<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 JUNE 30, 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:
CLASS OCTOBER 20, 2000
----- ----------------
Common stock, $ 0.0001 par value 23,627,929
<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 June 30,
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 par value data)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 37.4 $ 35.0
Accounts receivable, less allowance for doubtful accounts ... 13.4 10.1
Inventory, at lower of cost or market ....................... 8.5 8.5
License fees receivable ..................................... 7.0 -
Prepaid expenses and other current assets ................... 3.0 3.2
------ ------
Total current assets ................................. 69.3 56.8
Property, plant and equipment, net ............................ 40.2 41.3
Other assets .................................................. 0.8 0.9
------ ------
Total assets ......................................... $110.3 $ 99.0
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................ $ 1.2 $ 1.3
Accrued expenses ............................................ 11.1 8.0
Notes payable - current ..................................... 0.9 0.6
------ ------
Total current liabilities ............................ 13.2 9.9
Notes payable - long term ..................................... 11.3 11.9
------ ------
Total liabilities .................................... 24.5 21.8
------ ------
Commitments and contingent liabilities
Shareholders' equity:
Preferred stock, 3,000 shares authorized; none issued ....... - -
Common stock, $.0001 par value; 60,000,000 shares authorized;
23,529,950 and 22,374,366 issued and 23,437,656 and
23,282,072 outstanding in 2000 and 1999, respectively ..... 0.0 0.0
Additional paid-in capital .................................. 83.6 82.7
Notes receivable - related parties .......................... (14.4) (14.0)
Retained earnings ........................................... 19.1 10.9
Accumulated other comprehensive loss ........................ (1.6) (1.5)
Treasury stock, 92,294 shares of common stock at cost ....... (0.9) (0.9)
------ ------
Total shareholders' equity ........................... 85.8 77.2
------ ------
Total liabilities and shareholders' equity ........... $110.3 $ 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 Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Net product sales .......................... $ 20.0 $ 18.1 $ 36.5 $ 34.6
Income from licenses, royalties
and research contracts ................... 7.2 7.1 7.4 7.2
------------ ------------ ------------ ------------
Total revenues ..................... 27.2 25.2 43.9 41.8
------------ ------------ ------------ ------------
Costs and expenses:
Cost of goods sold ......................... 6.0 5.2 11.0 10.1
Research and development expenses .......... 2.7 2.0 5.3 4.2
Selling, general and administrative expenses 6.2 4.6 14.7 8.5
------------ ------------ ------------ ------------
Total costs and expenses ........... 14.9 11.8 31.0 22.8
------------ ------------ ------------ ------------
Income from operations ..................... 12.3 13.4 12.9 19.0
Interest expense ........................... (0.3) (0.5) (0.5) (0.9)
Interest and miscellaneous income .......... 0.8 0.3 1.3 0.6
------------ ------------ ------------ ------------
Income before taxes ........................ 12.8 13.2 13.7 18.7
Provision for income taxes ................. 5.1 5.5 5.5 7.7
------------ ------------ ------------ ------------
Net income ................................. $ 7.7 $ 7.7 $ 8.2 $ 11.0
============ ============ ============ ============
Net income per share:
Basic ................................. $ 0.33 $ 0.34 $ 0.35 $ 0.48
============ ============ ============ ============
Weighted average shares outstanding ... 23,388,175 22,931,602 23,340,298 22,862,843
============ ============ ============ ============
Diluted ............................... $ 0.31 $ 0.31 $ 0.34 $ 0.45
============ ============ ============ ============
Weighted average shares outstanding ... 24,933,030 25,315,224 24,489,291 25,240,877
============ ============ ============ ============
</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>
Six Months Ended
June 30,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................. $ 8.2 $ 11.0
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ........................ 1.9 1.6
Stock option compensation ............................ 0.1 0.1
Change in assets and liabilities:
Accounts receivable .................................. (3.4) 0.9
Inventory ............................................ 0.1 (2.3)
License fees receivable, prepaid expenses
and other current assets ............................ (6.9) (1.6)
Other assets ............................................... (0.3) 0.1
Accounts payable and accrued expenses ................ 3.2 6.4
-------- --------
Net cash provided by operating activities ....... 2.9 16.2
-------- --------
Cash flows from investing activities:
Capital expenditures ................................... (0.9) (7.2)
-------- --------
Net cash used for investing activities .......... (0.9) (7.2)
-------- --------
Cash flows from financing activities:
Payments of notes payable and capital
lease obligations ................................... (0.3) (4.9)
Stock options exercised ................................ 0.7 0.7
-------- --------
Net cash provided by (used for)
financing activities ......................... 0.4 (4.2)
-------- --------
Effect of exchange rate changes on cash .................... 0.0 0.0
-------- --------
Net increase in cash and cash equivalents .................. 2.4 4.8
Cash and cash equivalents at beginning of period ........... 35.0 16.5
-------- --------
Cash and cash equivalents at end of period ................. $ 37.4 $ 21.3
======== ========
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
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements at June 30, 2000 and
December 31, 1999 and for the three and six months ended June 30, 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, as amended and 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 June 30, 2000 and December 31, 1999 consisted of (in
millions):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Raw Materials ............................. $ 1.0 $ 0.6
Work-in-Process ........................... 6.5 7.2
Finished Goods ............................ 1.0 0.7
-------- --------
$ 8.5 $ 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 June 30, 2000 and December
31, 1999 was $14.4 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
June 30, 2000, there was $10.0 million of convertible debt outstanding.
6
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(unaudited)
NOTE 5 - 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 and six
months ended June 30, 2000 and 1999 (in millions):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
----
<S> <C> <C> <C> <C>
Net income ....................................... $ 7.7 $ 7.7 $ 8.2 $ 11.0
Change in cumulative translation adjustment ...... (0.1) 0.3 (0.1) 0.5
-------- -------- -------- --------
Comprehensive income ............................. $ 7.6 $ 8.0 $ 8.1 $ 11.5
======== ======== ======== ========
</TABLE>
NOTE 6 - 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 was convertible into 500,000 and 750,000 shares of common
stock at June 30, 2000 and 1999, respectively (see Note 4). This instrument has
been included in diluted earnings per share for the three and six months ended
June 30, 1999 and for the three months ended June 30, 2000 because its effect
would be dilutive. A reconciliation of weighted-average shares outstanding and
net income from basic to diluted for the three and six months ended June 30,
2000 and 1999 is as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted-average shares outstanding - Basic ...... 23,388,175 22,931,602 23,340,298 22,862,843
Dilutive effect of convertible debt instrument ... 500,000 750,000 - 750,000
Dilutive effect of stock options ................. 1,044,855 1,633,622 1,148,993 1,628,034
---------- ---------- ---------- ----------
Weighted-average shares outstanding - Diluted .... 24,933,030 25,315,224 24,489,291 25,240,877
========== ========== ========== ==========
Net income as reported ........................... $ 7.7 $ 7.7 $ 8.2 $ 11.0
Addback of interest expense
related to convertible debt, net of tax .......... 0.1 0.2 - 0.3
---------- ---------- ---------- ----------
Net income for diluted earnings per share ........ $ 7.8 $ 7.9 $ 8.2 $ 11.3
========== ========== ========== ==========
</TABLE>
7
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIESNOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(unaudited)
NOTE 7 - 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 and six months ended June 30, 2000 and 1999 (in millions):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net product sales:
Synvisc (-Registered Trademark-):
United States ......... $ 15.8 $ 13.3 $ 27.6 $ 25.9
Rest of the world ..... 3.6 3.8 7.4 7.0
All other products ....... 0.6 1.0 1.5 1.7
-------- -------- -------- --------
Total product sales ...... $ 20.0 $ 18.1 $ 36.5 $ 34.6
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Identifiable assets (in millions):
United States ...................... $ 100.3 $ 89.8
Rest of the world .................. 10.0 9.2
-------- --------
Total assets ....................... $ 110.3 $ 99.0
======== ========
</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 Tradmark-
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 totaled
$0.4 million through June 30, 2000. The Company disagrees with Jarcho's claims
and does not believe that Jarcho is owed any royalties on 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, 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.
NOTE 10 - PROPOSED MERGER
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, notwithstanding elections made by Biomatrix shareholders,
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.
9
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 10 - PROPOSED MERGER (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 time when the registration statement
on Form S-4 was filed by Genzyme Corporation, the Genzyme Biosurgery division is
expected to have approximately 35.4 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 36%
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 has granted Genzyme an option to purchase 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 compensation expense in its
financial statements with respect to the immediate acceleration of the options
of the executive and non-employee directors at the modification date. The
Company will record additional compensation expense for any unvested options
that will accelerate 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.
10
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 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
which could cause the results of operations and the financial position of the
Company to be materially adversely affected, 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, the
outcome of currently pending litigation, 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, as amended, for the year ended December 31,
1999 and the proxy statement filed as part of the Genzyme Corporation
registration statement on Form S-4, as amended on July 3, 2000. 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, 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.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
REVENUES. Total revenues for the three months ended June 30, 2000
were $27.2 million, representing an increase of $2.0 million or 8% over the
same period of the prior year. Net product sales for the three months ended
June 30, 2000 were $20.0 million, representing an increase of $1.9 million or
10% over the same period of 1999. This increase is primarily due to greater
sales of Synvisc-Registered Trademark- to the Company's marketing partner in
the United States which result from a greater than 100% increase in U.S.
end-user sales by our marketing partner over the same period of the prior
year. During the second quarter of 1999, Synvsic sales to our U.S. marketing
partner included an inventory build sufficient to support the advertising
campaign that was initiated in the second half of 1999. Product sales for the
three months ended June 30, 2000 of $20.0 million was comprised of $19.2
million from supply price revenues and $0.8 million from formula price
adjustment revenues. Product sales for the three months ended June 30, 1999
of $18.1 million was comprised of $17.7 million from supply price revenues
and $0.4 million from formula price adjustment revenues. The number of units
shipped and the average selling price per unit during the second quarter of
2000 was relatively consistent with the second quarter of 1999. Income from
licenses, royalties and research contracts for the three months ended June
30, 2000 and 1999 each included milestone payments of $7.0 million related to
achieving certain sales-related milestones. The milestone recognized in the
second quarter of 2000 related to our marketing partner in the United States
achieving $150 million of net sales of Synvsic on a rolling twelve month
basis, while the milestone recognized in the second quarter of 1999 related
to the same marketing partner achieving $100 million of net sales of Synvisc
in the United States. 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
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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 JUNE 30, 2000 AND 1999
(CONTINUED)
COSTS AND EXPENSES. Total costs and expenses were $14.9 million for the
three months ended June 30, 2000, representing an increase of $3.1 million or
26% over the same period of the prior year. Cost of goods sold for the second
quarter of 2000 and 1999 was $6.0 million and $5.2 million, respectively,
resulting in gross margins of 70% and 71%, respectively. This decrease in gross
margin percentage is a result of a higher proportion of unit shipments from our
US manufacturing facility which has unused capacity. Research and development
expenses were $2.7 million for the second quarter of 2000, representing an
increase of $0.7 million or 35% over the second quarter of 1999. The increase in
research and development expenses is primarily related to greater expenses
incurred for clinical trials of existing and pipeline products. Selling, general
and administrative expenses for the second quarter of 2000 were $6.2 million,
representing an increase of $1.6 million or 35%, over the second quarter of
1999. This increase is a result of higher market development costs related to
Synvisc, the increased scope of international operations and higher legal fees.
Selling, general and administrative expenses for the second quarter of 2000
included $0.8 million of merger related expenses, primarily legal costs
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
REVENUES. Total revenues for the six months ended June 30, 2000 were
$43.9 million, representing an increase of $2.1 million or 5% over the same
period of the prior year. Net product sales for the six months ended June 30,
2000 were $36.5 million, representing an increase of $1.9 million or 6% over the
same period of 1999. These increases were due to greater sales of Synvisc to the
Company's marketing partner in the United States which reflects the 71% increase
in end-user sales by this partner as compared to the comparable period of 1999.
During the first six months of 1999, Synvisc sales to our U.S. marketing partner
included an inventory build sufficient to support the advertising campaign that
was initiated in the second half of 1999. Product sales for the six months ended
June 30, 2000 of $36.5 million was comprised of $34.7 million from supply price
revenues and $1.8 million from formula price adjustment revenues. Product sales
for the six months ended June 30, 1999 of $34.6 million was comprised of $32.8
million from supply price revenues and $1.8 million from formula price
adjustment revenues. The number of units shipped and the average selling price
per unit during the first six months of 2000 was relatively consistent with the
first six months of 1999. Income from licenses, royalties and research contracts
for the six months ended June 30, 2000 and 1999 was $7.4 million and $7.2
million, respectively. The milestone recognized in 2000 related to our marketing
partner in the United States achieving $150 million of net sales on a rolling
twelve-month basis, while the milestone recognized in 1999 related to the same
marketing partner achieving $100 million of net sales in the United States. 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.
13
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(CONTINUED)
COSTS AND EXPENSES. Total costs and expenses were $31.0 million for the
six months ended June 30, 2000, representing an increase of $8.2 million or 36%
over the same period of the prior year. Cost of goods sold for the six months
ended June 30, 2000 and 1999 was $11.0 million and $10.1 million, respectively,
resulting in gross margins of 70% and 71%, respectively. This decrease in gross
margin percentage is a result of a higher proportion of unit shipments from our
US manufacturing facility which has unused capacity. Research and development
expenses were $5.3 million for the first six months of 2000, representing an
increase of $1.1 million or 26% over the comparable period in 1999. The increase
in research and development expenses is primarily related to increased clinical
expenses for existing and pipeline products. Selling, general and administrative
expenses for the first six months of 2000 were $14.7 million, representing an
increase of $6.2 million or 73% over the first six months of 1999. This increase
is due to $3.0 million of marketing expenses related to the Company's U.S.
advertising campaign for Synvisc, the increased scope of the Company's global
activities and $0.8 million of merger related expenses, primarily legal costs.
INCOME TAXES
The Company recorded federal and state tax provisions totaling $5.5
million and $7.7 million for the six months ended June 30, 2000 and 1999,
respectively. The consolidated effective tax rate for the first six months of
2000 was 40% as compared to 41% for the first six months of 1999.
As of June 30, 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.
The Company has provided a full valuation allowance on certain foreign-related
deferred tax assets due to their uncertainty of realization.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $37.4 million at June 30,
2000. Overall, the Company's cash position increased by $2.4 million during the
six months ended June 30, 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, and through June 30, 2000, 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.
For the six months ended June 30, 2000 the Company had positive cash
flows from operations of $2.9 million resulting principally from positive
operating results. During the six months ended June 30, 2000, the Company
invested $0.9 million in property, plant, and equipment for research and testing
equipment as well as for the continued completion of the exterior of the
Company's U.S. manufacturing plant. During July 2000, the Company received $7.0
million related to the license fee receivable that was outstanding on June 30,
2000, and as a result the Company had cash and cash equivalents of $48.0 million
as of July 31, 2000
14
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
PROPOSED MERGER
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, notwithstanding elections made by Biomatrix shareholders,
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 time when the registration statement
on Form S-4 was filed by Genzyme Corporation, the Genzyme Biosurgery division is
expected to have approximately 35.4 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.
15
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
PROPOSED MERGER (CONTINUED)
Certain officers of Biomatrix holding an aggregate of approximately 36%
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 has granted Genzyme an option to purchase 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 price
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 that will accelerate at the date on which an employee is
terminated. These amounts are subject to change based on the stock price at the
date of modification and based on the unvested shares subject to acceleration.
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, which was
most recently amended by SAB 101B on June 26, 2000 to delay the implementation
date until no later than their fourth 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.
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.
16
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LITIGATION
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.
17
<PAGE>
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
18
