
the Genzyme stockholders, including the approval of the exchange of GSP Stock
for GZBX Stock by GSP stockholders and the exchange of GTR Stock for GZBX Stock
by GTR stockholders, the receipt of regulatory approvals and certain other
customary closing conditions.
Certain officers of Biomatrix holding an aggregate of approximately 34% of
the outstanding shares of Biomatrix Common Stock have agreed to vote their
shares of Biomatrix Common Stock in favor of the Merger until the earlier to
occur of the completion of the Merger or 5 days after the termination of the
Merger Agreement. In addition, in connection with the Merger, Biomatrix has
granted Genzyme an option to purchase 4.6 million shares of Biomatrix Common
Stock under certain circumstances.
F-21
<PAGE>
EXHIBIT 10.3
AGREEMENT
THIS AGREEMENT, dated as of the 29th day of February, 2000, is by and
between BIOMATRIX, INC., a Delaware corporation with its principal place of
business at 65 Railroad Avenue, Ridgefield, New Jersey 07657 (the "Employer"),
and Endre A. Balazs, an individual residing at 200 Old Palisade Road, Fort Lee,
New Jersey 07024 (the "Employee").
ss. 1. Prior Agreements. All prior agreements between the parties relating
to the employment of the Employee, including, without limitation, the agreement
between the parties dated as of December 30, 1988 (as amended), are hereby
terminated and superceded by this Agreement, provided, however, that this
Agreement shall not affect in any manner the Change in Control Agreement between
the parties dated on or about the date hereof..
ss. 2. Compensation. The Employee has agreed to be an at-will employee of
the Employer and that the Employees' compensation for the services rendered by
the Employee to the Employer shall be determined each year by the Employer's
Compensation Committee.
ss. 3. Agreement Not to Compete. The Employee agrees that during the term
of his employment with the Employer and for a period of eighteen months
thereafter (the "post termination period"), the Employee shall not, within the
United States of America or its Territories or Possessions, or within any other
country in which the Employer conducts its business or distributes any of its
products (determined in each case as of the date of termination of the
Employee's employment), engage in business with, be employed by, or consult or
advise for any commercial entity which develops, manufactures, sells, or
distributes products that compete with products then manufactured, sold, or
distributed or the development of which is being actively pursued by the
Employer, to the extent that such products of the Employer are based upon any
Confidential Information (as defined below) or covered by patents issued or
pending on the date of termination of the Employee's employment, provided,
however, (i) that during the post termination period the severance arrangements
(if any) of the Employee shall be determined by the Compensation Committee of
the Employer, and (ii) that, with respect to the post-termination employment
period, any such employment or consulting by the Employee shall be prohibited
only if it relates to the commercial development, commercial application or
other commercial exploitation of products that compete with products
manufactured, sold, or distributed or the development of which is being actively
pursued by the Employer as of the date of termination of the Employee's
employment.
Confidential Information shall mean all nonpublic information which relates
directly to the present business of the Employer, including but not limited to
any ideas, formulae, processes, know-how, data, test results, raw materials,
techniques, models, computer programs, plans, schedules, sketches, notebooks,
drawings, process sheets, customer or supplier lists, and financial information.
ss. 4. Miscellaneous. This Agreement represents the entire understanding
and agreement between the parties as to the subject matter hereof. No prior,
concurrent or subsequent agreement, whether written or oral, shall be construed
to change, amend, alter, repeal or invalidate this Agreement, unless this
Agreement is specifically identified in and made subject to such other written
agreement. This Agreement may be amended only by a written instrument executed
in one or more counterparts by the parties hereto. This Agreement shall be
governed by and enforced, determined and construed in accordance with the laws
of the State of New Jersey (other than those relating to its conflicts of laws
rules).
IN WITNESS WHEREOF, this Agreement has been executed by the Employer, by
its duly authorized officer, and by the Employee, as of the date first above
written.
BIOMATRIX, INC.
By:
--------------------------------------- -------------------
H. Stuart Campbell Endre A. Balazs
Chairman of the Compensation Committee
and of the Board of Directors
<PAGE>
BIOMATRIX, INC.
EXHIBIT 21 - LIST OF SUBSIDIARIES
COUNTRY
NAME OF SUBSIDIARY WHERE INCORPORATED
- ------------------ ------------------
Biomatrix Medical Canada Inc. Canada
Biomatrix (U.K.) Limited Great Britain
Biomatrix Svenska AB Sweden
Biomatrix France SARL France
Biomatrix Schwiez GmbH Switzerland
Biomatrix Hong Kong Limited Hong Kong
Biomatrix (Germany) GmbH Germany
Biomatrix Belgium BVBA Belgium
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Biomatrix, Inc. on Forms S-8 (File nos. 33-91066, 33-91064 and 333-29983) and
Forms S-3 (File Nos. 33-99856 and 333-77367) of our report dated January 28,
2000, except for Note 18, as to which the date is March 7, 2000, on our audits
of the consolidated financial statements of Biomatrix, Inc. as of December 31,
1999 and 1998, and for each of the three years in the period ended December 31,
1999, which report is included in this 1999 Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
New York, New York
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000747952
<NAME> BIOMATRIX, INC.
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 35,000,000
<SECURITIES> 0
<RECEIVABLES> 10,100,000
<ALLOWANCES> 0
<INVENTORY> 8,500,000
<CURRENT-ASSETS> 56,800,000
<PP&E> 50,800,000
<DEPRECIATION> (9,500,000)
<TOTAL-ASSETS> 99,000,000
<CURRENT-LIABILITIES> 9,900,000
<BONDS> 11,900,000
0
0
<COMMON> 82,700,000
<OTHER-SE> (5,500,000)
<TOTAL-LIABILITY-AND-EQUITY> 99,000,000
<SALES> 72,000,000
<TOTAL-REVENUES> 79,700,000
<CGS> 21,100,000
<TOTAL-COSTS> 48,700,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,500,000
<INCOME-PRETAX> 31,000,000
<INCOME-TAX> 12,400,000
<INCOME-CONTINUING> 18,600,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,600,000
<EPS-BASIC> 0.81
<EPS-DILUTED> 0.76
</TABLE>
