<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 10-Q/A
AMENDMENT NO. 1 TO
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2000 COMMISSION FILE NUMBER 0-19373
-------------------------------
BIOMATRIX, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3058261
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
65 Railroad Avenue, Ridgefield, N.J. 07657
(Address of principal executive offices) (Zip Code)
(201) 945-9550
(Registrant's telephone number, including area code)
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 of 1934 during
the 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
--- ---
The number of shares outstanding of the issuer's common stock as of the latest
practicable date:
<TABLE>
<CAPTION>
Class October 20, 2000
----- ----------------
<S> <C>
Common stock, $ 0.0001 par value 23,627,929
</TABLE>
<PAGE>
The following items are amended:
Item 1. Unaudited Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
For purposes of this Form 10-Q/A, and in accordance with Rule 12b-15 under the
Securities Exchange Act of 1934, as amended, Biomatrix has amended and restated
in its entirety each item of its 2000 Form 10-Q for the quarter ended March 31,
2000 which has been affected by this Amendment. In order to preserve the nature
and character of the disclosures set forth in such items as originally filed, no
attempt has been made in this form 10-Q/A to otherwise modify or update such
disclosures.
2
<PAGE>
Item 1 - Unaudited Condensed Consolidated Financial Statements
BIOMATRIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in millions, except share and per share data)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................. $33.3 $35.0
Accounts receivable, less allowance for doubtful accounts............. 11.8 10.1
Inventory, at lower of cost or market................................. 9.0 8.5
Prepaid expenses and other current assets............................. 3.1 3.2
--- ---
Total current assets.......................................... 57.2 56.8
Property, plant and equipment, net....................................... 40.7 41.3
Other assets............................................................. 0.8 0.9
--- ---
Total assets................................................... $98.7 $99.0
===== =====
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................... $ 1.1 $ 1.3
Accrued expenses...................................................... 7.3 8.0
Notes payable - current............................................... 0.6 0.6
--- ---
Total current liabilities..................................... 9.0 9.9
Notes payable............................................................ 11.7 11.9
---- ----
Total liabilities............................................. 20.7 21.8
---- ----
Commitments and contingent liabilities
Shareholders' equity:
Preferred stock, 3,000 shares authorized; none issued................. - -
Common stock, $.0001 par value: 60,000,000 authorized;
23,401,065 and 23,374,366 issued and 23,308,771 and
23,282,072 outstanding in 2000 and 1999, respectively .............. 0.0 0.0
Additional paid-in capital ........................................... 83.1 82.7
Notes receivable - related parties.................................... (14.1) (14.0)
Retained earnings..................................................... 11.4 10.9
Accumulated other comprehensive loss ................................. (1.5) (1.5)
Treasury stock, 92,294 shares of common stock at cost................. (0.9) (0.9)
---- ----
Total shareholders' equity ................................... 78.0 77.2
---- ----
Total liabilities and shareholders' equity..................... $98.7 $99.0
===== =====
</TABLE>
The accompanying notes are an integral part of
the condensed consolidated financial statements.
3
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in millions, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
2000 1999
---- ----
<S> <C> <C>
Revenues:
Net product sales.................................................... $16.5 $ 16.5
Income from licenses, royalties and research contracts............... 0.2 0.1
--- ---
Total revenues................................................. 16.7 16.6
Costs and expenses:
Cost of goods sold................................................... 5.0 4.9
Research and development expenses.................................... 2.6 2.2
Selling, general and administrative expenses......................... 8.5 3.9
--- ---
Total costs and expenses....................................... 16.1 11.0
---- ----
Income from operations................................................... 0.6 5.6
Interest expense......................................................... (0.2) (0.4)
Interest and miscellaneous income........................................ 0.5 0.3
--- ---
Income before taxes...................................................... 0.9 5.5
Provision for income taxes............................................... 0.4 2.2
--- ---
Net income............................................................... $ 0.5 $ 3.3
===== =====
Net income per share:
Basic ............................................................... $0.02 $ 0.14
Weighted average basic shares outstanding............................ 23,292,421 22,794,084
Diluted.............................................................. $0.02 $ 0.13
Weighted average diluted shares outstanding.......................... 24,642,370 24,461,854
</TABLE>
The accompanying notes are an integral part of
the condensed consolidated financial statements.
4
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in millions)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................................. $ 0.5 $ 3.3
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization............................................ 0.9 0.8
Stock option compensation................................................ 0.2 0.1
Changes in assets and liabilities:
Accounts receivable...................................................... (1.6) (1.7)
Inventory ............................................................... (0.5) (2.0)
License fees, prepaid expenses and other current assets.................. 0.1 5.2
Other assets............................................................. 0.0 (0.0)
Accounts payable and accrued expenses.................................... (0.9) 2.5
---- ---
Net cash (used for) provided by operating activities........... (1.3) 8.2
---- ---
Cash flows from investing activities:
Capital expenditures........................................................ (0.4) (4.6)
---- ----
Net cash used for investing activities......................... (0.4) (4.6)
---- -----
Cash flows from financing activities:
Payments of notes payable and capital lease obligations..................... (0.2) (0.2)
Stock options exercised..................................................... 0.2 0.2
--- ----
Net cash provided by financing activities...................... 0.0 0.0
--- ----
Effect of exchange rate changes on cash......................................... 0.0 0.0
---- ----
Net (decrease) increase in cash and cash equivalents............................ (1.7) 3.6
Cash and cash equivalents at beginning of period................................ 35.0 16.5
---- ----
Cash and cash equivalents at end of period...................................... $33.3 $20.1
===== =====
Non-cash financing activities:
Sale of common stock financed with notes receivable......................... - $2.4
</TABLE>
The accompanying notes are an integral part of
the condensed consolidated financial statements.
5
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements at March 31, 2000 and
December 31, 1999 and for the three months ended March 31, 2000 and 1999 are
unaudited, but include all adjustments which the Company considers necessary for
a fair presentation of the financial position at such dates and the operating
results and cash flows for those periods. These condensed consolidated financial
statements should be read in conjunction with the Company's audited consolidated
financial statements for the year ended December 31, 1999, which were included
as part of the Company's Form 10-K, filed with the Securities and Exchange
Commission. Results for interim periods are not necessarily indicative of
results for the entire year.
NOTE 2 - INVENTORIES
Inventories at March 31, 2000 and December 31, 1999 consisted of (in
millions):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
Raw materials...................... $ 1.0 $ 0.6
Work-in-process.................... 6.9 7.2
Finished goods..................... 1.1 0.7
--- ---
$ 9.0 $ 8.5
===== ======
</TABLE>
NOTE 3 - NOTES RECEIVABLE - RELATED PARTIES
Notes receivable - related parties relates to the acquisition of common
stock of the Company at fair market value by certain officers and directors of
the Company pursuant to the Company's 1997 Restricted Stock Plan. The notes are
with full recourse and are payable with simple interest upon maturity. The
balance of the notes including accrued interest at March 31, 2000 and December
31, 1999 was $14.1 million and $14.0 million, respectively. The notes mature
over a range of dates from May 2007 to September 2009.
NOTE 4 - CONVERTIBLE DEBT
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. 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 and
March 31, 2000, there was $10.0 million of convertible debt outstanding.
6
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BIOMATRIX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - NET INCOME PER COMMON 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 is convertible into 500,000 shares of common stock (see
Note 4); however this instrument has not been included in diluted earnings per
share for the first quarter of 1999 or 2000 because its effect would be
anti-dilutive. A reconciliation of weighted average shares outstanding from
basic to diluted for the three months ended March 31, 2000 and 1999 is as
follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Weighted average shares outstanding - Basic................... 23,292,421 22,794,084
Dilutive effect of stock options.............................. 1,349,949 1,667,770
--------- ---------
Weighted average shares outstanding - Diluted................. 24,642,370 24,461,854
========== ==========
</TABLE>
NOTE 6 - SEGMENT DATA
The following data is utilized by the Company's Executive Committee
(the chief operating decision makers) when analyzing the performance of the
Company. Given the importance of revenue growth and product launches, the
Company analyzes its revenues by product line and sales destination. The Company
does not allocate its assets to the various product lines, but does analyze its
assets on a geographic basis. The following table presents the segment data for
the three months ended March 31, 2000 and 1999 (in millions):
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Product sales:
Synvisc-Registered Trademark-:
United States................................................. $11.8 $12.6
Rest of the world............................................. 3.8 3.2
All other products.............................................. 0.9 0.7
--- ---
Total product sales............................................. $16.5 $16.5
===== =======
</TABLE>
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
Identifiable assets (in millions):
United States................................................... $89.3 $89.8
Rest of the world............................................... 9.4 9.2
--- ---
Total assets.................................................... $98.7 $99.0
===== =====
</TABLE>
7
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - COMPREHENSIVE INCOME
Components of comprehensive income are net income and all other
non-owner changes in equity, such as the change in the cumulative translation
adjustment. The following table shows comprehensive income for the three months
ended March 31, 2000 and 1999 (in millions):
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Net income ................................................... $ 0.5 $ 3.3
Change in cumulative translation adjustment................... 0.0 0.2
--- ---
Comprehensive income.......................................... $ 0.5 $ 3.5
===== =====
</TABLE>
NOTE 8 - CONTINGENCIES
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-Registered Trademark-
resulted from his consultancy and 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 royalty Jarcho alleges he is entitled to would have totalled
$0.4 million through March 31, 2000. The Company disagrees with Jarcho's claims
and does not believe that Jarcho is owed 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 the Company 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
November 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 is
presently unable to predict the ultimate outcome of this matter or whether it
would have a material impact on the results of operations, financial position or
cash flows of Biomatrix. The Company has not made any provisions for any
liability that might result from the claims made by Jarcho.
8
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 9 - IMPACT OF THE ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 1999, the staff of the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin No. 101, Revenue Recognition ("SAB
101"), which was most recently amended by SAB 101B on June 26, 2000 to delay the
implementation date until no later than the fourth fiscal quarter for fiscal
years 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.
In consideration of SAB 101 and the guidance contained therein, we are
re-examining all elements and provisions of our contracts, specifically
non-refundable license fees and milestones, to determine the impact of SAB 101
on our policy of recording revenue. Based on our most recent analysis and our
understanding of the requirements, we have revised our previous estimates and
currently anticipate that the implementation of SAB 101 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 currently estimated to be
approximately $2.2 million. Such amount would be recorded as deferred revenue
and recognized as revenue in future periods. We will continue to assess the
impact of SAB 101 as additional guidance and interpretations evolve over the
remainder of the year. We intend to implement changes resulting from SAB 101 no
later than the fourth quarter of 2000.
9
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 10 - 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 fourth 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, (ii) one share of GZBX Stock or (iii) a fixed
combination of cash and GZBX Stock (the "Merger Consideration"). 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. 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. However, the number of shares of Biomatrix Common Stock to be
converted to cash in the Merger is subject to downward adjustment if there are
Biomatrix shareholders exercising their dissenter's rights or 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.
10
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 10 - RECENT DEVELOPMENTS (CONTINUED)
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 37% 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, as a condition to Genzyme's entering into the
Merger Agreement, Biomatrix granted Genzyme an option to acquire up to 4.6
million shares of Biomatrix Common Stock at a price of $30 per share. The option
may only be exercised by Genzyme upon the termination of the Merger Agreement
resulting from our shareholders' voting against the merger or our entering into
an alternative transaction that is recommended by our Board.
Under the terms of the Merger agreement and prior to the closing of the
Merger, Biomatrix expects to modify the stock option awards of one executive and
two non-employee directors to immediately accelerate any unvested options upon
the closing of the Merger. In addition, the Company expects to modify the option
plan to provide that if any employee's employment is terminated within one year
following the Merger other than (i) by the Company for cause (as defined in the
Biomatrix Separation Pay Plan), (ii) by reason of death or (iii) by the employee
without Good Reason (as defined in the Biomatrix Separation Pay Plan), all
unvested options will immediately vest and become exercisable as of the date of
termination.
The Company expects that the aforementioned modifications will be made
upon stockholder and board approvals and concurrent with the closing of the
Merger which is anticipated to occur in the fourth quarter of fiscal 2000. At
the time that the options and option plan are modified, Biomatrix will measure
any compensation expense based on the stock price at the date that the
modifications are made. The Company will record additional compensation expense
for any unvested options at the date on which an employee is terminated. The
amount of the compensation expense is based on the stock price at the date of
modification and the unvested shares subject to acceleration.
NOTE 11 - SUBSEQUENT EVENT
On July 21, and August 7, 15, and 30, 2000, class action lawsuits
requesting unspecified damages were filed in the United States District Court
for the District of New Jersey against Biomatrix and two of its officers and
directors, Endre A. Balazs and Rory B. Riggs. In these actions, the
plaintiffs seek to certify a class of all persons or entities who purchased
or otherwise acquired Biomatrix common stock during the period between July
20, 1999 and April 25, 2000. The plaintiffs allege, amongst other things,
that the defendants failed to accurately disclose information related to
Biomatrix's product Synvisc-Registered Trademark- during the period between
July 20, 1999 and April 25, 2000, and assert causes of action under the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated under that Act. We
disagree with these claims and believe that information related to Synvisc
was properly disclosed. Biomatrix intends to defend these actions vigorously.
Under the certificate of incorporation of Biomatrix, officers and directors
of Biomatrix are entitled to indemnification for such claims from Biomatrix
to the full extent permitted by Delaware law. The Company is presently unable
to predict the ultimate outcome of these cases or whether they would have a
material impact on the results of operations, financial position or cash
flows of Biomatrix. We have not made any provisions for any liability that
might result from these claims.
11
<PAGE>
Item 2 - Management's Discussion and Analysis of financial Condition and Results
of Operations
BIOMATRIX, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
The Company's business is subject to significant risks. Certain
statements contained in this Form 10-Q are forward-looking within the meaning of
Section 27A of the Securities Act of 1933 and involve risks and uncertainties,
including, but not limited to, governmental regulation, reimbursement for
products, dependence on distribution relationships, patents, competition,
manufacturing, rapid growth, dependence upon key personnel, fluctuation in
operating results, product liability, stock price volatility, and other risks
detailed in the Company's reports filed under the Securities and Exchange Act,
including the Company's Form 10-K for the year ended December 31, 1999. We rely
on distribution partners to sell our products in the U.S. and in many other
major markets. These distribution partners make independent decisions about the
amount of our products they will purchase in any given quarter based on a number
of factors, including their estimate of future sales in their marketing
territories and the level of inventory they decide to maintain at any given
time. Further, a portion of the Company's revenues may be based on payments from
corporate license and distribution agreements. Therefore, 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.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
REVENUES. Total revenues for the three months ended March 31, 2000
were $16.7 million, representing an increase of $0.1 million over the same
period of the prior year. Net product sales for the three months ended March 31,
2000 were $16.5 million, equal to the product sales reported for the same period
of 1999. Product sales for the three months ended March 31, 2000 of $16.5
million were comprised of $15.5 million from supply price revenues and $1.0
million from formula price adjustment revenues. Product sales for the three
months ended March 31, 1999 of $16.5 million were comprised of $15.1 million
from supply price revenues and $1.4 million from formula price adjustment
revenues. The number of units shipped and the average selling price per unit
during the first quarter of 2000 was relatively consistent with the first
quarter of 1999. However, the product sales from supply price revenues for the
first quarter of 1999 included an inventory build at the Company's U.S.
marketing partner so that the partner could begin an advertising campaign in the
second quarter of 1999. During the first quarter of 2000, U.S. end-user net
sales by our marketing partner increased by 39% when compared to the first
quarter of 1999. Income from licenses, royalties and research contracts was $0.2
million for the three months ended March 31, 2000, or an increase of $0.1
million from the three months ended March 31, 1999. Upon adoption of Staff
Accounting Bulletin No. 101, "Revenue Recognition," the Company's accounting
policy for recognizing revenue related to up front and milestone payments will
be to recognize revenue when all performance and economic commitments have been
completed.
12
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(CONTINUED)
COSTS AND EXPENSES. Total costs and expenses were $16.1 million for
the three months ended March 31, 2000, representing an increase of $5.1
million or 46% over the same period of the prior year. Cost of goods sold for
the first quarter of 2000 and 1999 were $5.0 million and $4.9 million,
respectively, which produced gross margins of 70% in each period. Research
and development expenses were $2.6 million and $2.2 million for the first
quarter of 2000 and 1999, respectively. The increase of $0.4 million or 18%
resulted from greater clinical costs related to the Company's pipeline of
products in development. Selling, general and administrative expenses for the
first quarter of 2000 were $8.5 million, representing an increase of $4.6
million or 118%, over the first quarter of 1999. First quarter expenses for
2000 include $3.0 million of marketing expenses related to the Company's U.S.
advertising campaign for Synvisc-Registered Trademark-. The Company expects
this to be a one-time expense. The first quarter of 2000 also includes
approximately $0.3 million of costs related to the expected merger with
Genzyme. The remainder of the increase over the first quarter of 1999 is
primarily due to increased costs related to supporting the scope of the
Company's growing global activities.
INCOME TAXES
The Company recorded federal and state tax provisions totaling $0.4
million and $2.2 million for the three months ended March 31, 2000 and 1999,
respectively. The effective rate for the first quarter of 2000 and 1999 was 40%.
The Company expects its effective tax rate to continue 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 March 31, 2000 the Company had $0.5 million of net deferred U.S.
tax assets included in other long term assets and $0.7 million of net deferred
tax assets included in other short term assets on its balance sheet, as it is
more likely than not that the Company will realize the benefit of these assets.
However, the Company has provided a full valuation allowance on certain
foreign-related deferred tax assets due to the uncertainty of realization.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $33.3 million at March 31,
2000. Overall, the Company's cash position decreased by $1.7 million in the
three months ended March 31, 2000.
The Company's operations and capital growth over the past several years
have been financed by its sales of products, up-front non-refundable license fee
payments from corporate partners, the utilization of the Company's cash and
investments and the private placement of debt and equity securities. Since
January 1, 1997, the Company has received $36.4 million from non-refundable
license fee payments and $19.8 million from the private placement of equity and
debt securities.
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BIOMATRIX, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
For the three months ended March 31, 2000 the Company had negative cash
flows from operations of $1.3 million. This decrease is primarily related to a
slight increase in accounts receivable as a result of the timing of shipments in
the first quarter and a reduction in accrued expenses that resulted from tax
payments. During the quarter, the Company also invested $0.4 million in
property, plant, and equipment.
IMPACT OF THE ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 1999, the staff of the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin No. 101, Revenue Recognition ("SAB
101"), which was most recently amended by SAB 101B on June 26, 2000 to delay the
implementation date until no later than the fourth fiscal quarter for fiscal
years beginning after December 15, 1999. To the extent the guidance in SAB 101
differs from the generally accepted accounting principles previously utilized by
a SEC registrant, SAB 101 indicates that the SEC staff will not object to
reporting the cumulative effect of a change in accounting principle.
In consideration of SAB 101 and the guidance contained therein, we are
re-examining all elements and provisions of our contracts, specifically
non-refundable license fees and milestones, to determine the impact of SAB 101
on our policy of recording revenue. Based on our most recent analysis and our
understanding of the requirements, we have revised our previous estimates and
currently anticipate that the implementation of SAB 101 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 currently estimated to be
approximately $2.2 million. Such amount would be recorded as deferred revenue
and recognized as revenue in future periods. We will continue to assess the
impact of SAB 101 as additional guidance and interpretations evolve over the
remainder of the year. We intend to implement changes resulting from SAB 101 no
later than the fourth quarter of 2000.
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BIOMATRIX, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 fourth 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, (ii) one share of GZBX Stock or (iii) a fixed
combination of cash and GZBX Stock (the "Merger Consideration"). 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. 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. However, the number of shares of Biomatrix Common Stock to be
converted to cash in the Merger is subject to downward adjustment if there are
Biomatrix shareholders exercising their dissenter's rights or 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.
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<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RECENT DEVELOPMENTS (CONTINUED)
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 37% 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, as a condition to Genzyme's entering into the
Merger Agreement, Biomatrix granted Genzyme an option to acquire up to 4.6
million shares of Biomatrix Common Stock at a price of $30 per share. The option
may only be exercised by Genzyme upon the termination of the Merger Agreement
resulting from our shareholders' voting against the merger or our entering into
an alternative transaction that is recommended by our Board.
Under the terms of the Merger agreement and prior to the closing of the
Merger, Biomatrix expects to modify the stock option awards of one executive and
two non-employee directors to immediately accelerate any unvested options upon
the closing of the Merger. In addition, the Company expects to modify the option
plan to provide that if any employee's employment is terminated within one year
following the Merger other than (i) by the Company for cause (as defined in the
Biomatrix Separation Pay Plan), (ii) by reason of death or (iii) by the employee
without Good Reason (as defined in the Biomatrix Separation Pay Plan), all
unvested options will immediately vest and become exercisable as of the date of
termination.
The Company expects that the aforementioned modifications will be made
upon stockholder and board approvals and concurrent with the closing of the
Merger which is anticipated to occur in the fourth quarter of fiscal 2000. At
the time that the options and option plan are modified, Biomatrix will measure
any compensation expense based on the stock price at the date that the
modifications are made. Based on the market value of the Company's stock on
August 1, 2000, the Company estimates the impact of the immediate acceleration
of the unvested options of the executive and non-employee directors to be
approximately $0.5 million which will be recorded in the Company's financial
statements at the modification date and up to $5.5 million related to the other
options. The Company will record additional compensation expense for any
unvested options at the date on which an employee is terminated. The amount of
the compensation expense is based on the stock price at the date of modification
and the unvested shares subject to acceleration.
SUBSEQUENT EVENT
On July 21, and August 7, 15, and 30, 2000, class action lawsuits
requesting unspecified damages were filed in the United States District Court
for the District of New Jersey against Biomatrix and two of its officers and
directors, Endre A. Balazs and Rory B. Riggs. In these actions, the
plaintiffs seek to certify a class of all persons or entities who purchased
or otherwise acquired Biomatrix common stock during the period between July
20, 1999 and April 25, 2000. The plaintiffs allege, amongst other things,
that the defendants failed to accurately disclose information related to
Biomatrix's product Synvisc-Registered Trademark- during the period between
July 20, 1999 and April 25, 2000, and assert causes of action under the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated under that Act. We
disagree with these claims and believe that information related to Synvisc
was properly disclosed. Biomatrix intends to defend these actions vigorously.
Under the certificate of incorporation of Biomatrix, officers and directors
of Biomatrix are entitled to indemnification for such claims from Biomatrix
to the full extent permitted by Delaware law. The Company is presently unable
to predict the ultimate outcome of these cases or whether they would have a
material impact on the results of operations, financial position or cash
flows of Biomatrix. We have not made any provisions for any liability that
might result from these claims.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: October 25, 2000 BIOMATRIX, INC.
By: /s/ Endre A. Balazs
----------------------------
Endre A. Balazs
Chief Executive Officer and
Chief Scientific Officer
By: /s/ Maxine Seifert
----------------------------
Maxine Seifert
Vice President, Finance and
Chief Financial Officer
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