<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN ISSUER PURSUANT TO RULE 13a - 16 AND 15d - 16 OF
THE SECURITIES EXCHANGE ACT OF 1934
APRIL 19, 2000 COMMISSION FILE NUMBER 001-11145
BIOVAIL CORPORATION
(TRANSLATION OF REGISTRANT'S NAME INTO ENGLISH)
2488 DUNWIN DRIVE, MISSISSAUGA, ONTARIO L5L 1J9, CANADA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (416) 285-6000
INDICATE BY CHECK MARK WHETHER THE REGISTRANT FILES OR WILL
FILE ANNUAL REPORTS UNDER COVER OF FORM 20-F OR FORM 40-F
FORM 20-F X FORM 40-F
--- ---
INDICATE BY CHECK MARK WHETHER FOR REGISTRANT BY FURNISHING THE INFORMATION
CONTAINED IN THIS FORM IS ALSO THEREBY FURNISHING THE INFORMATION TO THE
COMMISSION PURSUANT TO RULE 12g 3-2 (b) UNDER THE SECURITIES EXCHANGE ACT OF
1934.
YES NO X
--- ---
<PAGE>
BIOVAIL CORPORATION
Reporting issued to Canadian Securities Administrators:
a) Financial Statements
<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.
Biovail Corporation
April 19, 2000 By /s/ John R. Miszuk
-------------------------------------
John R. Miszuk
Vice President, Controller
<PAGE>
EXHIBIT INDEX
1.1 Financial Statements
5.1 Consent of Deloitte & Touche LLP
5.2 Acknowledgement of Ernst & Young LLP
5.3 Consent of Ernst & Young LLP
5.4 Consent of PricewaterhouseCoopers LLP
<PAGE>
Exhibit 1.1
-----------------------------
FINANCIAL STATEMENTS
-----------------------------
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
BIOVAIL CORPORATION
Report of Management...................................... F-2
Auditors' Report.......................................... F-3
Consolidated Balance Sheets as at December 31, 1999 and
1998.................................................... F-5
Consolidated Statements of Income and Retained Earnings
for the years ended December 31, 1999, 1998 and 1997.... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997........................ F-7
Notes to the Consolidated Financial Statements............ F-8
FUISZ TECHNOLOGIES LTD.
Report of Independent Accountants......................... F-35
Consolidated Balance Sheets............................... F-36
Consolidated Statements of Operations..................... F-37
Consolidated Statements of Stockholders' Equity........... F-38
Consolidated Statements of Cash Flows..................... F-39
Consolidated Statements of Comprehensive Loss............. F-40
Notes to Consolidated Financial Statements................ F-41
COMPILATION REPORT.......................................... F-63
COMMENTS FOR UNITED STATES READERS ON CANADIAN AND UNITED
STATES REPORTING DIFFERENCES.............................. F-63
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
Pro Forma Combined Statement of Operations for the year
ended December 31, 1999 (unaudited)..................... F-64
Notes to the Pro Forma Combined Financial Statements...... F-65
</TABLE>
F-1
<PAGE>
REPORT OF MANAGEMENT
The Company's management is responsible for preparing the accompanying
consolidated financial statements in conformity with accounting principles
generally accepted in Canada. The effect of the application of accounting
principles generally accepted in the United States is described in the notes to
consolidated financial statements. In preparing these consolidated financial
statements, management selects appropriate accounting policies and uses its
judgment and best estimates to report events and transactions as they occur.
Management has determined such amounts on a reasonable basis in order to ensure
that the financial statements are presented fairly, in all material respects.
Financial data included throughout this Annual Report is prepared on a basis
consistent with that of the financial statements.
The Company maintains a system of internal accounting controls designed to
provide reasonable assurance, at a reasonable cost, that assets are safeguarded
and that transactions are executed and recorded in accordance with the Company's
policies for doing business. This system is supported by written policies and
procedures for key business activities; the hiring of qualified, competent
staff; and by a continuous planning and monitoring program.
Ernst & Young LLP has been engaged by the Company's shareholders to audit
the consolidated financial statements. During the course of their audit,
Ernst & Young LLP reviewed the Company's system of internal controls to the
extent necessary to render their opinion on the consolidated financial
statements.
The Board of Directors is responsible for ensuring that management fulfills
its responsibility for financial reporting and is ultimately responsible for
reviewing and approving the financial statements. The Board carries out the
responsibility principally through its Audit Committee. The majority of the
members of the Audit Committee are outside Directors. The Committee considers,
for review by the Board of Directors and approval by the shareholders, the
engagement or reappointment of the external auditors. Ernst & Young LLP has full
and free access to the Audit Committee.
Management acknowledges its responsibility to provide financial information
that is representative of the Company's operations, is consistent and reliable,
and is relevant for the informed evaluation of the Company's activities.
<TABLE>
<S> <C>
/s/ EUGENE N. MELNYK /s/ KENNETH G. HOWLING
Eugene N. Melnyk Vice President, Finance
Chairman of the Board and Chief Financial Officer
</TABLE>
F-2
<PAGE>
AUDITORS' REPORT
To the Board of Directors of Biovail Corporation
We have audited the consolidated balance sheet of Biovail Corporation as at
December 31, 1999 and the consolidated statements of income and retained
earnings and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in Canada. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at December 31,
1999 and the results of its operations and its cash flows for the year then
ended in accordance with accounting principles generally accepted in Canada.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Chartered Accountants
Toronto, Canada,
February 29, 2000
F-3
<PAGE>
AUDITORS' REPORT
To the Board of Directors of BIOVAIL CORPORATION
We have audited the consolidated balance sheets of Biovail Corporation as at
December 31, 1998 and the consolidated statements of income and retained
earnings and cash flows for each of the years in the two year period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in Canada. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at December 31,
1998 and the results of its operations and its cash flows for each of the years
in the two year period ended December 31, 1998 in accordance with generally
accepted accounting principles in Canada.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Chartered Accountants
Toronto, Canada
May 14, 1999
F-4
<PAGE>
BIOVAIL CORPORATION
CONSOLIDATED BALANCE SHEETS
AS AT DECEMBER 31, 1999 AND 1998
(ALL DOLLAR AMOUNTS ARE EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents (Note 4)........................ $178,086 $ 78,279
Short-term investments (Note 5)........................... 65,893 --
Accounts receivable (Note 6).............................. 60,571 42,768
Inventories (Note 7)...................................... 12,701 10,542
Assets held for disposal (Note 3)......................... 20,000 --
Executive stock purchase plan loans (Note 8).............. -- 2,924
Deposits and prepaid expenses............................. 3,172 3,357
-------- --------
340,423 137,870
LONG-TERM INVESTMENTS (Note 9).............................. 12 10,055
CAPITAL ASSETS, net (Note 10)............................... 45,300 23,677
OTHER ASSETS, net (Note 11)................................. 249,402 28,317
-------- --------
$635,137 $199,919
======== ========
LIABILITIES
CURRENT
Accounts payable.......................................... $ 22,685 $ 12,244
Accrued liabilities (Note 12)............................. 31,107 4,129
Income taxes payable...................................... 3,585 1,004
Customer prepayments...................................... 4,962 4,516
Current portion of long-term debt (Note 13)............... 12,016 653
-------- --------
74,355 22,546
LONG-TERM DEBT (Note 13).................................... 125,488 126,182
-------- --------
199,843 148,728
-------- --------
SHAREHOLDERS' EQUITY
Share capital (Note 14)................................... 368,538 19,428
Warrants (Note 14)........................................ 8,244 8,244
Retained earnings......................................... 57,252 24,748
Cumulative translation adjustment......................... 1,260 (1,229)
-------- --------
435,294 51,191
-------- --------
$635,137 $199,919
======== ========
Commitments and contingencies (Note 20)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
On behalf of the Board:
<TABLE>
<S> <C>
/s/ EUGENE N. MELNYK /s/ BRUCE D. BRYDON
------------------------------------------- -------------------------------------------
Eugene N. Melnyk Bruce D. Brydon
CHAIRMAN OF THE BOARD DIRECTOR AND CHIEF EXECUTIVE OFFICER
</TABLE>
F-5
<PAGE>
BIOVAIL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(ALL DOLLAR AMOUNTS EXCEPT PER SHARE DATA ARE EXPRESSED IN THOUSANDS OF
U.S. DOLLARS)
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
REVENUE
Product sales............................................. $ 99,526 $ 69,154 $ 50,333
Research and development.................................. 52,260 32,070 19,559
Royalty and licensing..................................... 24,706 11,612 12,487
---------- ---------- ----------
176,492 112,836 82,379
---------- ---------- ----------
EXPENSES
Cost of goods sold........................................ 35,078 28,593 16,471
Research and development.................................. 33,130 17,490 14,386
Selling, general and administrative....................... 29,602 17,450 13,831
---------- ---------- ----------
97,810 63,533 44,688
---------- ---------- ----------
OPERATING INCOME............................................ 78,682 49,303 37,691
EQUITY LOSS (Note 3)........................................ (1,618) -- --
INTEREST EXPENSE, net (Note 13)............................. (9,152) (1,702) (351)
GAIN ON DISPOSAL OF LONG-TERM INVESTMENTS, net.............. 1,948 -- --
---------- ---------- ----------
INCOME BEFORE INCOME TAXES AND GOODWILL AMORTIZATION........ 69,860 47,601 37,340
PROVISION FOR INCOME TAXES (Note 16)........................ 4,215 2,024 1,941
---------- ---------- ----------
INCOME BEFORE GOODWILL AMORTIZATION......................... 65,645 45,577 35,399
GOODWILL AMORTIZATION, net of tax........................... 3,165 158 158
---------- ---------- ----------
NET INCOME.................................................. 62,480 45,419 35,241
RETAINED EARNINGS, BEGINNING OF YEAR........................ 24,748 49,709 22,712
EXCESS OF COST OF COMMON SHARES ACQUIRED OVER THE STATED
CAPITAL THEREOF (Note 14)................................. (29,976) (70,380) --
CONTRIBUTION TO INTELLIGENT POLYMERS LIMITED (Note 14)...... -- -- (8,244)
---------- ---------- ----------
RETAINED EARNINGS, END OF YEAR.............................. $ 57,252 $ 24,748 $ 49,709
========== ========== ==========
EARNINGS PER SHARE BEFORE GOODWILL AMORTIZATION............. $ 1.28 $ 0.86 $ 0.69
GOODWILL AMORTIZATION PER SHARE............................. 0.06 0.01 --
---------- ---------- ----------
EARNINGS PER SHARE (Note 15)................................ $ 1.22 $ 0.85 $ 0.69
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
(Note 15)................................................. 51,271,000 53,282,000 51,212,000
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
BIOVAIL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(ALL DOLLAR AMOUNTS ARE EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
NET INFLOW (OUTFLOW) OF CASH RELATED TO THE FOLLOWING
ACTIVITIES
OPERATING
Net income for the year................................... $ 62,480 $ 45,419 $ 35,241
Depreciation and amortization............................. 10,140 4,957 3,157
Gain on disposal of long-term investments, net
(Note 9)................................................ (1,948) -- --
Equity loss (Note 3)...................................... 1,618 -- --
-------- -------- --------
72,290 50,376 38,398
Change in non-cash operating items (Note 18)................ 8,723 3,197 (34,082)
-------- -------- --------
81,013 53,573 4,316
-------- -------- --------
INVESTING
Additions to capital assets, net.......................... (7,784) (3,744) (2,664)
Repayment (advance) of executive stock purchase plan loans
(Note 8)................................................ 3,100 10 (421)
Acquisition of product rights (Note 11)................... (38,340) (4,000) --
Acquisition of Fuisz Technologies Ltd., net of cash
acquired (Note 3)....................................... (43,720) -- --
Additions to short-term investments, net.................. (54,665) -- --
Decrease (increase) in other assets....................... 25 (176) (86)
Disposal (acquisition) of long-term investments
(Note 9)................................................ 11,991 (10,043) (12)
Acquisition of royalty interest........................... -- (15,000) --
-------- -------- --------
(129,393) (32,953) (3,183)
-------- -------- --------
FINANCING
Repurchase of share capital (Note 14)..................... (30,593) (72,141) --
Issuance of share capital (Note 14)....................... 253,721 3,929 4,464
Repurchase of subordinated convertible debentures......... (74,545) -- --
Reduction in other long-term debt......................... (667) (21,838) (2,202)
Increase in other long-term debt.......................... -- 19,143 373
Issuance of U.S. Senior Notes, net of financing costs..... -- 120,400 --
-------- -------- --------
147,916 49,493 2,635
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... 271 (109) (19)
-------- -------- --------
INCREASE IN CASH AND CASH EQUIVALENTS....................... 99,807 70,004 3,749
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 78,279 8,275 4,526
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $178,086 $ 78,279 $ 8,275
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE>
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
1. GOVERNING STATUTE AND NATURE OF OPERATIONS
In December 1999, the shareholders of Biovail Corporation International
approved a change in the name of the company to Biovail Corporation.
Biovail Corporation ("Biovail" or the "Company") is incorporated under the
laws of the province of Ontario. The Company is an international
full-service pharmaceutical company engaged in the formulation, clinical
testing, registration and manufacture of drug products utilizing advanced
drug delivery technologies.
2. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in Canada. The accounting
principles differ in certain respects from generally accepted accounting
principles in the US as described in Note 23.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and those of all its subsidiaries. All significant intercompany transactions
and balances have been eliminated.
USE OF ESTIMATES
In preparing the Company's financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets
and liabilities, and the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of all financial assets and liabilities, other than
long-term debt, approximates their carrying values at December 31, 1999 and
1998. Fair value of a financial instrument is defined as the amount at which
the instrument could be exchanged in a current transaction between willing
parties. The fair value of long-term debt is disclosed in Note 13.
REVENUE RECOGNITION
Research and development revenue represents fees earned from third party
customers for services rendered or attainment of development and regulatory
approval milestones, with respect to contract research and product
development done on their behalf.
Revenue from product sales is recognized when the product is shipped to the
customer.
Royalty revenue is recognized on an accrual basis in accordance with
contractual agreements with third parties and is net of amounts payable to
sublicensees.
Licensing revenue is recognized at the date the license is granted unless
there are specific events which must be completed under the terms of the
licensing agreement in which case a portion of the revenue is deferred and
recognized upon the completion of each specific event.
F-8
<PAGE>
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT
The Company's policy is to expense as incurred all research and product
development costs, net of investment tax credits, related to both costs
incurred on its own behalf and on behalf of its third party customers.
Technology acquired from others, which is still in research and development,
is deferred and amortized over management's estimate of its useful life.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less when purchased.
SHORT-TERM INVESTMENTS
Short-term investments include highly liquid investments with original
maturities greater than three months but less than one year when purchased.
Short-term investments are carried at cost which approximates fair value.
INVENTORIES
Inventories are comprised of raw materials, work in process, and finished
goods which are valued at the lower of cost and replacement cost. Cost is
determined on the first-in, first-out basis.
LONG-TERM INVESTMENTS
Long-term investments are reported at cost less any provision which may be
required to recognize a permanent decline in value.
CAPITAL ASSETS AND RELATED DEPRECIATION
Capital assets are recorded at cost less accumulated depreciation. Annual
rates applied to depreciate the cost of capital assets over their estimated
useful lives using the straight line basis are as follows:
<TABLE>
<S> <C>
Buildings........................... 25 years
Machinery and equipment............. 5-10 years
Other equipment..................... 3-5 years
Leasehold improvements.............. term of lease
</TABLE>
F-9
<PAGE>
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER ASSETS
Other assets are amortized on a straight line basis as follows:
<TABLE>
<S> <C>
Goodwill............................ 20 years
Royalty interests................... 15 years
Acquired in-process research and 15 years
development.......................
Core technology..................... 15 years
Workforce........................... 10 years
Product rights...................... 8-15 years
Deferred financing costs............ term of debt
</TABLE>
Goodwill and product rights are evaluated periodically, based on estimated
cash flows computed on a discounted basis and if conditions warrant an
impairment valuation is provided.
Advertising and promotion costs related to new product launches are deferred
and amortized over a one year period commencing at launch date.
REPORTING CURRENCY AND FOREIGN CURRENCY TRANSLATIONS
REPORTING CURRENCY
The Company reports its financial statements in U.S. dollars, while the
currency of measurement for the Company's operations varies depending upon
location.
FOREIGN CURRENCY TRANSACTIONS
Monetary assets and liabilities are translated at the rate of exchange
prevailing at the balance sheet date. Non-monetary assets and liabilities
are translated at historic rates. Revenue and expenses are translated at the
average rate of exchange for the year. Exchange gains and losses are
included in earnings.
SELF-SUSTAINING FOREIGN SUBSIDIARIES
Assets and liabilities of self-sustaining foreign subsidiaries are
translated at the rate of exchange in effect at the balance sheet date.
Revenue and expenses are translated at the average rate of exchange for the
year. Gains or losses arising on the translation of financial statements of
self-sustaining foreign subsidiaries are deferred and included as a separate
component of shareholders' equity. The net change in the cumulative
translation adjustment balance in the years presented is primarily due to
fluctuations in the exchange rate with respect to the Swiss franc, Irish
punt and Canadian dollar.
CUSTOMER PREPAYMENTS
Amounts received from customers as prepayments for goods or services to be
provided in the future are recorded on the balance sheet as customer
prepayments. When the goods or services are provided at a future date, they
are billed to the customer at contractual rates.
F-10
<PAGE>
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK OPTION PLAN
The Company has a stock option plan which is described in Note 14. No
compensation expense is recognized for this plan when stock options are
issued to employees. Any consideration paid by employees on the exercise of
stock options is credited to share capital.
INCOME TAXES
The Company follows the deferral method of income tax allocation.
1998 AND 1997 FIGURES
Goodwill amortization and certain other figures for 1998 and 1997 have been
reclassified to conform to the 1999 presentation.
3. ACQUISITION
(i) DESCRIPTION OF ACQUISITION
On November 12, 1999, the Company completed the acquisition of Fuisz
Technologies Ltd. ("Fuisz") for $177,897,000 including costs relating to the
acquisition. Fuisz is an international company that is engaged in the
development, manufacturing and commercialization of a wide range of drug
delivery, nutraceutical and food ingredient products utilizing its
proprietary CEFORM-Registered Trademark-, SHEARFORM-Registered Trademark-
and other drug delivery technologies (the "Fuisz Technology").
Fuisz was acquired through a series of transactions which began in July 1999
with the purchase of certain Fuisz common stock and the announcement on
July 25, 1999 that the Company had entered into a merger agreement to
acquire the remaining common stock of Fuisz in a two-stage transaction
consisting of a cash tender offer and a stock-for-stock merger.
By September 4, 1999, the Company had completed the acquisition of 49% of
Fuisz's outstanding common stock for cash consideration of $75,565,000
pursuant to the cash tender offer and other purchase transactions. On
November 12, 1999, Biovail acquired the remaining common stock of Fuisz by
issuing 1,544,155 pre-split common shares of the Company, which includes
44,155 pre-split common shares to be issued (see Note 14) with a fair value
of $96,006,000. Certain of these common shares are yet to be issued. The
value of the common shares issued by the Company was determined by reference
to the average market price of the Company's stock before and after the
acquisition on November 12, 1999 and after giving effect to normal costs of
issue of shares.
(ii) PURCHASE PRICE ALLOCATION
The Company accounted for the acquisition of Fuisz as a step acquisition
using the purchase method of accounting. The Company has recognized in these
consolidated financial statements its 49% equity interest in the results of
Fuisz for the period from September 4, 1999, the date it acquired
significant influence, to November 12, 1999, the date of acquisition of
control. The assets, liabilities, revenues and expenses of Fuisz have been
included in these consolidated financial statements from November 12, 1999.
F-11
<PAGE>
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
3. ACQUISITION (CONTINUED)
The purchase price of $177,897,000 which includes acquisition costs of
$6,326,000 was allocated as follows:
<TABLE>
<S> <C>
Acquired in-process research and development................ $137,470
Current assets.............................................. 60,617
Goodwill.................................................... 37,224
Assets held for disposal.................................... 20,000
Capital assets.............................................. 16,893
Core technology............................................. 11,185
Workforce................................................... 2,041
Other assets................................................ 358
Current liabilities......................................... (21,820)
Debt assumed................................................ (86,071)
--------
Purchase price.............................................. $177,897
========
</TABLE>
(iii) ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
The Fuisz Technology involves drug delivery platforms and the application of
such platforms to specific product development programs. At the date of
acquisition, Fuisz was involved in seventeen product development projects
for a number of pharmaceutical companies which were in various stages of
completion. With the exception of certain nutraceutical products, the Fuisz
Technology has not been employed in any product which has received
regulatory approval to date and was considered to have no alternative future
use other than for the therapeutic indications for which it was in
development or which may be developed. Accordingly, technological
feasibility of the products related to the Fuisz Technology was not
established at the acquisition date and was considered to be in-process
research and development.
Two of the projects have been submitted for approval with the applicable
regulatory authorities. One project was submitted to the Food and Drug
Administration ("FDA") in the US in June 1998 and the other was submitted to
the Medical Control Agency in the UK in April 1998. The remaining fifteen
projects are expected to be completed in accordance with Fuisz's contractual
obligations with the relevant customers over the next eighteen months.
The development projects were estimated to be 65% complete on average,
estimated peak sales were approximately $942 million per annum, estimated
costs to completion of these products were approximately $9.5 million and
discount rates of 28% were used. The average time to full completion of the
remaining work for the projects in development was estimated to be
approximately twelve months. The work remaining to complete the products in
development involved on-going formulation, bioequivalency, safety and
efficacy studies and the submission of regulatory filings to seek marketing
approvals. The principal risks relating to the acquired technology were the
outcomes of such clinical trials and Biovail's ability to negotiate
acceptable commercial terms with the pharmaceutical companies developing the
products. As pharmaceutical products cannot be marketed without regulatory
approvals, the Company will not receive any benefits unless regulatory
approval is obtained.
If the projects currently under development are successful, the Company
expects that the Fuisz Technology will have extended life cycles. Because
the Fuisz Technology is based on drug delivery, the technology can be
applied to numerous products. Although the risk of technological feasibility
is always present in each
F-12
<PAGE>
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
3. ACQUISITION (CONTINUED)
product, the Company's strategy is to exploit the technology through
numerous product developments which the Company expects will occur over at
least the next fifteen years.
(iv) ASSETS HELD FOR DISPOSAL
The Company determined, as part of its evaluation of the purchase, that
certain operations of Fuisz were not strategic to Biovail's business plans
and accordingly should be sold.
Prior to the completion of the share exchange, on October 22, 1999, Fuisz
agreed to sell all of the issued shares of three of its wholly owned
European subsidiaries for proceeds of $28,700,000. Further, Fuisz agreed to
assign all of the rights, privileges and advantages from its Cebutid
trademark to the purchaser of its European subsidiaries for proceeds of
$10,273,000. No gain or loss was recognized by the Company on these
transactions as these subsidiaries were included in the purchase price
allocation at their fair value when Biovail acquired its 49% interest in
Fuisz.
On December 1, 1999, Biovail entered into an agreement to sell all of the
issued share capital of Clonmel Healthcare Limited ("Clonmel"), a
pharmaceutical and antibiotic manufacturer and distributor, for proceeds of
$20,000,000. The sale is expected to close in early 2000. No gain or loss
was recognized by the Company on this transaction as this subsidiary was
included at fair value in the purchase price allocation at November 12,
1999.
(v) PRO FORMA INFORMATION
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and Fuisz as if the
acquisition, disposals and repayment of convertible subordinated debentures
had occurred January 1, 1998 (a full year of goodwill amortization and
interest cost is included for both 1998 and 1999).
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Total revenue............................................... $188,418 $125,835
Net income (loss)........................................... $ 21,892 $ (3,089)
Earnings (loss) per share (basic)........................... $ 0.39 $ (0.05)
</TABLE>
These unaudited pro forma results have been prepared for comparative
purposes only. They do not purport to be indicative of the results of
operations which actually would have resulted had Fuisz been included in the
Company's consolidated financial statements as of January 1, 1998. In
addition, they do not purport to be indicative of future consolidated
results of operations of the Company.
4. CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Cash and bank certificates of deposit..................... $ 38,776 $37,160
Corporate debt securities................................. 139,310 41,119
-------- -------
$178,086 $78,279
======== =======
Corporate debt securities are carried at cost which
approximates fair value.
</TABLE>
F-13
<PAGE>
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
5. SHORT-TERM INVESTMENTS
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Corporate debt securities.................................. $54,635 $ --
Restricted cash............................................ 11,258 --
------- -------
$65,893 $ --
======= =======
</TABLE>
Restricted cash is pledged as collateral against an IRL 8,452,000 bank loan
in connection with the 1997 acquisition of Clonmel by Fuisz. Under the terms
of the sale of Clonmel, which is expected to close in early 2000, the
Company will be required to repay the loan. Accordingly, the restricted cash
is shown as a current asset.
6. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Trade and royalties........................................ $53,634 $36,638
Other receivables.......................................... 6,937 2,672
Insurance claims recoverable............................... -- 3,458
------- -------
$60,571 $42,768
======= =======
</TABLE>
The Company performs ongoing credit evaluations of customers and generally
does not require collateral. Allowances are maintained for potential credit
losses. At December 31, 1999, three customers accounted for 82% of trade and
royalties receivable. At December 31, 1998, four customers accounted for 60%
of trade and royalties receivables. The Company believes that there is no
unusual exposure associated with the collection of these receivables.
Insurance claims recoverable related to business interruption losses
resulting from insurance damage in Puerto Rico in September 1998.
7. INVENTORIES
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Raw materials.............................................. $ 5,149 $ 4,759
Work in process............................................ 4,258 5,478
Finished goods............................................. 3,294 305
------- -------
$12,701 $10,542
======= =======
</TABLE>
8. EXECUTIVE STOCK PURCHASE PLAN LOANS
At December 31, 1998, Executive Stock Purchase Plan ("ESPP") loans of
$2,924,000, made to finance the acquisition of shares of the Company on the
open market by executive officers, were outstanding. The ESPP loans were
secured by shares of the Company owned by executive officers, and bore
interest at 1/4% over bank prime rate, equal to the Company's rate for
borrowings. The loans were repaid during 1999.
F-14
<PAGE>
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
9. LONG-TERM INVESTMENTS
Long-term investments is comprised of 12,000 special shares of Intelligent
Polymers Limited ("IPL"), acquired in 1998. These shares have no entitlement
to profits of IPL.
During 1999 the Company sold certain long-term investments, which had been
acquired in 1998, for a net gain of $1,948,000.
10. CAPITAL ASSETS
<TABLE>
<CAPTION>
1999 1998
----------------------- -----------------------
ACCUMULATED ACCUMULATED
COST DEPRECIATION COST DEPRECIATION
-------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Land................................................ $ 1,270 $ -- $ 1,220 $ --
Buildings........................................... 17,423 3,724 14,972 2,864
Machinery and equipment............................. 24,914 7,366 13,218 4,874
Other equipment and leasehold improvements.......... 15,873 3,090 4,061 2,056
------- ------- ------- ------
59,480 $14,180 33,471 $9,794
======= ======
Less accumulated depreciation....................... 14,180 9,794
------- -------
$45,300 $23,677
======= =======
</TABLE>
11. OTHER ASSETS
The following table summarizes other assets net of accumulated amortization.
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Goodwill.................................................... $ 38,514 $ 3,277
Acquired in-process research and development................ 136,215 --
Core technology and workforce............................... 13,096 --
Product rights and royalty interests........................ 56,945 20,522
Other intangibles........................................... 4,632 4,518
-------- -------
$249,402 $28,317
======== =======
</TABLE>
Amortization amounted to $6,002,000, $1,883,000, and $441,000 in 1999, 1998
and 1997, respectively.
In December 1999, the Company acquired from IPL the product rights to IPL's
generic version of Procardia XL for $25,000,000.
In October 1999, the Company acquired from Elan Corporation plc ("Elan") the
exclusive marketing rights for the US to Elan's generic version of Adalat
CC. The product will be marketed by Teva Pharmaceuticals ("Teva"). The net
cost to the Company was $9,000,000, which will be amortized over the life of
the product.
In November 1998, the Company completed the issue of U.S. Dollar Senior
Notes, due 2005, for gross proceeds of $125,000,000. The expenses associated
with this transaction have been deferred and are being amortized on a
straight-line basis over the seven-year term of the debt.
In March 1998, the Company completed the acquisition of the royalty interest
held by Galephar Puerto Rico, Inc. Limited ("Galephar") in certain of the
Company's products. The Company paid $15,000,000 to Galephar in full
satisfaction of the Company's royalty obligations on the sales of
Tiazac-Registered Trademark- and the Company's generic controlled release
version of Cardizem CD in the US and Canada. In September 1998, the Company
acquired from Centocor, Inc. the exclusive distribution rights in Canada for
Retavase for $4,000,000.
F-15
<PAGE>
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
12. ACCRUED LIABILITIES
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Restructuring costs......................................... $13,597 $ --
Employee costs.............................................. 4,528 836
Professional fees........................................... 2,163 368
Interest.................................................... 1,736 1,715
Royalties................................................... 1,331 594
Product rights.............................................. 1,524 --
Other....................................................... 6,228 616
------- ------
$31,107 $4,129
======= ======
</TABLE>
Restructuring costs accrued in relation to the acquisition of Fuisz
consisted of $11.3 million for the settlement of contracts, $1.5 million for
the termination of employees and $1.3 million of other costs. These costs
were included in the determination of the net assets of Fuisz acquired.
Since the date of acquisition, approximately $534,000 of these costs have
been settled.
Employee costs include $2.5 million of severance pay owing to certain Fuisz
employees terminated prior to the acquisition by Biovail.
13. LONG-TERM DEBT
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
NON-INTEREST BEARING GOVERNMENT LOAN
Payable to Western Economic Diversification, a Canadian
federal government agency. This loan is repayable on a
semi-annual installment basis of $381,000 per
installment with the final payment due in 2001.......... $ 1,250 $ 1,835
U.S. DOLLAR SENIOR NOTES, DUE 2005
Issued under an indenture dated November 16, 1998, the
U.S. Dollar Senior Notes are general unsecured senior
obligations of Biovail Corporation bearing interest at
10 7/8%, payable semi-annually in arrears on May 15 and
November 15 of each year. The U.S. Dollar Senior Notes
mature on November 15, 2005............................. 125,000 125,000
TERM BANK LOAN
Term loan payable of IRL 8,452,000 and bears interest at
the bank's reference rate plus margin (aggregate rate
4.13% at December 31, 1999). This loan is collateralized
by a cash balance of $11,258,000 and charges over the
assets of Clonmel....................................... 10,799 --
OTHER DEBT.................................................. 455 --
-------- --------
137,504 126,835
Less current portion........................................ 12,016 653
-------- --------
$125,488 $126,182
======== ========
</TABLE>
F-16
<PAGE>
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
13. LONG-TERM DEBT (CONTINUED)
On or after November 15, 2002, the U.S. Dollar Senior Notes will be
redeemable at the option of the Company at the following prices if redeemed
during the twelve months beginning November of the years indicated below:
<TABLE>
<CAPTION>
PERCENTAGE OF PRINCIPAL
YEAR OUTSTANDING
---- -----------------------
<S> <C>
2002.............................................. 105.438%
2003.............................................. 102.719%
2004.............................................. 100.000%
</TABLE>
At any time on or before November 15, 2001, the Company may, at its option,
redeem up to a maximum of 35% of the aggregate principal amount of the U.S.
Dollar Senior Notes with the net cash proceeds of one or more equity
offerings or the net cash proceeds received upon the exercise of warrants to
purchase capital stock of the Company, at a redemption price equal to
110.875% of the principal amount thereof.
At December 31, 1999, the fair value of the U.S. Dollar Senior Notes
approximates its carrying value of $128,388,000. The fair value of the
remaining debt approximates its carrying value.
Interest expense on long-term debt amounted to $13,594,000, $2,358,000 and
$199,000 in the years ended December 31, 1999, 1998 and 1997, respectively.
Principal repayments on long-term debt are as follows:
<TABLE>
<S> <C>
2000....................................................... $ 12,016
2001....................................................... 488
2002....................................................... --
2003....................................................... --
2004....................................................... --
2005....................................................... 125,000
--------
$137,504
========
</TABLE>
Subsequent to the year end, the Company announced a tender for any and all
its outstanding 10 7/8% U.S. Dollar Senior Notes at a redemption price of
110.951% of the principal amount. The initial expiration date for the tender
offer is March 20, 2000. Holders who irrevocably agree to tender on or prior
to March 6, 2000, will receive an additional 2% of the principal amount.
These U.S. Dollar Senior Notes have been classified as long term debt based
on the conditions that existed at the balance sheet date.
14. SHARE CAPITAL
AUTHORIZED AND ISSUED SHARES
In December, 1999, the shareholders of the Company authorized a 2 for 1
stock split to the issued common shares and an increase in authorized shares
from 120,000,000 common shares to an unlimited number of common shares
without par value. All share and per share amounts in these financial
statements have been retroactively adjusted to give effect to the 2 for 1
stock split.
In October 1999, the Company completed a share offering issuing 10,180,000
common shares for gross proceeds of $259 million less costs of $13.5
million.
F-17
<PAGE>
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
14. SHARE CAPITAL (CONTINUED)
By resolutions of the Board of Directors dated August 11, 1998, and
November 16, 1998, the Company implemented a stock repurchase program under
which the Company was enabled to purchase up to 10% of its issued and
outstanding common shares. Up to December 31, 1998, 4,543,800 common shares
had been repurchased under this plan at a cost of $72,141,000. The excess of
the cost of the common shares acquired over the stated capital thereof,
totaling $70,380,000, was charged to retained earnings. In 1999, 1,465,400
common shares were repurchased at a cost of $30,593,000. The excess of the
cost of the common shares acquired over the stated capital thereof, totaling
$29,976,000 was charged to retained earnings.
<TABLE>
<CAPTION>
NUMBER OF SHARES AMOUNT
---------------- --------
<S> <C> <C>
(000'S)
Balance, December 31, 1996.................................. 50,854 $ 14,614
Issued on the exercise of options........................... 2,466 4,434
Issued under Employee Stock Purchase Plan................... 2 30
Effect of exchange rate change.............................. -- (613)
------ --------
Balance, December 31, 1997.................................. 53,322 18,465
Issued on the exercise of options........................... 940 3,886
Issued under Employee Stock Purchase Plan................... 4 43
Cancelled under stock repurchase program.................... (4,544) (1,761)
Effect of exchange rate change.............................. -- (1,205)
------ --------
Balance, December 31, 1998.................................. 49,722 19,428
Issued on the exercise of options........................... 668 7,629
Issued under Employee Stock Purchase Plan................... 3 40
Cancelled under stock repurchase program.................... (1,465) (617)
Issued pursuant to equity offering.......................... 10,180 246,052
Issued on Fuisz acquisition(i).............................. 3,088 96,006
------ --------
Balance, December 31, 1999.................................. 62,196 $368,538
====== ========
</TABLE>
----------------------------
(i) Included in the issued and outstanding shares are 88,310 shares to be
issued following the effectiveness of a registration statement with
respect to the Fuisz acquisition.
STOCK OPTION PLAN
Under the Company's Stock Option Plan, as amended, (the "Plan") established
in 1993 and approved by the shareholders at the Special Meeting held on
March 28, 1994, the Company may grant to directors, officers, key employees,
consultants and advisors, options to purchase common shares of the Company.
The purpose of the Plan is to provide long-term incentives and rewards to
certain of the Company's directors, officers, employees, consultants and
advisors. The aggregate number of shares reserved for issuance under the
Plan taking into consideration the 2 for 1 stock split shall not exceed
14,000,000 common shares. The number of shares reserved for issuance to any
one person under the Plan together with shares which that person may acquire
under any similar plan of the Company may not exceed 5% of the total issued
and outstanding common shares. Under the Plan, the Company designates the
maximum number of shares that are subject to an option. The exercise price
per share of an option is the closing market price at which the shares are
traded on the New York Stock Exchange on the day prior to the date the
option is granted, or if not so traded, the average between the closing bid
and ask prices thereof as reported for that day.
F-18
<PAGE>
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
14. SHARE CAPITAL (CONTINUED)
The options vesting terms vary as per the type of options. Management
options granted prior to 1999 vest as to one third each year commencing on
the first anniversary of the grant and will expire on a date not later than
five years from the date of the grant.
Options granted in 1999 vest as follows: Executive options vest pursuant to
the terms and conditions of the employment agreement, special options vest
on the second anniversary date of the grant; management options vest as to
one fourth each year commencing on the first anniversary of the grant and
expire not later than seven years from the date of the grant.
The following table summarizes the Company's stock option activity for the
three years ended December 31, 1999 taking into effect the 2 for 1 stock
split in December 1999:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED AVERAGE
(000'S) EXERCISE PRICE
-------- ----------------
<S> <C> <C>
Outstanding Balance, December 31, 1996...................... 5,502 $ 6.57
Granted..................................................... 2,358 15.43
Exercised................................................... (2,466) 1.80
Cancelled................................................... (354) 13.15
------ ------
Outstanding Balance, December 31, 1997...................... 5,040 12.57
Granted..................................................... 602 17.57
Exercised................................................... (940) 4.13
Cancelled................................................... (280) 15.34
------ ------
Outstanding Balance, December 31, 1998...................... 4,422 13.82
Granted..................................................... 1,684 37.15
Exercised................................................... (668) 11.42
Cancelled................................................... (214) 14.75
------ ------
Outstanding Balance, December 31, 1999...................... 5,224 $21.61
====== ======
Exercisable at December 31, 1999............................ 2,367 $13.22
====== ======
</TABLE>
The following table summarizes the information about options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING AVERAGE CONTRACTUAL WEIGHTED
PRICE RANGE OPTIONS LIFE REMAINING AVERAGE PRICE
----------- ----------- ------------------- -------------
<S> <C> <C> <C>
(000'S)
$10 - $15............................................ 1,310 1.4 $11.22
$15 - $20............................................ 2,582 3.2 $16.42
$20 - $30............................................ 170 5.5 $26.57
$30 - $45............................................ 1,162 6.8 $44.14
-----
5,224 3.6 $21.61
=====
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan ("EPP") was approved by the
shareholders at the Special Shareholder Meeting held on January 1, 1996 and
was established in 1996. The purpose of the EPP is to provide a convenient
method for full-time employees of the Company to participate in the share
ownership
F-19
<PAGE>
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
14. SHARE CAPITAL (CONTINUED)
of the Company or to increase their share ownership in the Company via
payroll or contractual deduction. Directors, senior officers or insiders of
the Company are not eligible to participate in the EPP. The aggregate number
of shares reserved for issuance under the Plan, taking into consideration
the 2 for 1 stock split in December 1999, shall not exceed 600,000 common
shares. At the discretion of a committee of the Board of Directors that will
administer the EPP, the Company may issue directly from treasury or purchase
shares in the market from time to time to satisfy the obligation under the
EPP. A participant may authorize payroll or contractual deduction up to a
maximum of 10% of the base salary or remuneration to be received during any
purchase period. The purchase price shall be 90% of the fair market value
per share of stock on the date on which the eligible period ends.
WARRANTS
In October, 1997, IPL completed a public offering of 3,737,500 units. Each
unit comprised one common share of IPL and one warrant to purchase two post
split common shares of the Company. The net proceeds to IPL of the offering
before offering expenses amounted to approximately $69,500,000. On
September 30, 1999, the units separated and the IPL common shares and the
Company's warrants now trade independently of each other. The warrants are
exercisable at a per share price of $20.00 from October 1, 1999 until
September 30, 2002.
In 1997, the Company recorded a credit to equity of $8,244,000 equal to the
proceeds attributable to the warrants included in the offering as determined
at the time of their issuance and recorded a charge to retained earnings to
reflect the equivalent contributions to IPL.
15. EARNINGS PER SHARE
Earnings per share, for all years presented, has been calculated using the
weighted average number of common shares outstanding during the year after
giving effect to the 2 for 1 stock split. Earnings per share in 1999, 1998
and 1997 on a fully diluted basis giving effect to the exercise of all
options and warrants granted, would have been $1.09, $0.82 and $0.66 per
share, respectively.
16. INCOME TAXES
The major factors which caused variation from the Company's combined federal
and provincial statutory income tax rate of 44.81% in 1999 and 1998 and
44.34% in 1997, applicable to income before income taxes are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Provision for income taxes based on statutory rate.......... $ 31,303 $ 21,258 $ 16,486
Reduction in income taxes resulting from income of foreign
subsidiaries taxed at lower effective rate................ (36,925) (22,970) (14,331)
Benefit of current year losses not recognized for accounting
purposes.................................................. 9,661 3,736 --
Large Corporation Tax....................................... 176 -- --
Benefit of utilization of losses carried forward............ -- -- (214)
-------- -------- --------
$ 4,215 $ 2,024 $ 1,941
======== ======== ========
</TABLE>
F-20
<PAGE>
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
16. INCOME TAXES (CONTINUED)
At December 31, 1999, the Company has accumulated non-capital losses for
federal and provincial income tax purposes in Canada and unclaimed Canadian
investment tax credits for which no accounting benefit has been recognized
and which can be used to offset future taxable income and/or reduce income
taxes payable. These losses and investment tax credits expire as follows:
<TABLE>
<CAPTION>
NON-CAPITAL LOSSES
--------------------- INVESTMENT
FEDERAL PROVINCIAL TAX CREDITS
-------- ---------- -----------
<S> <C> <C> <C>
2000........................................................ $ -- $ 3,791 $ 470
2001........................................................ -- 3,263 454
2002........................................................ -- 1,173 432
2003........................................................ -- 2,896 137
2004........................................................ 50 119 436
2005........................................................ 4,956 5,271 505
2006........................................................ -- 6,042 1,129
2007........................................................ -- -- 1,600
2008........................................................ -- -- 2,053
2009........................................................ -- -- 3,217
------ ------- -------
$5,006 $22,555 $10,433
====== ======= =======
</TABLE>
The benefits of these losses carried forward and investment tax credits will
be recorded when realized.
As of December 31, 1999, the Company has available net operating loss carry
forwards in the US of approximately $75,375,000. These losses, which are
subject to restrictions, expire at various dates as follows:
<TABLE>
<CAPTION>
NET OPERATING
LOSSES
<S> <C>
2003........................................................ $ 113
2004........................................................ 165
2005........................................................ 564
2006........................................................ 64
2007........................................................ 4,507
2008........................................................ 6,068
2009........................................................ 6,746
2010........................................................ 3,109
2011........................................................ 16,424
2012........................................................ 15,483
2018........................................................ 22,132
-------
$75,375
=======
</TABLE>
In addition, the Company has pooled research and development expenditures
amounting to approximately $34,000,000 available for offset against future
taxable income. The tax benefit of these expenditures has not been
recognized in these financial statements.
F-21
<PAGE>
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
17. OPERATING LEASES
Minimum lease commitments under operating leases for each of the next five
years are as follows:
<TABLE>
<CAPTION>
<S> <C>
2000..................................................... $4,795
2001..................................................... 4,376
2002..................................................... 2,907
2003..................................................... 1,228
2004..................................................... 1,258
Thereafter............................................... 958
</TABLE>
18. CHANGE IN NON-CASH OPERATING ITEMS
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
Accounts receivable......................................... $(9,973) $(10,036) $(23,145)
Inventories................................................. (1,560) 6,307 (8,622)
Deposits and prepaid expenses............................... 693 (1,304) (991)
Accounts payable and accrued liabilities.................... 16,613 5,563 3,315
Income taxes payable........................................ 2,604 (9) 201
Customer prepayments........................................ 346 2,676 (4,840)
------- -------- --------
$ 8,723 $ 3,197 $(34,082)
======= ======== ========
</TABLE>
19. INTEREST AND INCOME TAXES PAID
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Interest paid............................................... $14,526 $1,050 $ 691
Income taxes paid........................................... 1,831 2,153 1,736
</TABLE>
20. LEGAL PROCEEDINGS
In January, 1998, Andrx Pharmaceutical, Inc. ("Andrx") commenced action
against the FDA, Faulding Inc., and Biovail seeking an order from the Court
which would preclude the FDA from approving any subsequently-filed ANDAs,
including the Company's filed ANDA for a generic version of Cardizem CD
until Andrx receives from the FDA thirty days' prior notice of the FDA's
intention to approve any such subsequently filed ANDA. Such notice would
allow Andrx to attempt to seek court relief based on its position that as a
first filer it is entitled to 180 days of market exclusivity. Biovail has
asserted affirmative defenses based upon the Company's status as an unsued
ANDA submitter. Biovail has also counter-sued Andrx for anti-trust law
violations based on the filing of this suit and Andrx' entry into an alleged
collusive agreement with Hoechst Marion Roussel relating to Andrx' generic
Cardizem CD which could result in keeping generic competition from entering
the marketplace in a regular and timely manner. The FDA has filed a motion
seeking summary dismissal of Andrx' action. Andrx has filed its own motion
to have its action dismissed, however, Biovail did not withdraw the
Company's counterclaim because the issues that were the subject of Andrx'
action have now overtaken the timelines contemplated in the action (Andrx
and Biovail have both launched their respective generic versions of Cardizem
CD and Andrx' main action was dismissed), Biovail's counterclaim has been
dismissed. Biovail has nevertheless launched an appeal to the
F-22
<PAGE>
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
20. LEGAL PROCEEDINGS (CONTINUED)
dismissal of its counterclaim even though Andrx' main action against the FDA
and Biovail has long since been terminated.
In March, 1998, Biovail commenced an action in the District of New Jersey
against Hoechst Aktiengesellschaft and related parties to recover three
times the Company's monetary damages and for injunctive relief for the
alleged violation by the defendants of the anti-trust laws of the United
States, for breach of contract, deceptive trade practices and restraint of
trade, unfair competition and other violations for the common law. A
reasonable estimation of the Company's potential recovery for damages cannot
be made at this time.
From time to time, Biovail becomes involved in various legal proceedings
which Biovail considers to be in the ordinary course of business. The vast
majority of these proceedings involve intellectual property issues that
often result in patent infringement suits brought by patent holders upon the
Company's filing of ANDA applications. The timing of these actions is
mandated by statute and may result in a delay of FDA's approval for such
filed ANDAs until the final resolution of such actions or the expiry of
30 months, whichever occurs earlier.
In this regard, Biovail and the Company's wholly owned subsidiary Biovail
Laboratories, Inc. ("Biovail Laboratories"), have been sued in separate
lawsuits by Bayer AG and Bayer Corporation, as well as by Pfizer, Inc., upon
the filing by Biovail Laboratories of separate ANDAs for generic versions of
Procardia XL and Adalat CC. These actions make the usual, technical claims
of infringement that, if successful, mandate a delay for the approval of the
Company's ANDAs for a period of 30 months or until successful resolution of
these patent infringement questions, whichever occurs first. Biovail
Laboratories is vigorously defending these suits and will aggressively
pursue motions for summary judgment in due course.
These four actions have been consolidated into two actions by the court.
Biovail has denied the allegations and has pleaded affirmative defences that
the patents are invalid, have not been infringed, and unenforceable.
On April 23, 1998, Biovail also filed a four-count Complaint against Bayer
AG, Bayer Corporation and Pfizer Inc. seeking a declaratory judgment that
their patents are invalid, unenforceable, and not infringed by the Company's
ANDAs. Biovail intends to amend the Complaint in due course to assert that
their patent has not been infringed by the filing of all four ANDAs by
Biovail Laboratories Inc. Biovail has also asserted that Bayer Corporation
and Pfizer Inc. have violated anti-trust laws and have interfered with the
Company's prospective economic advantage. Bayer and Pfizer have filed a
motion to dismiss the anti-trust and interference counts but that action has
been stayed pending the conclusion of the main actions.
On August 25, 1998, Andrx submitted to Biovail a Notice of Certification
under the FDC Act wherein it certified that the ANDA filed by Andrx for a
generic version of Tiazac did not infringe on the Company's Patent. As a
result, in October 1998, Biovail commenced a patent infringement suit
against Andrx. The FDA cannot approve Andrx's ANDA for a period of up to
30 months from the filing of the Company's suit or the date when Andrx
successfully defends the Company's patent infringement suit, whichever first
occurs. The trial of this action was recently completed but no judicial
decision has been released.
While Biovail is not currently able to determine the potential liability, if
any, related to such matters, Biovail believes none of the matters,
individually or in aggregate, will have a material adverse effect on the
Company's financial position, results of operations or cash flows.
F-23
<PAGE>
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
20. LEGAL PROCEEDINGS (CONTINUED)
In January 2000, Biovail Technologies Ltd. ("BTL"), commenced a suit against
Dr. Richard Fuisz, the founder and former chairman of Fuisz--now BTL,
Patrick Scrivens (the former CFO of Fuisz), Paul Kennedy (a former officer
of Fuisz and Manager of Fuisz's European subsidiaries), John Fuisz (a former
Board member of Fuisz) and others, in which a claim for damages has been
asserted, resulting from a number of specific breaches. The Company believes
it has meritorious claims.
In the ordinary course of business from time to time the Company becomes
involved in normal litigation reflective commercial or employment disputes.
The Company is not aware of any action, commenced or threatened, that are
discussed above or in combination has or may have a material impact on the
Company or the Company's operations.
21. RESEARCH AND DEVELOPMENT ARRANGEMENTS
IPL
IPL was formed by the Company in July, 1997. In September, 1997, the Company
concluded a development and license agreement (the "Development Contract")
and a services agreement (the "Services Agreement") with IPL, whereby the
Company develops on IPL's behalf once-daily controlled release branded
generic versions of designated products. In October, 1997, IPL completed a
public offering of 3,737,500 units resulting in net proceeds to IPL, before
offering expenses, of approximately $69,500,000.
The proceeds of the offering are being used by IPL primarily to make
payments to the Company under the Development Contract. The Development
Contract provides for the Company to conduct product development in respect
of certain designated products. Such costs are being computed with respect
to internal costs incurred by the Company at its fully absorbed cost plus a
mark-up, consistent with contractual relationships the Company has with
other third parties.
Revenue received by the Company from IPL pursuant to the Development
Contract, was $33.0 million, $9.7 million and $9.6 million for 1999, 1998
and 1997 respectively. The cost of providing these services amounted to
$19.8 million, $6.6 million and $4.2 million for 1999, 1998 and 1997
respectively.
Included in 1997 revenue was $3.5 million for access to and use by IPL of
the Company's proprietary technology in connection with product development.
The Company, as the holder of all of the issued and outstanding special
shares of IPL, has an option, exercisable at its sole discretion, to
purchase all, but not less than all, of the outstanding common shares of IPL
commencing on the closing date of the offering and ending on the earlier of
(i) September 30, 2002, or (ii) the 90(th) day after the date IPL provides
the Company with quarterly financial statements showing cash or cash
equivalents of less than $3 million. If the purchase option is exercised,
the purchase price calculated on a per share basis would be as follows:
<TABLE>
<CAPTION>
PURCHASE OPTION
EXERCISE PRICE
---------------
<S> <C>
Before October 1, 2000...................................... $39.06
On or after October 1, 2000 and on or before September 30,
2001...................................................... 48.83
On or after October 1, 2001 and on or before September 30,
2002...................................................... 61.04
</TABLE>
The purchase option exercise price may be paid in cash or the Company's
common shares, or any combination of the foregoing, at the Company's sole
discretion.
F-24
<PAGE>
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
21. RESEARCH AND DEVELOPMENT ARRANGEMENTS (CONTINUED)
During 1999, under the terms of its Development Contract, Biovail acquired
the rights to Procardia XL for $25 million.
TEVA PHARMACEUTICALS
In December 1997, the Company entered into an agreement with a subsidiary of
Teva for the development and marketing of twelve generic oral controlled
release products. Eight of the twelve products have been identified. As at
December 31, 1999, generic versions of Trental, Cardizem CD, Adalat CC and
Diltiazem SR have been approved by the FDA and ANDAs for four others have
been filed with the FDA.
The Company will incur all costs and expenses for the development and
registration of the eight identified products. The Company and Teva will
jointly select and equally share the costs associated with the development
and registration of the four products in the process of being identified.
Under the terms of the agreement, Teva was obligated to pay the Company an
aggregate of $34.5 million, subject to certain milestones. Of the
$34.5 million, $23.5 million related to reimbursement of research and
development costs and $11.0 million to the initial purchase of product.
Revenue received by the Company from Teva pursuant to the agreement for
reimbursement of research and development costs was $13.5 million and
$10.0 million for 1998 and 1997 respectively. Pursuant to an agreement
signed with Teva, the Company earned research and development revenues of
$4.8 million in 1999.
Product sales to Teva were $19.1 million, $5.0 million and $6.0 million for
1999, 1998 and 1997 respectively.
H. LUNDBECK A/S
In December, 1998, the Company entered into an agreement with H. Lundbeck
A/S ("Lundbeck") based in Denmark, for formulation, development, manufacture
and supply of a novel controlled-release formulation of the anti-depressant
Citalopram.
Under the terms of the agreement, Lundbeck will pay the Company product
development fees aggregating $8.5 million, subject to certain milestones.
Revenue received by the Company from Lundbeck for product development,
pursuant to the agreement, was $2 million in the year ended December 31,
1999 and $3.5 million in 1998.
22. SEGMENTED INFORMATION AND MAJOR CUSTOMERS
Biovail is an international full service pharmaceutical company. The Company
operates in a single industry and is engaged in formulation, clinical
testing, registration and manufacture of drug products utilizing advanced
drug delivery technologies.
Organizationally, the Company's operations consist of three
segments--Product Sales, Research and Development, and Royalty and
Licensing. The segments are determined based on several factors including
customer base, the nature of the product or service provided, delivery
channels and other factors.
The PRODUCT SALES segment covers sales of production from the Company's
Puerto Rico and Canadian facilities and sales by Crystaal, the Canadian
marketing division of the Company.
F-25
<PAGE>
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
22. SEGMENTED INFORMATION AND MAJOR CUSTOMERS (CONTINUED)
The RESEARCH AND DEVELOPMENT segment covers all revenues generated by the
Company's integrated research and development facilities, and comprises
research and development services provided to third parties, including IPL,
and product development milestone fees.
The ROYALTY AND LICENSING segment covers royalty revenues received from
licensees in respect of products for which the Company has manufacturing,
marketing and/or intellectual property rights.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
segment performance based on operating income after deducting selling,
general and administrative expense attributable to the business units.
Corporate general and administrative expense, and interest expense, are not
allocated to segments. Depreciation expense related to manufacturing and
research and development assets is allocated to the Product Sales and
Research and Development segments, respectively. Amortization expense
related to royalty interests is allocated to the Royalty and Licensing
segment. Amortization expense related to product rights is allocated to the
Product Sales segment. Amortization and depreciation of administrative
assets are included as a component of selling, general and administrative
expense.
The following table sets forth information regarding segment operating
income and segment assets:
<TABLE>
<CAPTION>
RESEARCH ROYALTY
PRODUCT AND AND
1999 SALES DEVELOPMENT LICENSING TOTAL
---- -------- ----------- --------- --------
<S> <C> <C> <C> <C>
Revenues from external customers.................... $ 99,526 $ 52,260 $24,706 $176,492
-------- -------- ------- --------
Segment operating income............................ 46,302 16,948 24,292 87,542
Unallocated amounts
Selling, general and administrative expenses...... (8,860)
Equity loss....................................... (1,618)
Interest expense, net............................. (9,152)
Gain on disposal of long-term investments, net.... 1,948
--------
Income before income taxes and goodwill
amortization...................................... $ 69,860
========
Total assets for operating segments................. $139,076 $169,767 $18,888 $327,731
Cash and investments not allocated to segments...... 183,937
Other unallocated assets............................ 123,469
--------
Total consolidated assets........................... $635,137
========
Expenditure on capital and other assets
Attributable to segments.......................... $ 43,137 $ 2,562 $ -- $ 45,699
Other unallocated assets.......................... 425
--------
$ 46,124
========
Amortization of capital and other assets
Attributable to segments.......................... $ 3,130 $ 4,507 $ 1,416 $ 9,053
Unallocated....................................... 1,087
--------
$ 10,140
========
</TABLE>
F-26
<PAGE>
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
22. SEGMENTED INFORMATION AND MAJOR CUSTOMERS (CONTINUED)
<TABLE>
<CAPTION>
RESEARCH ROYALTY
PRODUCT AND AND
1998 SALES DEVELOPMENT LICENSING TOTAL
---- -------- ----------- --------- --------
<S> <C> <C> <C> <C>
Revenues from external customers..................... $69,154 $32,070 $11,612 $112,836
------- ------- ------- --------
Segment operating income............................. 30,780 13,047 11,272 55,099
Unallocated amounts
Selling, general and administrative expenses....... (5,796)
Interest income, net............................... (1,702)
--------
Income before income taxes and goodwill
amortization....................................... $ 47,601
========
Total assets for operating segments.................. $86,420 $ 7,845 $18,016 $112,281
Cash and investments not allocated to segments....... 78,503
Other unallocated assets............................. 9,135
--------
Total consolidated assets............................ $199,919
========
Expenditure on capital and other assets
Attributable to segments........................... $ 6,383 $ 740 $15,000 $ 22,123
Other unallocated assets........................... 5,385
--------
$ 27,508
========
Amortization of capital and other assets
Attributable to segments........................... $ 2,209 $ 842 $ 1,482 $ 4,533
Unallocated........................................ 423
--------
$ 4,956
========
</TABLE>
<TABLE>
<CAPTION>
RESEARCH ROYALTY
PRODUCT AND AND
1997 SALES DEVELOPMENT LICENSING TOTAL
---- -------- ----------- --------- --------
<S> <C> <C> <C> <C>
Revenues from external customers...................... $50,333 $19,559 $12,487 $82,379
------- ------- ------- -------
Segment operating income.............................. 24,854 3,589 11,992 40,435
Unallocated amounts
Selling, general and administrative expenses........ (2,744)
Interest expense, net............................... (351)
-------
Income before income taxes and goodwill
amortization........................................ $37,340
=======
Total assets for operating segments................... $69,308 $ 6,448 $ 5,005 $80,761
Cash and investments not allocated to segments........ 6,078
Other unallocated assets.............................. 6,900
-------
Total consolidated assets............................. $93,739
=======
Expenditure on capital and other assets
Attributable to segments............................ $ 1,700 $ 870 $ -- $ 2,570
Other unallocated assets............................ 179
-------
$ 2,749
=======
</TABLE>
F-27
<PAGE>
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
22. SEGMENTED INFORMATION AND MAJOR CUSTOMERS (CONTINUED)
<TABLE>
<CAPTION>
RESEARCH ROYALTY
PRODUCT AND AND
1997 SALES DEVELOPMENT LICENSING TOTAL
---- -------- ----------- --------- --------
<S> <C> <C> <C> <C>
Amortization of capital and other assets
Attributable to segments............................ $ 1,756 $ 716 $ 392 $ 2,864
Unallocated......................................... 256
-------
$ 3,120
-------
</TABLE>
GEOGRAPHIC INFORMATION
The following table sets out certain geographic information relative to the
Company:
<TABLE>
<CAPTION>
REVENUE (I) LONG-LIVED ASSETS (II)
------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Canada.............................. $ 16,069 $ 10,735 $11,938 $ 32,523 $23,786 $20,079
United States....................... 116,566 76,498 57,965 201,580 -- --
Caribbean........................... 33,000 9,660 9,639 -- -- --
Puerto Rico and Barbados............ -- -- -- 60,272 27,694 9,889
Other foreign countries............. 10,857 15,943 2,837 327 514 775
-------- -------- ------- -------- ------- -------
$176,492 $112,836 $82,379 $294,702 $51,994 $30,743
======== ======== ======= ======== ======= =======
</TABLE>
----------------------------
(i) Revenues are attributed to countries based on location of customer.
(ii) Consists of capital and other assets, net.
INFORMATION ABOUT MAJOR CUSTOMERS
External customers accounting for 10% or more of the Company's revenues in
1999 are set out as follows:
<TABLE>
<CAPTION>
% OF TOTAL
1999 REVENUE REVENUES INCLUDED IN REPORTABLE SEGMENT
---- -------- ---------- ---------------------------------------------------
<S> <C> <C> <C>
Forest $73,569 42 Product Sales (34%), Royalties (7%), Research and
Laboratories Inc...... Development (1%)
Teva.................... $23,911 14 Product Sales (11%), Research and Development (3%)
IPL..................... $33,000 19 Research and Development
</TABLE>
External customers accounting for 10% or more of the Company's revenues in
1998 are set out as follows:
<TABLE>
<CAPTION>
% OF TOTAL
1998 REVENUE REVENUES INCLUDED IN REPORTABLE SEGMENT
---- -------- ---------- ---------------------------------------------------
<S> <C> <C> <C>
Forest $57,159 51 Product Sales
Laboratories Inc......
Teva.................... $18,502 16 Product Sales (4%), Research and Development (12%)
</TABLE>
F-28
<PAGE>
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
23. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The financial statements of the Company have been prepared in accordance
with generally accepted accounting principles in Canada ("Canadian GAAP")
which differ in certain material respects from those applicable in the
United States ("US GAAP").
The material differences as they apply to the Company's financial statements
are as follows:
a) Balance sheet adjustments:
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Deposits and prepaid expenses:
Balance under Canadian GAAP............................... $ 3,172 $ 3,357
Writeoff of product launch advertising costs (i).......... -- (426)
--------- -------
Balance under US GAAP....................................... 3,172 2,931
========= =======
Long-term investments:
Balance under Canadian GAAP............................... 12 10,055
Adjustments for unrealized holding losses (ii)............ -- (877)
--------- -------
Balance under US GAAP....................................... 12 9,178
========= =======
Other assets, net:
Balance under Canadian GAAP............................... 249,402 28,317
Acquired in-process research and development (iii)........ (136,215) --
Acquired product right (iv)............................... (25,000) --
Adjustment to value of goodwill (v)....................... (6,743) --
--------- -------
Balance under US GAAP....................................... 81,444 28,317
========= =======
Shareholders' equity:
Balance under Canadian GAAP............................... 435,294 51,191
Current year net income adjustments....................... (172,458) (3,842)
Cumulative prior year net income adjustments.............. (6,881) (3,039)
Collection of warrant subscription receivable (vi)........ 5,957 1,929
Cumulative employee stock options......................... 12,167 4,526
Adjustment to value of shares issued (v).................. (6,743) --
Unrealized holding losses on long-term investments........ -- (877)
--------- -------
Balance under US GAAP....................................... $ 267,336 $49,888
========= =======
</TABLE>
----------------------------
i) Under US GAAP, companies are required to write-off certain product
launch and advertising costs incurred during the year. This adjustment
represents the portion of product launch costs deferred under Canadian
GAAP that is required to be written off under US GAAP.
ii) Under US GAAP, specifically SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities", the Company classified
certain of its long-term securities as available-for-sale and
accordingly was required to include the change in net unrealized
holding gains or losses on these securities in other comprehensive
income. During the year, these long-term securities were sold and the
net gain is included in net income.
F-29
<PAGE>
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
23. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
iii) Under US GAAP, specifically SFAS No. 2 "Accounting for Research and
Development Costs", acquired in-process research and development having
no alternative future use must be written-off at the time of
acquisition. The adjustment represents the value of the acquired
in-process research and development, net of accumulated amortization,
capitalized under Canadian GAAP.
iv) Under US GAAP, specifically SFAS No. 2, the cost of intangibles that are
purchased from others for a particular research and development project
that have no alternative future use must be written-off at the time of
acquisition. The adjustment represents the value of the intangible
capitalized under Canadian GAAP.
v) Under US GAAP, the acquisition of Fuisz would be valued based on the
stock market price of the shares before and after the July 25, 1999 date
of the agreement. Under Canadian GAAP, the acquisition was valued based
on the average price at the date of acquisition. The effect is that
under US GAAP the value of shares issued would be lower by $7,763,000
reducing the goodwill acquired by an equal amount. In addition, certain
options were issued to consultants in connection with this acquisition
with a fair value of $1,020,000 that have been included in the
allocation of the purchase price with the effect of increasing goodwill
acquired.
vi) Under US GAAP, companies are required to record in paid-up capital an
amount equal to the proceeds attributable to warrants as determined at
the time of their issuance, along with an offsetting contra equity
account, "Warrant subscription receivable". The contra account is
amortized over the life of the warrants. Under Canadian GAAP, the
offsetting amount was recorded as an immediate reduction in retained
earnings.
b) The components of shareholders' equity under US GAAP are as follows:
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Share Capital............................................... $ 373,962 $23,954
Warrants.................................................... 8,244 8,244
Warrant subscription receivable............................. (2,287) (6,315)
Retained earnings (deficit)................................. (113,843) 26,111
Accumulated other comprehensive income (loss)............... 1,260 (2,106)
--------- -------
$ 267,336 $49,888
========= =======
</TABLE>
F-30
<PAGE>
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
23. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
c) Reconciliation of net income (loss) under Canadian and US GAAP:
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Net income under Canadian GAAP.............................. $ 62,480 $45,419 $35,241
US GAAP adjustments
Reversal (write-off) of product launch advertising
costs................................................... 426 (426) --
Collection of warrant subscription receivable............. (4,028) (1,179) (750)
Compensation cost for employee stock options (i)............ (7,641) (2,237) (1,669)
Acquired in process research and development................ (136,215) -- --
Acquired product right...................................... (25,000) -- --
--------- ------- -------
(172,458) (3,842) (2,419)
--------- ------- -------
Net income (loss) according to US GAAP...................... $(109,978) $41,577 $32,822
========= ======= =======
Earnings (loss) per share under US GAAP
Basic..................................................... $ (2.15) $ 0.78 $ 0.64
Fully diluted............................................. $ (2.15) $ 0.76 $ 0.62
Weighted average number of common shares outstanding under
US GAAP
Basic..................................................... 51,271 53,282 51,212
Fully diluted............................................. 54,087 54,472 53,238
</TABLE>
----------------------------
(i) Under US GAAP, specifically APB 25 "Accounting for Stock Issued to
Employees", the Company recognizes compensation expense for certain
employee stock option plans. No such expense is required to be
determined under Canadian GAAP.
In accordance with Statement of Financial Accounting Standard ("SFAS") No.
128 "Earnings per Share", basic earnings per share is computed by dividing
income available to common shareholders by the weighted average number of
common shares outstanding for the reporting period. Fully diluted earnings
per share reflect the dilution that would occur if outstanding stock options
and warrants were exercised or converted into common shares using the
treasury stock method. The computation of diluted earnings per share does
not include stock options and warrants with dilutive potential that would
have an antidilutive effect on earnings per share.
Under US GAAP, goodwill amortization would be included in the determination
of operating income. Earnings per share before goodwill amortization would
not be presented.
F-31
<PAGE>
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
23. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
d) Comprehensive income (loss):
Under US GAAP, the following additional disclosure would be provided
pursuant to the requirements of SFAS No. 130 "Reporting Comprehensive
Income" which established standards for the reporting of comprehensive
income and its components:
<TABLE>
<CAPTION>
STATEMENT OF COMPREHENSIVE INCOME (LOSS) 1999 1998 1997
---------------------------------------- --------- -------- --------
<S> <C> <C> <C>
Net income (loss) under US GAAP............................. $(109,978) $41,577 $32,822
--------- ------- -------
Other comprehensive income (loss), net of tax
Foreign currency translation adjustment................... 2,489 (269) (577)
Unrealized holding loss on long-term investments.......... -- (877) --
Reclassification adjustment for gain on long-term
investments included in net income...................... 877 -- --
--------- ------- -------
Other comprehensive income (loss)........................... 3,366 (1,146) (577)
--------- ------- -------
Comprehensive income (loss) under US GAAP................... $(106,612) $40,431 $32,245
========= ======= =======
</TABLE>
<TABLE>
<CAPTION>
1999 1998
------------------------------------ ------------------------------------
FOREIGN UNREALIZED FOREIGN UNREALISED
ACCUMULATED OTHER COMPREHENSIVE INCOME CURRENCY LOSSES ON CURRENCY LOSSES ON
(LOSS) BALANCES TRANSLATION INVESTMENTS TOTAL TRANSLATION INVESTMENTS TOTAL
-------------------------------------- ----------- ----------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of year.......... $(1,229) (877) (2,106) (960) -- $ (960)
Current year change................. 2,489 877 3,366 (269) (877) (1,146)
------- ---- ------ ------ ---- -------
Balance, end of year................ $ 1,260 -- 1,260 (1,229) (877) $(2,106)
======= ==== ====== ====== ==== =======
</TABLE>
e) Cash flow adjustments:
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Operating:
Balance under Canadian GAAP............................... $ 81,013 $ 53,573 $ 4,316
Acquired product right.................................. (25,000) -- --
Collection of warrant subscription receivable........... (4,028) (1,179) (750)
--------- -------- -------
Balance under US GAAP..................................... 51,985 52,394 3,566
========= ======== =======
Investing:
Balance under Canadian GAAP............................... (129,393) (32,953) (3,183)
Acquired product right.................................. 25,000 -- --
--------- -------- -------
Balance under US GAAP..................................... (104,393) (32,953) (3,183)
========= ======== =======
Financing:
Balance under Canadian GAAP............................... 147,916 49,493 2,635
Collection of warrant subscription receivable........... 4,028 1,179 750
--------- -------- -------
Balance under US GAAP..................................... $ 151,944 $ 50,672 $ 3,385
========= ======== =======
</TABLE>
F-32
<PAGE>
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
23. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
f) Under US GAAP, the following additional disclosure would be provided
pursuant to the requirements of SFAS No. 109 "Accounting for Income Taxes":
As at December 31, 1999, the Company has unused tax benefits of
approximately $10,904,000 related to net operating loss and tax credit carry
forwards which relate to the Canadian operations. In addition, the Company
has net operating loss carry forwards relating to the US operations of
approximately $26,950,000. Under US GAAP, a valuation allowance of an
equivalent amount would be recognized to of the related deferred tax asset
due to the uncertainty of realizing the benefit of the loss and tax carry
forwards.
Deferred income taxes have been provided on the following temporary
differences:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Deferred tax assets
Canadian non-capital losses and tax credits............... $ 16,865 $ 6,293 $ 10,497
US net operating losses carry forward..................... 26,950 -- --
Valuation allowance......................................... (38,781) (6,293) (10,497)
-------- ------- --------
$ 5,034 $ -- $ --
======== ======= ========
Deferred tax liabilities: US technology..................... $ 5,034 $ -- $ --
======== ======= ========
</TABLE>
g) The Company accounts for compensation expense for certain members of its
employee stock option plan under the provisions of Accounting Principals
Board Opinion 25. Had compensation cost for the employee stock option plan
been determined based upon fair value at the grant date for awards under
this plan consistent with the methodology prescribed under SFAS
No. 123--"Accounting for Stock-based Compensation", the Company's net income
and earnings per share would have changed to the pro-forma amounts indicated
below:
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Net income (loss) as reported............................... $(109,978) $41,577 $32,822
Estimated stock-based compensation costs.................... 7,534 5,264 2,053
--------- ------- -------
Pro forma net income (loss)................................. $(117,512) $36,313 $30,769
========= ======= =======
Pro forma earnings (loss) per share......................... $ (2.29) $ 0.68 $ 0.60
========= ======= =======
</TABLE>
The fair values of all options granted during 1999, 1998 and 1997 were
estimated as of the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Expected option life (years)................................ 3.81 4.0 4.0
Volatility.................................................. 49.08 47.6 40.2
Risk-free interest rate..................................... 5.73 5.47 5.27
Dividend yield.............................................. nil nil nil
</TABLE>
The Black-Scholes model, used by the Company to calculate option values, as
well as other currently accepted option valuation models, were developed to
estimate the fair value of freely tradeable, fully transferable options
without vesting restrictions, which significantly differ from the Company's
stock option
F-33
<PAGE>
BIOVAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS
EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
23. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
awards. These models also require highly subjective assumptions, including
future stock price volatility and expected time until exercise, which
greatly affect the calculated values. Accordingly, management believes that
these models do not necessarily provide a reliable single measure of the
fair value of the Company's stock option awards.
h) There were no impairment write-downs related to goodwill, product
rights, or fixed assets required under US GAAP.
i) Recent Accounting Developments:
i) The Financial Accounting Standards Board has issued Statement No.
133 "Accounting for Derivative Instruments and Hedging Activities",
as amended by Statement No. 137, which is required to be adopted in
years beginning after June 15, 2000. The Company is determining the
impact of the adoption of the new statement.
ii) The Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements", in
December 1999, which summarizes certain views in applying generally
accepted accounting principles to revenue recognition in financial
statements. The statements in the staff accounting bulletins
represent interpretations and practices followed by the Division of
Corporation Finance and the Office of the Chief Accountant in
administering the disclosure requirements of the Federal securities
laws. The impact of the application of this Staff Accounting
Bulletin is currently being reviewed by the Company.
24. YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize
the year 2000 as 1900 or some other date, resulting in errors when
information using year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates in 1999 to
represent something other than a date. Although the change in date to the
year 2000 has occurred, it is not possible to conclude that all aspects of
the Year 2000 Issue that may affect the entity, including those related to
customers, supplier, or other third parties, have been fully resolved.
25. SUBSEQUENT EVENT
On February 7, 2000, the Company announced that it had entered into an
agreement to acquire a pharmaceutical manufacturing facility located in
Dorado, Puerto Rico for $11,000,000. Included in the acquisition of this
facility is the specialized production and packaging equipment. The closing
date is scheduled for January 2001.
F-34
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Fuisz Technologies Ltd.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, comprehensive loss, changes in
stockholders' equity and cash flows present fairly, in all material respects,
the financial position of Fuisz Technologies Ltd. and its subsidiaries (the
"Company") at December 31, 1997 and 1998, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
McLean, Virginia
February 25, 1999,
except for Note 18 for which the date is September 20, 1999
F-35
<PAGE>
FUISZ TECHNOLOGIES LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1997 1998 1999
-------- -------- ---------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 5,548 $ 9,238 $ 3,956
Marketable securities..................................... 73,134 19,678 12,163
Accounts receivable, net.................................. 10,237 13,889 14,200
Inventory................................................. 5,375 5,072 5,906
Other current assets...................................... 1,263 1,621 2,057
-------- -------- --------
Total current assets.................................... 95,557 49,498 38,282
Restricted cash............................................. 10,255 10,971 11,394
Property, plant and equipment, net.......................... 22,941 26,554 25,187
Intangibles, net............................................ 34,883 55,550 46,291
Other assets................................................ 6,484 3,163 4,097
-------- -------- --------
Total assets............................................ $170,120 $145,736 $125,251
======== ======== ========
LIABILITIES, REDEEMABLE PREFERENCE SHARES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES:
Lines of credit........................................... $ 1,042 $ 633 514
Current portion of notes payable.......................... 2,679 2,266 2,027
Accounts payable.......................................... 8,973 8,159 8,143
Accrued and other liabilities............................. 4,305 5,192 8,242
Deferred revenue.......................................... 622 2,664 1,025
-------- -------- --------
Total current liabilities............................... 17,621 18,914 19,951
Notes payable............................................... 90,184 90,639 88,247
Other liabilities........................................... 1,534 1,735 1,375
-------- -------- --------
Total liabilities....................................... 109,339 111,288 109,573
-------- -------- --------
Commitments and contingencies
Redeemable preference shares of subsidiary.................. 1,173 -- --
-------- -------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share; authorized
1,000,000 shares; none issued or outstanding.............. -- -- --
Common stock, par value $.01 per share; authorized
50,000,000 shares; issued, 22,189,462, 22,541,638 and
22,563,923 (unaudited), respectively; and outstanding
22,189,462, 21,903,438 and 21,925,723 (unaudited) shares,
respectively.............................................. 222 225 225
Additional paid-in capital.................................. 109,332 111,163 111,272
Accumulated deficit......................................... (49,055) (72,658) (87,221)
Accumulated other comprehensive income (loss)............... (891) 1,283 (3,033)
Treasury stock, at cost; 638,200 shares in 1998 and 1999
(unaudited), respectively................................. -- (5,565) (5,565)
-------- -------- --------
Total stockholders' equity.............................. 59,608 34,448 15,678
-------- -------- --------
Total liabilities, redeemable preference shares and
stockholders' equity.................................. $170,120 $145,736 $125,251
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-36
<PAGE>
FUISZ TECHNOLOGIES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Product sales.................................. $ 48 $ 11,968 $ 47,898 $ 23,977 $ 21,007
Research and development....................... 2,426 5,390 4,334 2,833 1,051
Licensing fees and other....................... 6,052 4,840 8,987 3,497 13,817
------- -------- -------- -------- --------
Total operating revenues................... 8,526 22,198 61,219 30,307 35,875
------- -------- -------- -------- --------
OPERATING EXPENSES:
Cost of sales.................................. -- 7,807 27,924 14,850 12,751
Research and development....................... 9,232 16,944 24,058 11,659 12,385
Selling, general and administrative............ 9,073 13,877 29,482 14,646 15,456
Other operating expenses....................... -- 4,694 -- -- 5,711
------- -------- -------- -------- --------
Total operating expenses................... 18,305 43,322 81,464 41,155 46,303
------- -------- -------- -------- --------
Net operating loss............................... (9,779) (21,124) (20,245) (10,848) (10,428)
------- -------- -------- -------- --------
OTHER INCOME (EXPENSE), NET:
Interest income................................ 2,977 3,013 3,212 1,862 781
Interest expense............................... (4) (1,490) (7,357) (3,413) (3,387)
Foreign currency gain (loss), net.............. -- -- 1,172 -- (1,683)
------- -------- -------- -------- --------
Total other income (expense)............... 2,973 1,523 (2,973) (1,551) (4,289)
------- -------- -------- -------- --------
Net loss before income taxes..................... (6,806) (19,601) (23,218) (12,399) (14,717)
Income tax (provision) benefit................... -- -- (361) -- 154
------- -------- -------- -------- --------
Net loss......................................... $(6,806) $(19,601) $(23,579) $(12,399) $(14,563)
======= ======== ======== ======== ========
Net loss per share (basic and diluted)........... $ (0.35) $ (0.92) $ (1.07) $ (0.56) $ (0.66)
======= ======== ======== ======== ========
Weighted average shares outstanding (basic and
diluted)....................................... 19,496 21,234 22,129 22,259 21,925
======= ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-37
<PAGE>
FUISZ TECHNOLOGIES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK TREASURY STOCK ADDITIONAL OTHER ACCUMULATED
--------------------- ------------------- PAID IN COMPREHENSIVE INCOME
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (LOSS)
---------- -------- -------- -------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995...................... 18,038,987 $180 -- $ -- $ 54,452 $(22,629) $ --
Secondary public offering of
Common Stock, $25.00 per
share, net of expenses.... 1,894,550 19 -- -- 35,764 -- --
Repayment of obligations
under Section 16(b) of the
Securities Exchange Act of
1934...................... -- -- -- -- 40 -- --
Exercise of stock options... 430,880 4 -- -- 897 -- --
Exercise of warrants........ 39,160 1 -- -- 129 -- --
Purchase of treasury
stock..................... -- -- (100,000) (775) -- -- --
Issuance of 380,952 shares
of stock in connection
with employment
agreement................. 280,952 3 100,000 775 2,222 -- --
Amortization of deferred
compensation.............. -- -- -- -- (86) -- --
Net loss.................... -- -- -- -- -- (6,806) --
---------- ---- -------- -------- -------- -------- -------
Balance, December 31,
1996...................... 20,684,529 207 -- -- 93,418 (29,435) --
Exercise of stock options... 215,699 2 -- -- 741 -- --
Exercise of warrants........ 194,828 2 -- -- 996 -- --
Issuance of 1,000,000
warrants in connection
with license agreement.... -- -- -- -- 2,294 -- --
Common Stock issued in
connection with business
acquisitions.............. 1,094,406 11 -- -- 11,883 -- --
Other comprehensive
income.................... -- -- -- -- -- -- (891)
Dividends on redeemable
preference shares......... -- -- -- -- -- (19) --
Net loss.................... -- -- -- -- -- (19,601) --
---------- ---- -------- -------- -------- -------- -------
Balance, December 31,
1997...................... 22,189,462 222 -- -- 109,332 (49,055) (891)
Exercise of stock options... 345,151 3 -- -- 1,555 -- --
Exercise of warrants........ 7,025 -- -- -- -- -- --
Purchases of treasury
stock..................... -- -- (638,200) (5,565) -- -- --
Other comprehensive
income.................... -- -- -- -- -- -- 2,174
Acceleration of stock option
vesting................... -- -- -- -- 276 -- --
Dividends on redeemable
preference shares......... -- -- -- -- -- (24) --
Net loss.................... -- -- -- -- -- (23,579) --
---------- ---- -------- -------- -------- -------- -------
Balance, December 31,
1998...................... 22,541,638 225 (638,200) (5,565) 111,163 (72,658) 1,283
Exercise of stock options
(unaudited)............... 22,285 -- -- -- 109 -- --
Other comprehensive loss
(unaudited)............... -- -- -- -- -- -- (4,316)
Net loss (unaudited)........ -- -- -- -- -- (14,563) --
---------- ---- -------- -------- -------- -------- -------
Balance, June 30, 1999
(unaudited)............... 22,563,923 $225 (638,200) $ (5,565) $111,272 $(87,221) $(3,033)
========== ==== ======== ======== ======== ======== =======
<CAPTION>
DEFERRED
COMPENSATION
ON STOCK
OPTIONS
GRANTED TOTAL
------------ --------
<S> <C> <C>
Balance, December 31,
1995...................... $ (101) $ 31,902
Secondary public offering of
Common Stock, $25.00 per
share, net of expenses.... -- 35,783
Repayment of obligations
under Section 16(b) of the
Securities Exchange Act of
1934...................... -- 40
Exercise of stock options... -- 901
Exercise of warrants........ -- 130
Purchase of treasury
stock..................... -- (775)
Issuance of 380,952 shares
of stock in connection
with employment
agreement................. -- 3,000
Amortization of deferred
compensation.............. 101 15
Net loss.................... -- (6,806)
------- --------
Balance, December 31,
1996...................... -- 64,190
Exercise of stock options... -- 743
Exercise of warrants........ -- 998
Issuance of 1,000,000
warrants in connection
with license agreement.... -- 2,294
Common Stock issued in
connection with business
acquisitions.............. -- 11,894
Other comprehensive
income.................... -- (891)
Dividends on redeemable
preference shares......... -- (19)
Net loss.................... -- (19,601)
------- --------
Balance, December 31,
1997...................... 59,608
Exercise of stock options... -- 1,558
Exercise of warrants........ --
Purchases of treasury
stock..................... -- (5,565)
Other comprehensive
income.................... -- 2,174
Acceleration of stock option
vesting................... -- 276
Dividends on redeemable
preference shares......... -- (24)
Net loss.................... -- (23,579)
------- --------
Balance, December 31,
1998...................... -- 34,448
Exercise of stock options
(unaudited)............... -- 109
Other comprehensive loss
(unaudited)............... -- (4,316)
Net loss (unaudited)........ -- (14,563)
------- --------
Balance, June 30, 1999
(unaudited)............... $ -- $ 15,678
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-38
<PAGE>
FUISZ TECHNOLOGIES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------- -------------------------
1996 1997 1998 1998 1999
--------- --------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss........................................... $ (6,806) $(19,601) $(23,579) $(12,399) $(14,563)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization.................... 703 2,439 8,455 4,252 4,745
Impairment loss.................................. -- -- -- -- 1,566
Amortization of deferred financing costs......... -- 74 423 212 217
Amortization of discount on notes payable........ -- 364 1,124 593 139
Noncash compensation expense..................... 3,015 -- 276 -- --
Noncash warrant issue expense.................... -- 2,294 -- -- --
Increase (decrease) in cash resulting from changes
in working capital items, net of effects of
business acquisitions:
Accounts receivable and other current assets..... (2,050) (2,703) (1,271) (2,004) (3,511)
Accounts payable and other liabilities........... 2,458 873 208 (1,748) 1,943
-------- -------- -------- -------- --------
Net cash used by operating activities.......... (2,680) (16,260) (14,364) (11,094) (9,464)
-------- -------- -------- -------- --------
Investing activities:
(Increase) decrease in marketable securities..... (45,051) (28,171) 52,939 34,273 5,719
Capital expenditures............................. (4,449) (12,789) (5,236) (1,936) (1,848)
Acquisitions of businesses, net of acquired
cash........................................... -- (8,021) (19,654) (19,403) --
Additions to intangibles......................... -- (2,403) (3,474) (91) (21)
(Increase) decrease in other assets.............. (1,114) (2,068) 2,763 1,433 (1,261)
-------- -------- -------- -------- --------
Net cash (used) provided by investing
activities................................... (50,614) (53,452) 27,338 14,276 2,589
-------- -------- -------- -------- --------
Financing activities:
Net proceeds from sale of subordinated
convertible debentures......................... -- 72,750 -- -- --
Net proceeds from sale of Common Stock........... 35,824 -- -- -- --
Purchases of treasury stock...................... (775) -- (5,565) -- --
Proceeds from exercise of stock options.......... 901 743 1,558 866 109
Proceeds from exercise of stock warrants......... 130 997 -- -- --
Redemption of preference shares of subsidiary.... -- -- (1,159) (209) --
Net borrowings under line of credit agreements... -- (1,338) (451) 88 (45)
Net payments of debt obligations................. (58) (2,283) (2,976) (604) 72
Decrease in long-term liabilities................ -- -- -- (221) --
-------- -------- -------- -------- --------
Net cash provided (used) by financing
activities..................................... 36,022 70,869 (8,593) (80) 136
-------- -------- -------- -------- --------
Effect of exchange rate changes on cash.............. -- (891) (691) (28) 1,457
Net (decrease) increase in cash and cash
equivalents........................................ (17,272) 266 3,690 3,074 (5,282)
Cash and cash equivalents, beginning of period....... 22,554 5,282 5,548 5,548 9,238
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period............. 5,282 5,548 9,238 8,622 3,956
Marketable securities and restricted cash, end of
period............................................. 55,218 83,389 30,649 48,661 23,557
-------- -------- -------- -------- --------
Cash, cash equivalents and marketable securities, end
of period.......................................... $ 60,500 $ 88,937 $ 39,887 $ 57,283 $ 27,513
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-39
<PAGE>
FUISZ TECHNOLOGIES LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------ -------------------------
1996 1997 1998 1998 1999
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss....................................... $(6,806) $(19,601) $(23,579) $(12,399) $(14,563)
Other comprehensive income (loss).............. -- (891) 2,174 (551) (4,316)
------- -------- -------- -------- --------
Comprehensive loss............................. $(6,806) $(20,492) $(21,405) $(12,950) $(18,879)
======= ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-40
<PAGE>
FUISZ TECHNOLOGIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Fuisz Technologies Ltd., a Delaware corporation, was formed on June 9, 1988
(Fuisz Technologies Ltd., together with its wholly owned subsidiaries, is
referred to collectively herein as the "Company"). The Company is engaged in
the development, manufacture and commercialization of a wide variety of
pharmaceutical and consumer healthcare products and technologies. The
Company uses its unique drug delivery technologies, including its
CEFORM-Registered Trademark- and Shearform-Registered Trademark-
technologies, to conduct research and development activities on behalf of
pharmaceutical and consumer healthcare companies. Products flowing from
these research and development efforts include drug and consumer healthcare
formulations using the Company's innovative Flash
Dose-Registered Trademark-, EZ Chew-Registered Trademark-, soft chew and
Spoon Dose-Registered Trademark- formats.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of Fuisz
Technologies Ltd. and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in the
consolidated financial statements.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current year presentation.
FOREIGN CURRENCY TRANSLATION
The financial statements of the foreign subsidiaries were prepared in their
respective local currencies and translated into U.S. dollars based on the
current exchange rate at the end of the period for the balance sheet and a
weighted-average rate for the period on the statements of operations and
cash flows. Translation adjustments are reflected as a component of other
comprehensive loss in stockholders' equity and accordingly have no effect on
net loss. Transaction adjustments for all foreign subsidiaries are included
as part of net loss.
The Company has made loans to certain of its foreign subsidiaries that are
denominated in U.S. dollars. Currency gains and losses on loans for which
settlement is planned are included as part of net loss. Currency gains and
losses on loans for which no settlement is planned are reflected as a
component of other comprehensive loss in stockholders' equity.
NET LOSS PER SHARE
Basic earnings per share is computed by dividing the net loss available to
common shareholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed by
dividing net earnings available to common shareholders by the weighted
average number of common shares outstanding after giving effect to all
dilutive potential common shares that were outstanding during the period.
Potential common shares are not included in the computation of diluted
earnings per share if they are antidilutive. The Company did not have any
dilutive potential common shares for the years ended December 31, 1996, 1997
and 1998. Net loss available to common stockholders was increased by $19,000
and $24,000 for dividends payable on redeemable preference shares for the
years ended December 31, 1997 and 1998, respectively. Net loss available to
common stockholders was not adjusted for the year ended December 31, 1996.
F-41
<PAGE>
FUISZ TECHNOLOGIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Product sales are recognized upon delivery to customers. Product sales are
recorded net of reserves for returns and discounts. The Company maintains
reserves at a level that management believes is sufficient to cover
estimated future returns and discounts. Research and development fees are
deferred and recognized over the period of performance under the terms of
the related agreements. License and other fees are recognized as revenue
pursuant to the terms of the related agreements.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments with a maturity of three
months or less at the time of purchase to be cash equivalents.
MARKETABLE SECURITIES
Marketable securities consist of direct obligations of the United States
Government and corporations with strong credit ratings with remaining
maturities of one to three years. These investments are considered as
available-for-sale as defined by SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The Company's investments are
held for an unspecified period of time and are sold to meet its liquidity
needs. Accordingly, the Company has classified these investments as current
assets. In accordance with SFAS No. 115, unrealized gains and losses are
shown as a component of stockholders' equity. Realized gains and losses were
immaterial in 1996, 1997 and 1998 and are included in interest income.
CONCENTRATION OF RISKS
The Company has invested its excess cash generally in obligations of the
United States Government, commercial paper and money market funds with
strong credit ratings and deposits with a commercial bank. The Company has
not experienced any losses on its investments. The Company sells its
products and services without requiring collateral. However, the Company
periodically assesses the financial strength of its customers and
collaborative partners and provides allowances for anticipated losses when
necessary. At December 31, 1997 and 1998, the allowance for doubtful
accounts totaled $477,000 and $732,000, respectively.
The Company derives a significant portion of its consolidated revenues from
its European operations (see Note 16). The Company had three customers (37%
from Customer B, 24% from Customer C and 17% from Customer D) during 1996
and one customer (13% from Customer A) during 1997 that accounted for more
than 10% of total consolidated revenues. No single customer accounted for
more than 10% of total consolidated revenues during 1998.
INVENTORY
Inventory is stated at the lower of cost (principally standard cost which
approximates actual cost on a first-in, first-out basis) or market.
PROPERTY AND EQUIPMENT
Furniture and equipment is carried at cost and depreciated using the
straight-line method over estimated useful lives ranging from three to eight
years. Buildings are carried at cost and depreciated using the straight-line
method over estimated useful lives of forty years. Equipment acquired under
capital leases is recorded at the present value of the lease payments and
amortized over estimated useful lives ranging from three to seven years.
Leasehold improvements are carried at cost and amortized using the
straight-line
F-42
<PAGE>
FUISZ TECHNOLOGIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
method over the lesser of the estimated useful life or the remaining lease
term. Amortization of construction-in-progress will begin when construction
is complete. Expenditures for maintenance and repairs are charged to
operating expense when incurred. When items are sold or retired, the related
cost and accumulated depreciation are removed from the accounts and any
resulting gain or loss is reflected in the statement of operations.
INTANGIBLE ASSETS
Goodwill and the cost of acquired trademarks, product licenses and patents
are amortized on a straight-line basis over periods ranging from 5 to
20 years.
LONG-LIVED ASSETS
The Company periodically evaluates the recoverability of the carrying value
of property and equipment and intangible assets. The Company considers
historical performance and anticipated future results in its evaluation of
potential impairment. Accordingly, when indicators of impairment are
present, the Company evaluates the carrying value of these assets in
relation to the operating performance of the business and future and
undiscounted cash flows expected to result from the use of these assets.
Impairment losses are required to be recognized when the sum of expected
future cash flows, undiscounted, are less than the assets' carrying value.
No such impairment losses have been recognized to date. Such losses, if
necessary, are measured based upon the sum of the discounted expected future
cash flows compared to the assets' carrying value.
DEFERRED FINANCING COSTS
Deferred financing costs associated with the various debt issues are
classified as part of other assets and are being amortized over the terms of
the related debt, using the straight-line method which approximates the
effective interest method. Amortization of the deferred financing costs is
included in interest expense.
INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future
years of differences between the financial statement and tax bases of assets
and liabilities at each year-end, based on enacted tax laws and statutory
tax rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances have been established to reduce
deferred tax assets to the amount expected to be realized. Income tax
expense is the sum of tax payable for the period and the change during the
period in deferred tax assets and liabilities.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company believes that the carrying amount of certain of its financial
instruments, which include cash equivalents, marketable securities, accounts
receivable, accounts payable, accrued liabilities, term loans and
installment notes approximate fair value due to the relatively short
maturity of these instruments. The fair value of the Debentures (see
Note 11) as of December 31, 1997 and 1998 was approximately $67,500,000 and
$81,000,000, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the
F-43
<PAGE>
FUISZ TECHNOLOGIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This
Statement requires that an entity recognize all derivatives as either assets
or liabilities in the balance sheet and measure those instruments at fair
value. The Company will be required to adopt this new accounting standard
beginning with the quarter ended March 31, 2000. The Company believes that
the effect of adoption of SFAS No. 133 will not be significant.
3. ACQUISITIONS
During 1998 and 1997, the Company acquired five companies (the "Acquired
Companies"), each of which has been accounted for as a purchase and,
accordingly, their operating results have been included in the Company's
consolidated financial statements since the respective dates of acquisition.
FUISZ PHARMA KG
Effective February 1, 1998, the Company completed the acquisition of all of
the issued and outstanding equity interests of Dr. Rentschler GmbH & Co.
Medizin KG ("Fuisz Pharma KG"), a subsidiary of Dr. Rentschler Arzneimittel
GmbH & Co., a pharmaceutical sales and distribution company based in
Laupheim, Germany, for an aggregate purchase price of approximately
$19.4 million in cash. The excess of the aggregate purchase price over the
fair market value of net assets acquired of approximately $15.8 million is
being amortized over 15 years.
ISTORIA FARMACEUTICI
In October 1997, the Company acquired substantially all of the outstanding
stock of Istoria Farmaceutici ("Istoria"), a marketer of pharmaceutical
products based in Padova, Italy. The total consideration consisted of:
(i) 94,406 shares of common stock of the Company, valued at a price of
$13.17 per share (based on the weighted average price of shares traded
during the period September 9, 1997 to September 15, 1997) and
(ii) $2.2 million in cash, which includes acquisition costs. The excess of
the aggregate purchase price over the fair market value of net assets
acquired of approximately $2.6 million is being amortized over 10 years.
CLONMEL HEALTHCARE LIMITED
In September 1997, the Company acquired all of the outstanding ordinary
share capital of Clonmel Healthcare Limited ("Clonmel"), a private
manufacturer of branded generic pharmaceutical products in the Republic of
Ireland. The total consideration of $22.7 million consisted of: (i) one
million shares of common stock of the Company, valued at a price of $10.65
per share (based on the weighted average price of shares traded from
July 25, 1997 to July 31, 1997), which are subject to a contractual
restriction on transfer, (ii) an IR Pound Sterling 8,510,000 ($12,650,000 at
the date of acquisition) non-interest bearing note due in three installments
through January 2000 (the payments of which have been financed with a bank
term loan facility) and (iii) related acquisition costs. In addition,
$250,000 of contingent consideration was paid to the seller in 1998 since
Clonmel executed certain contracts for the manufacture and supply of various
pharmaceutical products. The face amount of the installment note was
discounted at a rate of 10%. The excess of the aggregate purchase price over
the fair market value of net assets acquired of approximately $15.7 million
is being amortized over 20 years.
F-44
<PAGE>
FUISZ TECHNOLOGIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (CONTINUED)
REDEEMABLE PREFERENCE SHARES. In connection with the acquisition of Clonmel,
the Company assumed the obligation of the 750,000 cumulative redeemable
preference shares of Clonmel. Cumulative dividends of 3% on 300,000 shares
and 6.5% on 450,000 shares were payable annually. The Company redeemed the
shares in 1998 at a redemption rate of IR Pound Sterling 1 per share plus
accrued dividends.
PANGEA, LTD.
In May 1997, the Company acquired all of the outstanding capital stock of
Pangea, Ltd. ("Pangea"), a U.S. nationwide marketer of nutritional
supplements and skincare products, for approximately $1.1 million in cash,
which includes acquisition costs. The excess of the aggregate purchase price
over the fair market value of net assets acquired of approximately
$2.0 million is being amortized over 10 years.
Prior to the closing of the transaction, one of the Company's directors, who
has since resigned from the Board, was also a director and stockholder of
Pangea. At the closing, the director received $500,000 of the purchase price
for his Pangea shares and repayment in full of $200,000 in loans to Pangea.
In addition, the Company's Chairman was also a director of Pangea but
received no compensation with respect thereto.
LABORATOIRES MURAT
In April 1997, the Company acquired all of the outstanding capital stock of
Laboratoires Murat ("Murat"), a privately-owned pharmaceutical sales and
distribution company based in Paris, France, for an aggregate purchase price
of approximately $5.0 million in cash, which includes acquisition costs. The
excess of the aggregate purchase price over the fair market value of net
assets acquired of approximately $4.5 million is being amortized over
10 years.
PRO FORMA INFORMATION
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and the Acquired Companies
(excluding Fuisz Pharma KG) as if the acquisitions had occurred January 1,
1996 (a full year of goodwill amortization and interest cost is included for
both 1997 and 1996). Pro forma information for Fuisz Pharma KG has not been
provided because stand-alone financial information was not produced by the
previous owner of Fuisz Pharma KG for periods prior to the acquisition on
February 1, 1998.
<TABLE>
<CAPTION>
1996 1997
--------- ---------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Total revenue............................................... $ 41,813 $ 45,062
Net loss.................................................... (10,336) (22,059)
Net loss per share (basic and diluted)...................... $ (0.50) $ (1.00)
</TABLE>
These unaudited pro forma results have been prepared for comparative
purposes only. They do not purport to be indicative of the results of
operations which actually would have resulted had the Acquired Companies
been included in the Company's consolidated financial statements as of
January 1, 1996. In addition, they do not purport to be indicative of future
consolidated results of operations of the Company.
F-45
<PAGE>
FUISZ TECHNOLOGIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. MARKETABLE SECURITIES
Marketable securities are carried at fair market value and consist of the
following at December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
U.S. Government obligations................................. $14,213 $ 5,090
Mortgage-backed government securities....................... 5,550 1,309
Corporate debt securities................................... 23,929 5,912
Asset-backed securities..................................... -- 3,014
Equity securities........................................... -- 359
Commercial paper/certificates of deposit.................... 29,442 3,994
------- -------
$73,134 $19,678
======= =======
</TABLE>
5. INVENTORY
Inventory consists of the following at December 31, 1997 and 1998.
<TABLE>
<CAPTION>
1997 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Raw materials............................................... $1,874 $2,088
Work in process............................................. 1,130 694
Finished goods.............................................. 2,371 2,290
------ ------
$5,375 $5,072
====== ======
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, stated at cost, is comprised of the following
at December 31, 1997 and 1998.
<TABLE>
<CAPTION>
1997 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Buildings................................................... $ 4,834 $ 5,729
Production and laboratory equipment......................... 10,118 11,422
Office furniture, computers and equipment................... 2,442 3,728
Leasehold improvements...................................... 1,107 5,305
Construction-in-progress.................................... 7,510 6,503
------- -------
26,011 32,687
Less accumulated depreciation and amortization.............. (3,070) (6,133)
------- -------
$22,941 $26,554
======= =======
</TABLE>
Construction-in-progress consists primarily of costs incurred in connection
with the design and construction of the Company's manufacturing and lab
facilities. Depreciation expense was $691,000, $1,279,000 and $3,004,000 for
the years ended December 31, 1996, 1997, and 1998, respectively.
F-46
<PAGE>
FUISZ TECHNOLOGIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INTANGIBLE ASSETS
Intangible assets, stated at cost, consist of the following at December 31,
1997 and 1998.
<TABLE>
<CAPTION>
USEFUL
1997 1998 LIVES
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Goodwill.................................................... $23,649 $40,719 10-20
Product licenses/trademarks................................. 12,016 21,048 5-10
Patents and other........................................... 289 284 5-17
------- -------
35,954 62,051
Less accumulated amortization............................... (1,071) (6,501)
------- -------
$34,883 $55,550
======= =======
</TABLE>
Amortization expense was $12,000, $1,160,000 and $5,451,000 for the years
ended December 31, 1996, 1997 and 1998, respectively.
8. ACCRUED LIABILITIES AND OTHER
Accrued liabilities and other consists of the following at December 31, 1997
and 1998.
<TABLE>
<CAPTION>
1997 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Interest payable............................................ $1,090 $1,144
Personnel costs............................................. 1,233 1,609
Outside services............................................ 1,081 682
Facility.................................................... 188 402
Income taxes................................................ -- 361
Other....................................................... 713 994
------ ------
$4,305 $5,192
====== ======
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases certain of its office, laboratory, warehouse and
operating facilities under operating leases which expire at various dates
through the year 2005. Most of the leases provide the Company with certain
early cancellation rights, as well as renewal options. The facility leases
generally require the Company to pay for utilities, taxes, insurance and
maintenance costs, in addition to the base rent, which, generally increases
by 3% per annum after the first year. Total rent expense for facility leases
was approximately $522,000, $818,000 and $1,334,000 for the years ended
December 31, 1996, 1997 and 1998, respectively.
The Company has an $18.0 million equipment leasing line of credit (the
"Equipment LOC") with an outside group of lenders. The Equipment LOC is
available through June 30, 2000 and provides equipment financing under three
or four year operating leases. These operating leases provide the Company
with the option after the initial lease term either to purchase the property
at the then fair value or renew its lease at the then fair rental value for
a negotiated renewal term. The Company has leased certain of its equipment
under this Equipment LOC as well as other operating leases which expire at
various dates through the year 2002. Total rent expense for equipment leases
was approximately $283,000 and $1,960,000, for the years ended December 31,
1997 and 1998, respectively (1996 was not material).
F-47
<PAGE>
FUISZ TECHNOLOGIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum lease payments required under operating leases as of
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR (IN THOUSANDS)
- ---- --------------
<S> <C>
1999................................................ $ 4,272
2000................................................ 4,281
2001................................................ 4,133
2002................................................ 2,652
2003................................................ 1,172
Thereafter.......................................... 2,003
-------
Total............................................... $18,513
=======
</TABLE>
CAPITAL LEASES
The Company also leases certain of its equipment under capital leases. As of
December 31, 1997 and 1998, property, plant and equipment includes $251,000
and $896,000, respectively (net of $39,000 and $298,000 of accumulated
amortization) of assets under capital leases. Future minimum payments under
these capital leases are as follows:
<TABLE>
<CAPTION>
YEAR (IN THOUSANDS)
- ---- --------------
<S> <C>
1999................................................ $269
2000................................................ 240
2001................................................ 236
2002................................................ 189
----
Total minimum lease payments........................ 934
Less amount representing interest................... (73)
----
Present value of net minimum lease payments......... $861
====
</TABLE>
LEGAL PROCEEDINGS
In February 1999, the Company brought suit against Elan Corporation, plc
("Elan") for breach of an agreement entered into in December 1998 under
which Elan agreed to pay a fee to the Company for the right, until
January 31, 1999, to conclude a manufacturing and licensing agreement
regarding manufacturing, as a third party contractor, of certain Company
products.
10. LINES OF CREDIT
Short-term borrowings of $1,042,000 and $633,000 at December 31, 1997 and
1998, respectively, consist of borrowings by subsidiaries located outside
the United States under the terms of lines of credit which allow the
subsidiaries to borrow in the applicable local currency. These lines of
credit total $3.5 million (using exchange rates as of December 31, 1998) and
are concentrated in Ireland, France and Italy. The lines of credit generally
provide borrowing at the bank reference rate plus 1-2%, which varies
depending on the country where the funds are borrowed.
F-48
<PAGE>
FUISZ TECHNOLOGIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. NOTES PAYABLE
Notes payable consists of the following at December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Convertible subordinated debentures......................... $75,000 $75,000
Term loans, net of discount of $861 in 1997................. 12,913 14,168
Installment notes, net of discount of $594 and $870,
respectively.............................................. 4,747 2,876
Capital leases.............................................. 203 861
------- -------
92,863 92,905
Less current portion........................................ (2,679) (2,266)
------- -------
Long-term notes payable..................................... $90,184 $90,639
======= =======
</TABLE>
CONVERTIBLE SUBORDINATED DEBENTURES. On October 22, 1997, the Company
privately placed $75.0 million aggregate principal amount of 7% Convertible
Subordinated Debentures (the "Debentures") due October 15, 2004, which were
resold under Rule 144A and Regulation S of the Securities Act of 1933. The
Company received net proceeds of approximately $72.8 million related to the
sale of the Debentures. The Debentures are convertible into the Company's
common stock at the option of the holder at any time at or before maturity,
unless previously redeemed, at $13.25 per share, subject to adjustment upon
the occurrence of certain events. The Debentures are subordinated to the
Company's present and future Senior Indebtedness (as defined). The
Debentures are redeemable in whole or in part, at the option of the Company,
at 104%, 103%, 102% and 101% in 2000, 2001, 2002 and 2003, respectively.
Interest is payable semiannually on April 15 and October 15.
TERM LOANS. The Company has an IR Pound Sterling 8,451,000 ($11,902,000 and
$12,592,000 as of December 31, 1997 and 1998, respectively) term loan with a
bank in Ireland under which it has financed the installment note obligations
in connection with the 1997 acquisition of Clonmel (see Note 3). This term
loan is payable at various maturities beginning in June 2000 and ending
December 2002 and bears interest at the bank's reference rate plus fees
(4.3% at December 31, 1998). As collateral for the loan, the Company has
pledged approximately $11.0 million in cash and all of Clonmel's assets. The
cash which is pledged is shown as restricted cash in the accompanying
consolidated balance sheets.
The Company has several other term loans, in the aggregate amount of
$1,872,000 and $1,576,000 as of December 31, 1997 and 1998, respectively,
with banks in Ireland, France and Italy. The other term loans are payable in
quarterly or annual installments plus interest generally at rates ranging
from 4.0&8.5%. The other term loans mature at various dates through the year
2002.
INSTALLMENT NOTES. The Company has an installment note obligation for the
purchase of product and trademark rights, which has been discounted at a
rate of 10%. The installment note is payable annually and matures in 2001.
CAPITAL LEASES. The Company leases certain of its equipment under capital
leases (see Note 9).
The weighted average interest rate on all of the above notes payable was
6.7% at December 31, 1998. Total long-term debt maturities during each of
the four years ending December 31, 2002 are $2,266,000, $2,087,000,
$2,135,000 and $12,011,000. No maturities are due in 2003 and the Debentures
are due in full in 2004.
F-49
<PAGE>
FUISZ TECHNOLOGIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCKHOLDERS' EQUITY
TREASURY STOCK
In November 1996, the Company's Board of Directors authorized a stock
repurchase program under which the Company is authorized to repurchase up to
1,000,000 shares of the Company's common stock for reissuance upon the
exercise of employee stock options and for other compensation programs
utilizing the Company's common stock. During 1996, the Company repurchased
100,000 shares at a cost of $775,000 under this program. In December 1996,
the 100,000 repurchased shares were reissued to an officer/director of the
Company in connection with an employment agreement. During 1998, the Company
repurchased 638,200 shares for $5,565,000.
ACCUMULATED OTHER COMPREHENSIVE INCOME
During 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income", which requires additional disclosures with respect to certain
changes in assets and liabilities that previously were not required to be
reported as results of operations for the period. SFAS No. 130 requires
unrealized gains and losses on the Company's available-for-sale securities
and foreign currency translation adjustments to be included in other
comprehensive income.
Components of other comprehensive income (loss), which is included as a
separate component of stockholders' equity consists of the following:
<TABLE>
<CAPTION>
1996 1997 1998
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Foreign currency translation adjustments.................... $ -- $(891) $1,833
Change in unrealized gains on marketable securities......... -- -- 341
--------- ----- ------
$ -- $(891) $2,174
========= ===== ======
</TABLE>
13. CAPITAL STOCK
OPTIONS AND STOCK PURCHASE PLANS
The Board of Directors has adopted the 1991 Stock Option Plan (the "1991
Option Plan"), the 1994 Stock Incentive Plan (the "1994 Option Plan"), the
1994 Employee Stock Purchase Plan (the "Stock Purchase Plan"), and the 1994
Director Stock Option Plan (the "Director Option Plan") (collectively, the
"Plans") under which 5,600,000 shares of Common Stock have been reserved for
issuance upon exercise of options granted to officers, employees, directors
and consultants of the Company.
The Company's 1991 Option Plan provided for formula option awards to
non-employee directors and discretionary awards to employees, consultants,
advisors, officers, or directors of the Company. In May 1994, the Board
adopted and the stockholders of the Company approved the 1994 Option Plan,
the Stock Purchase Plan and the Director Option Plan and provided that no
further grants may be made under the 1991 Option Plan.
Under the Company's 1994 Option Plan, a variety of awards, including stock
options, stock appreciation rights and restricted and unrestricted stock
grants may be made to the Company's employees, officers, consultants and
advisors who are expected to contribute to the Company's future growth and
success. The Compensation Committee of the Board of Directors administers
the 1994 Option Plan and determines the price and other terms upon which
awards shall be made. Stock options may be granted either in the form of
incentive stock options or non-statutory stock options and are granted at
fair market value. Options or other awards that are granted under the Plan
but expire unexercised are available for future grants.
F-50
<PAGE>
FUISZ TECHNOLOGIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. CAPITAL STOCK (CONTINUED)
Under the Company's Stock Purchase Plan, which has been inactive through
December 31, 1998, employees and officers of the Company are eligible to
participate in semiannual plan offerings in which payroll deductions may be
used to purchase shares of Common Stock. The purchase price of such shares
is 85% of the fair market value of the Common Stock at the lower of the
value at either the commencement date or termination date of the offering
under the Stock Purchase Plan.
The Director Option Plan provides that each new non-employee director first
elected will receive a nonstatutory option to purchase 30,000 shares of
Common Stock upon his or her initial election. In addition, each
non-employee director will receive an annual nonstatutory option to purchase
3,000 shares of Common Stock under the Director Option Plan during his or
her tenure. All options granted to directors under the Director Option Plan
have an exercise price equal to the fair market value of the Common Stock on
the date of grant and expire the earlier of 90 days after the optionee
ceases to serve as a director of the Company or ten years after the date of
grant. Options granted under the Director Option Plan are fully vested and
are exercisable when granted.
Options granted under the 1991 Option Plan and the 1994 Option Plan
generally vest over a two- to four-year period. Options to purchase
approximately 1,918,000 and 2,411,000 shares were vested and exercisable at
December 31, 1997 and 1998, respectively, with weighted average exercise
prices of $6.12 and $7.53, respectively. The weighted average fair value per
share of options granted during 1997 and 1998 was $4.79 and $7.02,
respectively. Options of approximately 469,000 shares were available for
future grant at December 31, 1998, under all plans. The Company has reserved
sufficient shares of Common Stock for issuance upon exercise of stock
options and stock warrants. Stock option activity since December 31, 1995 is
as follows:
<TABLE>
<CAPTION>
WEIGHTED
1994 AVERAGE
1991 1994 STOCK DIRECTORS EXERCISE
PRE-PLAN STOCK INCENTIVE STOCK PRICE PER
GRANTS OPTION PLAN PLAN OPTION PLAN TOTAL SHARE
-------- ----------- ---------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995............ 195,900 1,395,916 1,235,277 45,000 2,872,093 $ 4.57
Granted............................. -- -- 798,350 15,000 813,350 $17.94
Exercised........................... (195,900) (596,630) (39,900) -- (832,430) $ 2.43
Forfeited........................... -- (39,750) (345,800) -- (385,550) $16.38
-------- --------- --------- ------- ---------
Balance, December 31, 1996............ -- 759,536 1,647,927 60,000 2,467,463 $ 8.02
Granted............................. -- -- 1,246,175 100,000 1,346,175 $ 8.43
Exercised........................... -- (146,325) (39,374) (30,000) (215,699) $ 3.45
Forfeited........................... -- (1,125) (314,834) -- (315,959) $22.32
-------- --------- --------- ------- ---------
Balance, December 31, 1997............ -- 612,086 2,539,894 130,000 3,281,980 $ 7.05
Granted............................. -- -- 830,675 38,000 868,675 $11.50
Exercised........................... -- (189,036) (113,115) (43,000) (345,151) $ 4.52
Forfeited........................... -- (469) (249,703) (3,000) (253,172) 8.40
-------- --------- --------- ------- ---------
Balance, December 31, 1998............ -- 422,581 3,007,751 122,000 3,552,332 $ 8.25
======== ========= ========= ======= =========
</TABLE>
F-51
<PAGE>
FUISZ TECHNOLOGIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. CAPITAL STOCK (CONTINUED)
The following table summarizes additional information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE EXERCISE PRICE
------------------------ ----------- ----------- --------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 1.7800-2.5000.................... 62,500 2.3 1.78 62,500 $ 1.78
$ 2.5001-5.0000.................... 521,007 5.1 3.47 521,007 3.47
$ 5.0001-7.5000.................... 689,670 7.8 7.21 424,125 7.24
$ 7.5001-10.0000................... 1,434,561 7.9 8.36 1,013,191 8.21
$10.0001-12.5000................... 228,194 8.3 10.89 99,194 10.76
$12.5001-15.0000................... 611,400 9.8 12.76 286,071 12.77
$15.0001-25.0000................... 5,000 7.3 25.00 5,000 25.00
--------- ---- --------- --------- ------
3,552,332 7.7 $ 8.25 2,411,088 $ 7.53
========= ==== ========= ========= ======
</TABLE>
During 1996, the Board of Directors authorized the exchange of 134,800 stock
options originally granted during 1996 under the 1994 Stock Incentive Plan
at exercise prices ranging from $8.00 to $30.25 for 134,800 stock options
having an exercise price of $10.375 and $7.6875, the fair market value on
the dates of exchange.
During 1997, the Board of Directors authorized the exchange of 287,500 stock
options originally granted during 1996 under the 1994 Stock Incentive Plan
at exercise prices ranging from $15.17 to $25.00 for 287,500 stock options
having an exercise price of $7.25, the fair market value on the date of
exchange.
The Company has adopted the disclosure-only provisions of SFAS No. 123 as
they pertain to financial statement recognition of compensation expense
attributable to option grants. If the Company had elected to recognize
compensation cost for the 1994 Stock Incentive Plan and the 1994 Director
Stock Option Plan consistent with SFAS No. 123, the Company's net loss and
net loss per share on a pro forma basis would be:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net loss as reported........................................ $ (6,806) $(19,601) $(23,579)
Net loss pro forma.......................................... (10,931) (24,497) (29,417)
Net loss per share (basic and diluted) as reported.......... (0.35) (0.92) (1.07)
Net loss per share (basic and diluted) pro forma............ (0.56) (1.15) (1.33)
</TABLE>
The fair value of each option grant was estimated using the Black-Scholes
option pricing model with the following weighted average assumptions for
each year:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate..................................... 6.33% 6.28% 5.29%
Expected life of options--years............................. 6.0 6.0 6.0
Expected stock price volatility............................. 70% 50% 60%
Expected dividend yield..................................... 0.0% 0.0% 0.0%
</TABLE>
F-52
<PAGE>
FUISZ TECHNOLOGIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. CAPITAL STOCK (CONTINUED)
WARRANTS
In connection with the issuance of convertible notes payable in May 1994,
the Company issued warrants to purchase an aggregate of 60,000 shares of
Common Stock. These warrants have an exercise price of approximately $5.30
per share and expire in May 1999. As of December 31, 1998, all of these
warrants are outstanding. The Company estimated a fair value of $1.24 per
share of underlying Common Stock attributable to these warrants. No
resulting expense was reflected on the Company's financial statements, as
such amounts were immaterial.
In connection with a line of credit agreement entered into in October 1995,
the Company issued warrants to purchase 132,000 shares of Common Stock at an
exercise price of $5.00 per share. As of December 31, 1998, 120,000 of these
warrants are outstanding. The Company estimated a fair value of $1.69 per
share of underlying Common Stock attributable to these warrants. Because the
line of credit was terminated in December 1995, the resulting expense of
$224,000 was fully amortized to expense during the fourth quarter of 1995.
In June 1997, the Company entered into a license agreement (the "Agreement")
with ConAgra, Inc. ("ConAgra"). Pursuant to the Agreement, the Company
granted to ConAgra a warrant to purchase one million shares of Common Stock
at $25.00 per share. The warrant became fully exercisable on August 11, 1997
and expires on August 11, 2007, subject to an early termination date of
December 15, 2002 if certain revenue milestones are not achieved. The
Company recorded a noncash charge equal to the fair value of the warrant of
$2.3 million in the third quarter of 1997.
All of the warrants issued by the Company contain anti-dilutive provisions
that adjust the number of shares of Common Stock available for purchase
under the warrant or the exercise price, upon the subsequent issuance of
certain equity securities or equivalents below the respective exercise
prices of the warrants. During 1997, warrantholders exercised 194,828
warrants (originally granted prior to 1994) generating proceeds to the
Company of approximately $997,000. During 1998, warrantholders exercised
12,000 warrants (originally granted in 1995) resulting in the issuance of
7,025 shares of Common Stock and the cancellation of 4,975 warrants as
payment for the exercise. At December 31, 1998, warrantholders could
purchase an aggregate number of shares of Common Stock totaling 1,180,000 at
exercise prices ranging from $5.00 to $25.00 per share.
14. RELATED PARTY TRANSACTIONS
On December 31, 1998, the Company entered into a stock purchase agreement
(the "Stock Purchase Agreement") to sell all of the issued and outstanding
share capital of FuiszDrugstore.com Ltd. ("FuiszDrugstore"), then a
wholly-owned subsidiary of the Company, to a corporation owned by Richard C.
Fuisz, M.D. ("Dr. Fuisz"). At the Closing, which took place in
February 1999, the Company delivered the shares, which were transferred to
RxDrugstore.com Limited ("RxDrugstore.com") and received consideration of
$100,000 in cash and 200,000 shares of common stock of RxDrugstore.com
(which represents 5% of the issued and outstanding shares of common stock of
RxDrugstore.com). The Company will account for its 5% investment in
RxDrugstore.com using the cost method. Prior to the Closing, FuiszDrugstore
was engaged in sales of drugstore products over the Internet.
In connection with the Stock Purchase Agreement, in February 1999, the
Company and a wholly-owned subsidiary of Dr. Fuisz (the "Subsidiary")
concluded a 20 year license agreement (the "License Agreement"), which
grants the Subsidiary the non-exclusive right to sell Licensed Products (as
that term is defined in the License Agreement) through the Internet. The
license covers all existing products of the Company as well as certain
additional products developed by the Company over the next four years. In
F-53
<PAGE>
FUISZ TECHNOLOGIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RELATED PARTY TRANSACTIONS (CONTINUED)
consideration for the license, the Company received a non-interest bearing
promissory note for $2.4 million, payable by the Subsidiary in four annual
installments commencing on December 31, 1999.
Dr. Fuisz, a director of the Company, is a director and greater than 10%
stockholder of RxDrugstore.com. The purchase price was determined by the
Company's management and approved by the Board of Directors. Dr. Fuisz did
not participate in the determination of the purchase price or the
deliberations of the Board.
15. INCOME TAXES
The provision for income taxes for the years ended December 31, 1996, 1997
and 1998 is summarized as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal................................................... $ -- $ -- $ --
State..................................................... -- -- --
Foreign................................................... -- -- 162
Deferred:
Federal................................................... -- -- --
State..................................................... -- -- --
Foreign................................................... -- -- 199
---- ---- ----
Total provision............................................. $ -- $ -- $361
==== ==== ====
</TABLE>
The tax effects of the temporary differences giving rise to the Company's
deferred taxes at December 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net operating loss carryforwards............................ $21,012 $31,407
General business credit carryforwards....................... 204 204
Other....................................................... 1,181 92
Valuation allowance......................................... (22,397) (31,703)
------- -------
Net deferred taxes........................................ $ -- $ --
======= =======
</TABLE>
Realization of net deferred tax assets at the balance sheet dates is
dependent on the Company's ability to generate future taxable income which
is uncertain. Accordingly, a full valuation allowance was recorded against
these assets as of December 31, 1997 and 1998.
As of December 31, 1998, the Company has available net operating loss
carryforwards of approximately $83,408,000 and general business credit
carryforwards of $204,000. These loss and credit carryforwards expire at
various dates beginning in 1998. There may be limitations on the annual
utilization of these net operating losses and general business credits as a
result of certain changes in ownership that have occurred since the
Company's inception. The Company's total net operating loss carryforwards
include $15,982,000 related to the exercise of non-qualified stock options.
The tax benefit of $6,073,000 related to the exercise of these options will
be credited to stockholders' equity when realized.
F-54
<PAGE>
FUISZ TECHNOLOGIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. INCOME TAXES (CONTINUED)
The Company's tax provision for the years ended December 31, 1996, 1997 and
1998 differs from the statutory rate for Federal income taxes as a result of
the tax effect of the following factors:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Statutory rate.............................................. (34.0)% (34.0)% (34.0)%
State income taxes, net of federal benefit.................. (4.0) (4.0) (4.0)
Permanent differences....................................... 16.9 0.6 0.4
Foreign taxes............................................... -- -- 1.6
Valuation allowance......................................... 21.1 37.4 37.6
------- ------- -------
Effective tax rate.......................................... -- -- 1.6 %
======= ======= =======
</TABLE>
16. SEGMENT INFORMATION
During 1998, the Company adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 requires the Company
to report financial and descriptive information about its reportable
operating segments. The accounting policies of the segments are the same as
those described in Note 2, "Summary of Significant Accounting Policies."
Segment data includes a charge for management fees allocating a portion of
corporate headquarters' costs to each of its operating segments. The Company
is engaged in the development, manufacture and commercialization of a wide
variety of pharmaceutical and consumer healthcare products. To achieve these
objectives, the Company has three reportable segments: Pharmaceutical
Operations, Pharmaceutical Research and Development and Consumer Healthcare.
PHARMACEUTICAL OPERATIONS. This segment includes the selling and
distribution of a wide variety of pharmaceutical products through five of
the Company's subsidiaries: Fuisz Pharma KG, Murat, Istoria, Pangea and
Clonmel. These companies operate as pharmaceutical marketing and
distribution companies and sell various pharmaceutical products for which
they own product marketing rights through their distribution channels. This
segment also includes the Company's manufacturing operations, which through
December 31, 1998, have principally taken place at the manufacturing
facilities of Clonmel. The products sold by this segment are either
manufactured by Clonmel or by third parties contracted by the Company.
PHARMACEUTICAL RESEARCH AND DEVELOPMENT. This segment includes research
and development efforts focused on developing pharmaceutical products for
the Company's collaborators as well as Company-funded products for future
collaboration. The Company's collaborative arrangements typically provide
for a customer-funded development project and contemplate a licensing
arrangement under which, if a product is commercialized by the collaborative
partner, the Company would receive license fees, royalty payments from
product sales and manufacturing revenue.
CONSUMER HEALTHCARE. This segment includes product research and
development efforts primarily focused on developing food and nutraceutical
products for the Company's collaborators as well as the manufacture and sale
of such products through conventional distribution channels. Through
December 31, 1998, this segment's operations have principally been focused
on research and development activities. The Company's collaborative
arrangements are structured similar to those of the Pharmaceutical Research
and Development segment.
F-55
<PAGE>
FUISZ TECHNOLOGIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SEGMENT INFORMATION (CONTINUED)
Segment information for 1996, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
PHARMACEUTICAL
PHARMACEUTICAL RESEARCH AND CONSUMER
OPERATIONS DEVELOPMENT HEALTHCARE TOTAL
-------------- -------------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
1996........................................ $ -- $ 7,227 $ 1,299 $ 8,526
1997........................................ 11,968 6,389 3,841 22,198
1998........................................ 47,898 11,617 1,704 61,219
------- -------- ------- --------
Net operating loss:
1996........................................ -- (8,630) (1,149) (9,779)
1997........................................ (1,519) (16,958) (2,647) (21,124)
1998........................................ (1,249) (15,287) (3,709) (20,245)
Identifiable assets(1):
1996........................................ -- 69,083 -- 69,083
1997........................................ 58,644 111,476 -- 170,120
1998........................................ 84,040 61,696 -- 145,736
Depreciation and amortization(1):
1996........................................ -- 703 -- 703
1997........................................ 1,430 1,009 -- 2,439
1998........................................ 6,263 2,192 -- 8,455
Capital expenditures(1):
1996........................................ -- 4,449 -- 4,449
1997........................................ 5,911 6,878 -- 12,789
1998........................................ 3,048 2,188 -- 5,236
------------------------
</TABLE>
(1) Asset information for the Consumer Healthcare segment is aggregated with
the Pharmaceutical Research and Development segment since the Company
does not produce such information internally by segment.
F-56
<PAGE>
FUISZ TECHNOLOGIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SEGMENT INFORMATION (CONTINUED)
Summarized financial information by geographic region for 1996, 1997 and
1998 is as follows:
<TABLE>
<CAPTION>
NORTH AMERICA EUROPE TOTAL
------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
1996...................................................... $ 8,526 $ -- $ 8,526
1997...................................................... 12,948 9,250 22,198
1998...................................................... 19,766 41,453 61,219
-------- ------- --------
Net operating income (loss):
1996...................................................... (9,779) -- (9,779)
1997...................................................... (19,322) (1,802) (21,124)
1998...................................................... (20,352) 107 (20,245)
-------- ------- --------
Identifiable assets:
1996...................................................... 69,083 -- 69,083
1997...................................................... 107,353 62,767 170,120
1998...................................................... 56,100 89,636 145,736
-------- ------- --------
</TABLE>
17. SUPPLEMENTAL CASH FLOW DISCLOSURE
Supplemental cash flow disclosure for the years ended December 31 1996, 1997
and 1998 is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Supplemental cash flow disclosures:
Cash paid for interest.................................... $52 $ 105 $5,452
=== ======= ======
Noncash investing and financing activities:
Equipment acquired under capital leases................. $-- $ -- $ 893
=== ======= ======
Offering and acquisition costs financed in accounts
payable............................................... $-- $ 406 $ --
=== ======= ======
Common stock issued in connection with business
acquisitions.......................................... $-- $11,894 $ --
=== ======= ======
Issuance of installment notes in connection with
business and product acquisitions, net of discount of
$2,082................................................ $-- $15,437 $ --
=== ======= ======
Accrued dividends....................................... $-- $ 19 $ 24
=== ======= ======
</TABLE>
18. CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The financial statements of the COMPANY have been prepared in accordance
with generally accepted accounting principles in the United States ("US
GAAP") which differ in certain material respects from
F-57
<PAGE>
FUISZ TECHNOLOGIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
those applicable in Canada ("Cdn. GAAP"). The material differences as they
apply to the Company's financial statements are as follows:
a) Reconciliation of net income under US and Cdn. GAAP:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Net loss according to US GAAP............................... $(6,806) $(19,601) $(23,579)
Cdn. GAAP adjustments
Discount on convertible subordinated debentures(i)........ -- (189) (1,136)
------- -------- --------
Net unrealized gain on marketable securities(ii).......... -- -- 341
Net loss according to Cdn. GAAP............................. $(6,806) $(19,790) $(24,374)
------- -------- --------
Loss per share according to Cdn. GAAP....................... $ (0.35) $ (0.93) $ (1.10)
======= ======== ========
------------------------
</TABLE>
(i) Under Cdn. GAAP, convertible debt is recorded at the present value
of the principal and interest cash flows discounted at the company's
borrowing rate (estimated at 10%). The difference between the
present value and the face value of the debt is recorded as
additional paid-in capital. The present value of the debt is
accreted to the face value over the term of the debt using the
effective interest method.
(ii) Under Cdn. GAAP, unrealized gains and losses on marketable
securities are recorded as a component of net loss.
b) Comprehensive loss
There is no requirement to disclose comprehensive loss under Cdn. GAAP.
c) The component of stockholders equity under Cdn. GAAP are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
-------- --------
<S> <C> <C>
Common shares............................................... $ 222 $ 225
Additional paid-in capital.................................. 107,032 108,863
Warrants.................................................... 2,300 2,300
Accumulated deficit(i)...................................... (49,055) (72,317)
Treasury stock.............................................. -- (5,565)
Cumulative translation adjustment(i)........................ (891) 942
-------- --------
Total stockholders' equity................................ $ 59,608 $ 34,448
======== ========
------------------------
</TABLE>
(i) There is no requirement to disclose comprehensive loss under Cdn.
GAAP. Accumulated other comprehensive loss has been included in
accumulated deficit, except for the portion of accumulated other
comprehensive loss attributable to the cumulative effect of foreign
currency translation adjustments which has been disclosed
separately.
d) Under US GAAP, the Company's statements of cash flows are prepared
pursuant to the provisions of SFAS No. 95, STATEMENT OF CASH FLOWS. For
purposes of Cdn. GAAP, the Company has elected to adopt the provisions of
CICA Handbook Section 1540, CASH FLOW STATEMENTS, which provisions are
F-58
<PAGE>
FUISZ TECHNOLOGIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
substantially the same as SFAS No. 95. Accordingly, there are no
reconciling differences related to the Company's statements of cash flows
under US and Cdn. GAAP.
19. UNAUDITED INTERIM INFORMATION
BASIS OF PRESENTATION
The unaudited interim financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to those rules and
regulations, although the Company believes that the disclosures made are
adequate to make the information presented not misleading. The unaudited
interim financial statements reflect, in the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
fairly present the financial position, results of operations and changes in
cash flows as of and at the end of the periods presented. The unaudited
interim financial information should be read in conjunction with the audited
financial statements and related notes thereto, appearing elsewhere herein.
The results for the interim periods presented are not necessarily indicative
of results to be expected for the full year.
INVENTORY
Inventory consists of the following at June 30, 1999:
<TABLE>
<CAPTION>
JUNE 30, 1999
--------------
(IN THOUSANDS)
<S> <C>
Raw materials............................................... $3,480
Work in process............................................. 876
Finished goods.............................................. 1,550
------
$5,906
======
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company believes that the carrying amount of certain of its financial
instruments, which include cash equivalents, marketable securities, accounts
receivable, accounts payable, accrued liabilities, term loans and
installment notes, approximates fair value due to the relatively short
maturity of these instruments. As of June 30, 1999, the fair value of the
$75.0 million aggregate principal amount of 7% Convertible Subordinated
Debentures due October 15, 2004, was approximately $35.6 million.
OTHER OPERATING EXPENSES
The Company recorded nonrecurring charges of $5.7 million during the second
quarter. The nonrecurring expenses include approximately a $1.6 million
charge for impairment of goodwill associated with the Company's Pangea unit
as discussed in Note 5 as well as a $3.6 million charge relating to expenses
associated with an employee head-count reduction program (including
severance) and other expenses concerning executive resignations, among
others.
SEGMENT INFORMATION
The Company is engaged in the development, manufacture and commercialization
of a wide variety of pharmaceutical and consumer healthcare products. To
achieve these objectives, the Company has three
F-59
<PAGE>
FUISZ TECHNOLOGIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. UNAUDITED INTERIM INFORMATION (CONTINUED)
reportable segments: Pharmaceutical Operations, Pharmaceutical Research and
Development and Consumer Healthcare.
PHARMACEUTICAL OPERATIONS. This segment includes the selling and
distribution of a wide variety of pharmaceutical products through five of
the Company's subsidiaries: Laboratoires Murat ("Murat"), Pangea, Ltd.
("Pangea"), Clonmel Healthcare Limited ("Clonmel"), Istoria Farmaceutici
("Istoria") and Dr. Rentschler GmbH & Co. Medizin KG ("Fuisz Pharma KG").
These companies operate as pharmaceutical marketing and distribution
companies and sell various pharmaceutical products for which they own
product marketing rights through their distribution channels. This segment
also includes the Company's manufacturing operations, which through
June 30, 1999, have principally taken place at the manufacturing facilities
of Clonmel. The products sold by this segment are either manufactured by
Clonmel or by third parties contracted by the Company.
As a result of Pangea's inability to achieve improvements specified in
business plans developed by management over prior business cycles, including
efforts to help improve product sales and attract new distributors to its
marketing program, Pangea has incurred recurring losses since its
acquisition in 1997. Pangea continued operating at a loss for the first half
of 1999. Accordingly, the Company recorded a $1.6 million impairment charge
in the second quarter which represents a complete write-down of the
unamortized balance of goodwill acquired in connection with the acquisition
of Pangea.
PHARMACEUTICAL RESEARCH AND DEVELOPMENT. This segment includes research and
development efforts focused on developing pharmaceutical products for the
Company's collaborative partners as well as Company-funded products for
future collaboration. The Company's collaborative arrangements typically
provide for a customer-funded development project and contemplate a
licensing arrangement under which, if a product is commercialized by the
collaborative partner, the Company would receive license fees, royalty
payments from product sales and manufacturing revenue.
CONSUMER HEALTHCARE. This segment includes product research and development
efforts primarily focused on developing consumer healthcare products for the
Company's collaborative partners as well as the manufacture and sale of such
products through conventional distribution channels. The Company's
collaborative arrangements are structured similarly to those of the
Pharmaceutical Research and Development segment.
F-60
<PAGE>
FUISZ TECHNOLOGIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. UNAUDITED INTERIM INFORMATION (CONTINUED)
Segment information for the three months and six months ended June 30, 1998
and 1999 is as follows:
<TABLE>
<CAPTION>
PHARMACEUTICAL
PHARMACEUTICAL RESEARCH AND CONSUMER
OPERATIONS DEVELOPMENT HEALTHCARE TOTAL
------------------- ------------------- ------------------- -------------------
THREE SIX THREE SIX THREE SIX THREE SIX
MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
JUNE 30 JUNE 30 JUNE 30 JUNE 30 JUNE 30 JUNE 30 JUNE 30 JUNE 30
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
1998.............................. $12,130 $23,977 $ 3,951 $ 6,031 $ 223 $ 299 $ 16,304 $ 30,307
1999.............................. 9,273 18,337 4,252 14,729 1,730 2,809 15,255 35,875
Operating loss:
1998.............................. 285 556 (3,386) (8,346) (1,922) (3,058) (5,023) (10,848)
1999.............................. (2,480) (3,210) (8,437) (5,355) (1,116) (1,863) (12,033) (10,428)
Identifiable assets(1):
1998(2)........................... -- 84,040 -- 61,696 -- -- -- 145,736
1999.............................. -- 71,162 -- 54,089 -- -- -- 125,251
--------------------------
</TABLE>
(1) As balance sheet items, identifiable assets are presented as six-month
ended June 30 figures. Asset information for the Consumer Healthcare
segment is aggregated with the Pharmaceutical Research and Development
segment since the Company does not produce such information internally by
segment.
(2) Information is as of December 31, 1998.
SUBSEQUENT EVENT
Proposed Merger with Biovail Corporation International. The Company entered
into a Merger Agreement (the "Merger Agreement") with Biovail Corporation
International ("Biovail") dated as of July 25, 1999. Pursuant to the Merger
Agreement, Biovail has commenced a cash tender offer for that number of
shares that would result in Biovail owning 49% of the outstanding common
stock, par value $.01 of the Company ("Common Stock"). The Merger Agreement
contemplates that the Company will subsequently become a wholly-owned
subsidiary of Biovail. In connection with the Merger, all remaining
outstanding shares of Common Stock will be exchanged for Common Stock of
Biovail. The Merger is subject to completion of the tender offer, approval
by the Company's stockholders and satisfaction or waiver of certain other
conditions. Consummation of the tender offer or the Merger may significantly
affect the future operations, capital requirements and liquidity of the
Company in manners that differ from those originally contemplated by
management. The transaction will be accounted for by the purchase method of
accounting for business combinations. The transaction is subject to
regulatory approvals in the United States, and Europe.
Proposed sale of continental European operations. Fuisz has entered into a
non-binding letter of intent for the sale of certain of its continental
European operations and the rights to a particular product.
CONTINGENCIES
On July 2, 1999, the Company received a demand for arbitration filed by
Kenneth W. McVey and Casteldermot Limited, relating to a dispute over
severance benefits with Mr. McVey, the Company's former Chief Executive
Officer. The demand arises from the Company's action to withhold from
payments under the McVey Agreement amounts that would have been payable to
the IRS if, after Mr. McVey became CEO of the Company, Mr. McVey's
compensation constituted U.S. source income subject to tax withholding. The
F-61
<PAGE>
FUISZ TECHNOLOGIES LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. UNAUDITED INTERIM INFORMATION (CONTINUED)
amounts that have been withheld from payment under the McVey Agreement have
been deposited and are included in restricted cash and other liabilities on
the balance sheet.
CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The financial statements of the Company have been prepared in accordance
with generally accepted accounting principles in the United States ("US
GAAP") which differ in certain material respects from those applicable in
Canada ("Cdn. GAAP"). The material differences as they apply to the
Company's financial statements are as follows:
a) Reconciliation of net income under US and Cdn. GAAP:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Net loss according to US GAAP............................... $(12,399) $(14,563)
Cdn. GAAP adjustments
Discount on convertible subordinated debentures(i)........ (614) (737)
-------- --------
Net loss according to Cdn. GAAP............................. $(13,013) $(15,300)
-------- --------
Loss per share according to Cdn. GAAP....................... $ (0.58) $ (0.70)
======== ========
------------------------
</TABLE>
(i) Under Cdn. GAAP, convertible debt is recorded at the present value
of the principal and interest cash flows discounted at the company's
borrowing rate (estimated at 10%). The difference between the
present value and the face value of the debt is recorded as
additional paid-in capital. The present value of the debt is
accreted to the face value over the term of the debt using the
effective interest method.
b) Comprehensive loss
There is no requirement to disclose comprehensive loss under Cdn. GAAP.
c) The components of stockholders equity under Cdn. GAAP are as follows:
<TABLE>
<CAPTION>
JUNE 30,
1999
--------
<S> <C>
Common shares............................................... $ 225
Additional paid-in capital.................................. 108,972
Warrants.................................................... 2,300
Accumulated deficit(i)...................................... (86,880)
Treasury stock.............................................. (5,565)
Cumulative translation adjustment(i)........................ (3,374)
--------
Total stockholders' equity................................ $ 15,678
========
------------------------
</TABLE>
(i) There is no requirement to disclose comprehensive loss under Cdn.
GAAP. Accumulated other comprehensive loss has been included in
accumulated deficit, except for the portion of accumulated other
comprehensive loss attributable to the cumulative effect of foreign
currency translation adjustments which has been disclosed
separately.
d) Under US GAAP, the Company's statements of cash flows are prepared
pursuant to the provisions of SFAS No. 95, STATEMENT OF CASH FLOWS. For
purposes of Cdn. GAAP, the Company has elected to adopt the provisions of
CICA Handbook Section 1540, Cash Flow Statements, which provisions are
substantially the same as SFAS No. 95. Accordingly, there are no
reconciling differences related to the Company's statements of cash flows
under US and Cdn. GAAP.
F-62
<PAGE>
COMPILATION REPORT
To the Board of Directors of
Biovail Corporation
We have reviewed, as to compilation only, the accompanying pro forma
combined statement of operations for the year ended December 31, 1999, which has
been prepared for inclusion in the short form prospectus of Biovail Corporation
dated March 15, 2000, relating to the issue of US$300,000,000 6.75% Convertible
Subordinated Preferred Equivalent Debentures due March 31, 2025 of Biovail
Corporation.
In our opinion, the pro forma combined statement of operations has been
properly compiled to give effect to the transactions and assumptions described
in the accompanying notes thereto.
Toronto, Canada (Signed) ERNST & YOUNG LLP
March 15, 2000 Chartered Accountants
COMMENTS FOR UNITED STATES READERS ON CANADIAN AND
UNITED STATES REPORTING DIFFERENCES
The above report, provided solely pursuant to Canadian requirements, is
expressed in accordance with standards of reporting generally accepted in
Canada. Such standards contemplate the expression of an opinion with respect to
the compilation of pro forma financial information. United States standards do
not provide for the expression of an opinion on the compilation of pro forma
financial information. To report in conformity with United States standards on
the reasonableness of pro forma adjustments and their application to the pro
forma financial information requires an examination or review substantially
greater in scope than the review we have conducted. Consequently, we are unable
to express any opinion in accordance with standards of reporting generally
accepted in the United States with respect to the compilation of the
accompanying pro forma combined financial statements.
Toronto, Canada (Signed) ERNST & YOUNG LLP
March 15, 2000 Chartered Accountants
F-63
<PAGE>
BIOVAIL CORPORATION
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
CANADIAN GAAP
-------------------------------------
JAN 1 - NOV 12 PROFORMA ADJUSTMENTS
-------------- -------------------------------------
BIOVAIL FUISZ DIVESTITURE PRO FORMA PRO FORMA
NOTES CONSOLIDATED TECHNOLOGIES NOTE 2.1 ADJUSTMENTS COMBINED
-------- ------------ -------------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Product sales......................... $ 99,526 $ 36,152 $(14,181) $121,497
Research and development.............. 52,260 1,022 -- 53,282
Royalty and licensing................. 2.5 24,706 13,919 (326) (7,500) 30,799
-------- -------- -------- -------- --------
176,492 51,093 (14,507) (7,500) 205,578
-------- -------- -------- -------- --------
Expenses
Cost of goods sold.................... 35,078 21,989 (5,355) 51,712
Research and development.............. 33,130 21,836 -- 54,966
Selling, general and administrative... 29,602 20,287 (10,292) 39,597
Amortization of goodwill, in-process
research & development, and other
intangibles......................... 2.2 3,165 4,603 -- 7,894 15,662
Other operating expenses.............. -- 5,861 -- -- 5,861
-------- -------- -------- -------- --------
100,975 74,576 (15,647) 7,894 167,798
-------- -------- -------- -------- --------
Operating income........................ 75,517 (23,483) 1,140 (15,394) 37,780
Equity in loss of Biovail
Technologies Inc...................... 2.4 (1,618) -- 1,618 --
Interest (expense) income, net.......... 2.3 (9,152) (4,810) 1,295 19,341 6,674
Gain on disposal of long term
investments........................... 1,948 1,948
Foreign currency loss................... -- (1,856) 1,085 (771)
-------- -------- -------- -------- --------
Income (loss) before income taxes....... 66,695 (30,149) 3,520 5,565 45,631
Provision for (recovery of) income
taxes................................. 4,215 -- -- -- 4,215
-------- -------- -------- -------- --------
Net income (loss)....................... 62,480 (30,149) 3,520 5,565 41,416
Charges on Convertible Subordinated
Preferred Equivalent Debentures....... 2.6 -- -- -- (21,610) (21,610)
-------- -------- -------- -------- --------
Net income (loss) attributable to common
shareholders.......................... $ 62,480 $(30,149) $ 3,520 $(16,045) $ 19,806
======== ======== ======== ======== ========
Net earnings (loss) per share........... $ 1.22 $ 0.35
Weighted average number of common shares
outstanding........................... 51,271 55,974
</TABLE>
F-64
<PAGE>
BIOVAIL CORPORATION
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
(U.S. DOLLARS, EXCEPT PER SHARE FIGURES AND UNLESS OTHERWISE STATED)
1. BASIS OF PRESENTATION
The accompanying pro forma statements have been prepared by the management
of Biovail based on the audited consolidated financial statements of Biovail
as at and for the year ended December 31, 1999, and the unaudited
consolidated financial statements of Fuisz for the period from January 1,
1999 to November 12, 1999, adjusted to reflect classifications consistent
with the presentation adapted by Biovail. The accounting policies used in
the preparation of the pro forma statements are those disclosed in Biovail's
audited consolidated financial statements. The unaudited consolidated
financial statements of Fuisz have been prepared in accordance with
U.S. GAAP, and any material differences between Canadian GAAP and U.S. GAAP
have been adjusted.
In the opinion of the management of Biovail these pro forma statements
include all adjustments necessary for a fair presentation of pro forma
statements.
The pro forma statements also are not necessarily indicative of the results
that actually would have been achieved if the transactions reflected therein
had been completed on the dates indicated, or of the results which may be
obtained in the future. In preparing these pro forma statements, except as
otherwise noted, no adjustments have been made to reflect transactions which
have occurred since the dates indicated or to reflect the operating benefits
and general and administrative cost savings expected to result from
combining the operations of Biovail and Fuisz.
The pro forma statements should be read in conjunction with the description
of the acquisition in the audited consolidated financial statements of
Biovail as at and for the year ended December 31, 1999 and notes thereto,
included in this prospectus, and the audited consolidated financial
statements for Fuisz as at and for the year ended December 31, 1998 and
notes thereto, also included in this prospectus.
2. PRO FORMA ASSUMPTIONS AND ADJUSTMENTS
The pro forma statements incorporate the following assumptions:
- Acquisition of Fuisz and the sale of certain European sales and marketing
operations
- Issuance of $300 million 6.75% Convertible Subordinated Preferred
Equivalent Debentures pursuant to this offering
- Issuance of 2,000,000 common shares pursuant to a concurrent offering
- Repayments of the $125 million US Dollar Senior Notes at 10 7/8% due 2005
with proceeds of the Convertible Subordinated Preferred Equivalent
Debentures and common share offerings.
These pro forma statements give effect to the following assumptions and
adjustments as if they had occurred on January 1, 1999.
2.1 DIVESTITURE OF CERTAIN FUISZ OPERATIONS
To adjust for the divestiture of certain European operations of Fuisz and
a particular product, CEBUTID, which were sold by Fuisz prior to the
acquisition by Biovail. The results of these European operations are
excluded from the Company's Pro Forma Combined Statements of Operations.
No gain or loss is to be reflected in Biovail's financial statements
relating to these disposals as these operations have been included in the
purchase price equation at their fair value.
These pro forma financial statements do not adjust for the effects of the
sale of another Fuisz operation, Clonmel Healthcare Ltd. which was
identified for sale as part of the acquisition. Biovail has
F-65
<PAGE>
BIOVAIL CORPORATION
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(U.S. DOLLARS, EXCEPT PER SHARE FIGURES AND UNLESS OTHERWISE STATED)
2. PRO FORMA ASSUMPTIONS AND ADJUSTMENTS (CONTINUED)
reached an agreement to sell all of the issued and outstanding shares of
Clonmel. The transaction is expected to close in early 2000. Please see
Management Discussion and Analysis for a description of the effect on
these pro forma financial statements of this divestiture.
2.2 AMORTIZATION OF GOODWILL
To record the incremental cost of $7.9 million related to the
amortization of goodwill, in-process research and development ("IPR&D")
and other intangibles, arising from the acquisition, over amortization
expense from continuing operations previously recorded by Fuisz and
Biovail of $3.6 million.
2.3 INTEREST EXPENSE
(i) To eliminate interest of $5.0 million for December 31, 1999 recorded
as interest on the 7% Convertible Subordinated Debentures of Fuisz
which became immediately payable following the commencement of an
offer to purchase for cash all the outstanding 7% Convertible
Subordinated Debentures on November 17, 1999. This has been recorded
as if the transaction had occurred on January 1, 1999 in the pro
forma financial statements.
(ii) To eliminate interest of $13.6 million for December 31, 1999
recorded as interest on the $125 million US Dollar Senior Notes due
2005 which will be repaid with proceeds of the convertible
preferred securities and common share offering. The retirement of
the Senior Notes will result in a loss which has not been included
in the pro forma financial statements.
(iii) To eliminate amortization of deferred financing costs of
$0.7 million on the $125 million US Dollar Senior Notes due 2005
for the year ended December 31, 1999, recorded as a component of
interest expense.
2.4 EQUITY IN LOSS OF FUISZ TECHNOLOGIES LTD.
To eliminate the equity loss of Fuisz for the period September 3, to
November 12, 1999. During this period, Biovail had a 49% interest in
Fuisz and applied equity accounting for this investment.
2.5 TERMINATION OF CONTRACT
Fuisz is a party to agreements relating to licenses of Fuisz' technology
for use in the manufacture and development of products. Biovail is in the
process of renegotiating or terminating certain of these agreements.
Therefore, the license fees associated with these agreements have been
eliminated.
2.6 CHARGES ON CONVERTIBLE SUBORDINATED PREFERRED EQUIVALENT DEBENTURES
To record charges of $21.1 million on the $300 million Convertible
Subordinated Preferred Equivalent Debentures which will be issued
pursuant to this offering assuming this transaction occurred on
January 1, 1999.
To record amortization of deferred financing costs of $0.5 million,
recorded as a component of charges on the $300 million Convertible
Subordinated Preferred Equivalent Debentures which will be issued
pursuant to this offering assuming this transaction occurred on
January 1, 1999.
F-66
<PAGE>
BIOVAIL CORPORATION
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(U.S. DOLLARS, EXCEPT PER SHARE FIGURES AND UNLESS OTHERWISE STATED)
3. PER SHARE DATA
The pro forma calculation of basic earnings (loss) per common share was
based on the weighted average number of common shares outstanding during the
period, after giving effect to the stock split described below, as
calculated below:
<TABLE>
<CAPTION>
PRO FORMA
COMBINED FOR
YEAR ENDED
DECEMBER 31, 1999
------------------
<S> <C>
Biovail weighted average shares outstanding................. 51,272,000
Deduct: effect of shares issued re Fuisz.................... (385,892)
Fuisz average shares outstanding converted to equivalent
Biovail shares (0.1197 exchange ratio).................... 2,850,014
Fuisz options exercised and converted to equivalent Biovail
shares (0.1197 exchange ratio)............................ 238,296
Biovail shares issued pursuant to a concurrent offering..... 2,000,000
----------
Total....................................................... 55,974,418
==========
</TABLE>
4. RECONCILIATION OF PRO FORMA RESULTS REPORTED UNDER CANADIAN GAAP WITH
U.S. GAAP
Biovails's accounting policies are consistent in all material aspects with
US GAAP with the following exceptions:
<TABLE>
<CAPTION>
YEAR ENDED
PRO FORMA NET INCOME RECONCILIATION DECEMBER 31, 1999
----------------------------------- ------------------
(IN THOUSANDS)
<S> <C>
Net Income attributable to common shareholders--Canadian
GAAP...................................................... $ 19,806
--------
Adjustments:
Amortization of purchased in-process research and
development (I)......................................... 7,894
Reversal/(Write off) of product launch costs (II)......... 426
Collection of warrant receivable (III).................... (4,028)
Compensation cost for employee stock options (IV)......... (7,641)
Acquired product rights (V)............................... (25,000)
Accretion on Convertible Subordinated Preferred Equivalent
Debentures (VI)......................................... 900
--------
Net loss attributable to common shareholders................ $ (7,643)
========
Net loss per common share--U.S. GAAP
Basic..................................................... $ (0.14)
Common share effect of GAAP differences in period........... $ (0.49)
</TABLE>
I. For the purpose of reporting under US GAAP, companies are required to
immediately write-off IPR&D. Under Canadian GAAP, IPR&D has been
capitalized and is being amortized over its useful life of fifteen
years. Under Canadian GAAP amortization of IPR&D for the year was
$7.9 million. Under US GAAP, the IPR&D of $136.2 million is written off
immediately but has not been reflected in the reconciliation above.
F-67
<PAGE>
BIOVAIL CORPORATION
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(U.S. DOLLARS, EXCEPT PER SHARE FIGURES AND UNLESS OTHERWISE STATED)
4. RECONCILIATION OF PRO FORMA RESULTS REPORTED UNDER CANADIAN GAAP WITH
U.S. GAAP (CONTINUED)
II. For the purpose of reporting under US GAAP, companies are required to
write off certain product launch and advertising costs incurred during
the year. The adjustment represents the portion of the product launch
and advertising costs currently expensed under Canadian GAAP which have
been previously written off under US GAAP.
III. For the purpose of reporting under US GAAP, companies are required to
record in paid-up capital an amount equal to the proceeds attributable
to warrants as determined at the time of their issuance, along with an
offsetting contra equity account, "Warrant subscription receivable".
The contra account is amortized over the life of the warrants. Under
Canadian GAAP, the offsetting amount was recorded as an immediate
reduction in retained earnings.
IV. For the purpose of reporting under US GAAP, companies are required to
account for compensation expense arising from certain employee stock
option plans under the provisions of Accounting Principles Board
No. 25. No such expense is required under Canadian GAAP.
V. For the purpose of reporting under US GAAP, companies are required to
write-off the cost of intangibles that are purchased from others for
research and development projects that have no alternative future use at
the time of acquisition. Under Canadian GAAP, these costs have been
capitalized.
VI. For the purpose of reporting under US GAAP, companies are required to
record charges on the Convertible Subordinated Preferred Equivalent
Debentures at the coupon rate of 6.75%. Under Canadian GAAP, the
interest is recorded at the effective yield rate taking into
consideration the ascribed fair value attributable to the convertible
feature.
F-68
<PAGE>
Exhibit 5.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement No.
333-92229 of Biovail Corporation on Form S-8 of our report dated May 14, 1999
included in this Form 6K of Biovail Corporation for the year ended December
31, 1998.
/s/ DELOITTE & TOUCHE LLP
Chartered Accountants
April 19, 2000
<PAGE>
Exhibit 5.2
April 19, 2000
Board of Directors
Biovail Corporation
We are aware of the incorporation by reference in the Registration Statement
(Form S-8 No. 333-92229) pertaining to the 1993 Stock Option Plan and the
1996 Employee Stock Purchase Plan of Biovail Corporation of our compilation
report and Comment to United States readers on Canadian and United States
reporting differences dated March 17, 2000 relating to the unaudited pro
forma combined statements of operations of Biovail Corporation for the year
ended December 31, 1999, which are included in the Company's Form 6-K dated
April 19, 2000.
Yours truly,
/s/ Ernst & Young LLP
<PAGE>
Exhibit 5.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-92229) pertaining to the 1993 Stock Option Plan and the
1996 Employee Stock Purchase Plan of Biovail Corporation of our report dated
February 29, 2000, with respect to the consolidated financial statements of
Biovail Corporation for the year ended December 31, 1999, included in the
Form 6-K, dated April 19, 2000.
Toronto, Canada /s/ Ernst & Young LLP
April 19, 2000 Chartered Accountants
<PAGE>
Exhibit 5.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-92229) of Biovail Corporation of our report,
dated February 25, 1999, except for Note 18, for which the date is September
20, 1999 relating to the consolidated financial statements of Fuisz
Technologies Ltd. for each of the three years in the period ended December
31, 1998, which appears in the Form 6-K of Biovail Corporation dated April
19, 2000.
PricewaterhouseCoopers LLP
McLean, Virginia
April 19, 2000
