Glyko Biomedical Ltd.
1998 Annual Report
<PAGE>
Glyko Biomedical Ltd.
Company Profile
Glyko Biomedical Ltd. is a Canadian company, who in 1997 co-founded BioMarin
Pharmaceutical Inc. (BioMarin).
In 1997, Glyko Biomedical Ltd. licensed its carbohydrate enzyme technology
for therapeutic applications to BioMarin.
In 1998, Glyko Biomedical Ltd. sold its U.S. operating subsidiary, Glyko Inc.,
a company engaged in carbohydrate analytical and diagnostic products and
services, to BioMarin.
As a result, Glyko Biomedical Ltd.'s shareholders hold a 41.7% ownership in
BioMarin, a biotechnology start-up company which will be described in greater
detail in this report.
<PAGE>
Glyko Biomedical Ltd.
To our stockholders:
Thank you for supporting the Company's efforts to develop its technology for the
treatment of disease through BioMarin Pharmaceutical Inc. BioMarin is a
leading developer of carbohydrate enzyme therapies for debilitating,
life-threatening, chronic genetic diseases and other disorders. The following is
a progress report on BioMarin.
BioMarin's first genetic disease treatment is successful in clinical trials
In October 1998, BioMarin completed the primary evaluation for its pivotal
clinical trial of its lead enzyme replacement product candidate, BM101, for the
treatment of Mucopolysaccharidosis-I (MPS-I). Based on the data from that trial,
BioMarin intends to complete the filing of a Biological License Application
(BLA) with the U.S. Food and Drug Administration (FDA) in the second half of
1999. BioMarin recently agreed to form a joint venture with Genzyme for the
worldwide commercialization and development of BM101. BioMarin is also
developing enzyme replacement therapies for other life-threatening genetic
diseases and is currently developing BM102 for the treatment of MPS-VI. BioMarin
received an orphan drug designation for BM102 to treat MPS-VI in the first
quarter of 1999 and intends to file an Investigational New Drug application
(IND) for the use of BM102 to treat MPS-VI in the fourth quarter of 1999.
BioMarin has completed animal trials for burn wound and anti-fungal enzymes
BioMarin has two enzyme treatments which have been shown to accelerate the rate
of debridement of burn wounds in animals without any signs of topical or
systemic toxicity. In addition they significantly reduced the total time in
which grafts were successfully made and wounds closed when compared to phosphate
buffered saline, which was used as a control, and to selected topical enzymatic
products. BioMarin is also developing two naturally occurring enzymes to combat
infection by Aspergillus spp. Aspergillus is one of the most common fungi in the
environment and it can pose a life-threatening risk to those with compromised
immune systems, such as cancer patients undergoing chemotherapy, organ and bone
marrow transplant recipients and people with late stage AIDS. BioMarin's
preclinical animal research on BM301 and BM302 shows that these enzymes
effectively treated aspergillosis in mice. No toxicity or other adverse side
effects were observed in these animal studies. BioMarin intends to apply for FDA
orphan drug designation for these anti-fungal enzymes.
We hope that you are encouraged by the continued progress of BioMarin. Please
feel free to follow BioMarin's progress via the Internet at www.glyko.com or
www.biomarinpharm.com (which is currently under development.)
1
<PAGE>
Glyko Biomedical Ltd.
Financial Results
Contents Page
Management's Discussion and Analysis of
Financial Condition and Results of Operations 3-4
Consolidated Balance Sheets 5
Consolidated Statements of Operations 6
Consolidated Statements of Stockholders' Equity (Deficit) 7
Consolidated Statements of Cash Flows 8
Notes to Consolidated Financial Statements 9-16
Auditors' Report 17
2
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
Glyko Biomedical Ltd. (the Company or GBL) is a Canadian holding company that
owned 41.7% of the capital stock of BioMarin Pharmaceutical Inc. (BioMarin) at
December 31, 1998. BioMarin owns 100% of the capital stock of Glyko, Inc. Glyko,
Inc. and BioMarin are operating companies based in California. The following
discussion and the accompanying consolidated financial statements include the
accounts of Glyko Biomedical Ltd. and, through October 7, 1998, Glyko, Inc.,
presented on a consolidated basis plus BioMarin presented on the equity method
of accounting. Numerical references in the following discussion are rounded to
the nearest thousand. Since its inception in October 1990, Glyko, Inc. has been
engaged in research and development of new techniques to analyze and manipulate
carbohydrates for research, diagnostic and pharmaceutical purposes. Glyko, Inc.
developed a line of analytic instrumentation laboratory products that include an
imaging system, analysis software and chemical analysis kits. On October 7,
1998, GBL sold to BioMarin 100% of the outstanding capital stock of Glyko, Inc.
in exchange for 2,259,039 shares of BioMarin's common stock. In addition,
BioMarin agreed to assume options to purchase up to 585,969 shares of GBL's
common stock, previously issued to employees of Glyko, Inc., and to pay GBL $500
in cash. With the financial support of BioMarin, Glyko, Inc. continues to
develop additional chemical kits for use with the imaging system, and is also
developing a line of carbohydrate diagnostic products.
The Company's share of BioMarin's net loss plus Glyko, Inc.'s current net
operating loss offset by the Company's share of BioMarin's equity increase and
the gain on disposition of Glyko, Inc. resulted in the Company reporting a net
income for the year ended December 31, 1998 of $9,991,000. GBL expects to incur
losses during 1999 due to its share of BioMarin's net loss resulting from
BioMarin's ongoing research and development of pharmaceutical product
candidates. The BioMarin losses do not have an impact on cash balances of GBL.
As a result of GBL's sale of Glyko, Inc., as of October 7, 1998, GBL has no
operating activities and its principal asset is its investment in BioMarin.
Accordingly, without further investments in other companies or technologies,
management believes that GBL has sufficient cash to sustain planned operations
for the foreseeable future. BioMarin will require additional capital. While GBL
was not obligated to provide this capital, the Company purchased BioMarin notes
in the amount of $4,300,000 as part of BioMarin's $26,000,000 convertible note
financing which was completed on April 13, 1999. While BioMarin has an
accumulated deficit of $14,889,994 at December 31, 1998 and is expected to incur
significant losses during 1999 and beyond, management of GBL believes that there
has not been any impairment of its investment in BioMarin.
Results of Operations
Revenues in 1998 were $1,160,000 and consisted of sales of products and services
of $865,000 and other revenues representing development fees of $25,000 and
grant revenues of $270,000. Sales of products and services consisted of sales of
chemical analysis kits and imaging systems, and fees for custom analytic
services. Revenues in 1997 were $2,037,000 and consisted of sales of products
and services of $1,176,000 and other revenues representing technology,
development and licensing fees of $704,000 and grant revenues of $157,000. The
decline in product revenues in 1998 was due a decrease in sales volume and due
to the sale of the analytic and diagnostic business to BioMarin in October 1998.
The decrease in other revenues was due to development, technology and licensing
fees received in 1997 that did not reoccur in 1998.
3
<PAGE>
Gross margin on sales of products and services was 67 percent in 1998 and 59
percent in 1997. The increase in gross margin in 1998 was due to a combination
of decreased manufacturing overhead expenses and an increase in product prices
that took effect in July 1997.
Research and development expenses in 1998 were $646,000 compared to $549,000 in
1997, an increase of $97,000. The increase in research and development expenses
was mainly due to the increase in lab personnel and lab supplies purchased.
Selling, general and administrative expense was $690,000 in 1998, an increase of
$127,000 from 1997 expense of $563,000. The increase is due to a reversal in
1997 of prior years expenses accrued on GBL's statement of operations which
reduced expenses in 1997 by $120,000 and a small increase in advertising and
sales travel in 1998.
Equity in loss of BioMarin for 1998 was $5,421,000 compared to $2,442,000 for
1997, an increase of $2,979,000. The increase was due to the increased net loss
of BioMarin.
Interest income earned in 1998 and 1997 of $43,000 and $13,000, respectively,
reflected earnings on cash invested in short term interest bearing accounts. The
increase in interest income in 1998 resulted from higher cash balances available
for investment compared to 1997. Interest expense in 1998 and 1997 was
immaterial.
Other operating expenses in 1998 of $(166,000) represented the gain on the
settlement of a claim at an amount less than was provided for by the Company.
Gain on dilution of ownership of BioMarin for 1998 was $7,154,000 compared to
$3,978,000 for 1997, an increase of $3,176,000. The increase was due to the
increased amount of additional funds raised by third-party investors in 1998
compared to 1997.
Gain on disposition of Glyko, Inc. of $8,512,000 in 1998 represented 58.3% of
the difference between the fair market value of BioMarin stock issued for the
sale of Glyko, Inc. to GBL and the underlying book value of the net assets of
Glyko, Inc.
As a result of GBL's sale of Glyko, Inc. to BioMarin, GBL does not anticipate
having any revenues and substantially lower operating expenses in 1999.
Liquidity and Capital Resources
The Company's cash position increased by $2,040,000 for 1998 to $2,568,000. Net
cash proceeds of $2,330,000 from the issuance of common stock from the exercise
of stock options and warrants and a private placement financing (relating to a
technology and licensing fee agreement) and $1,212,000 from the settlement of
intercompany receivables were partially offset by an investment in BioMarin of
$1,000,000, the deconsolidation of Glyko, Inc. in the amount of $267,000 and net
cash used in operating activities of $236,000.
Year 2000-Related Problems
GBL has conducted a review of potential year-2000 compliance issues. Since GBL
no longer offers products and services for sale, GBL is focusing its
inquiry on the impact of these issues on its internal administrative
activities and on its professional service providers and other third parties.
GBL does not currently anticipate that it will incur material expenditures in
connection with any products or services it previously offered. GBL may incur
some expense in connection with this review, thought it does not currently
anticipate that these expenses will be material.
4
<PAGE>
GLYKO BIOMEDICAL LTD.
CONSOLIDATED BALANCE SHEETS
(In U.S. dollars)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
----------------------- -----------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 2,567,824 $ 528,280
Trade receivables - 141,743
Inventories - 95,210
Note receivable 100,000 -
Other current assets 9,710 15,179
----------------------- -----------------------
Total current assets 2,677,534 780,412
Investment in BioMarin Pharmaceutical Inc.
14,578,497 3,036,261
Property, plant and equipment, net - 118,910
Note receivable from stockholder 712,261 -
Other assets - 2,206
----------------------- -----------------------
Total assets $ 17,968,292 $ 3,937,789
======================= =======================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ - $ 38,916
Accrued liabilities 411,109 173,597
Deferred rent and related costs - 365,880
Payable to stockholder - 219,811
----------------------- -----------------------
Total current liabilities 411,109 798,204
----------------------- -----------------------
Total liabilities 411,109 798,204
Stockholders' equity:
Common stock, no par value, unlimited shares authorized, 28,020,234 and
21,573,044 shares issued and outstanding at December 31, 1998 and
December 31, 1997, respectively
17,963,167 13,154,224
Common stock warrants 547,285 929,585
Accumulated deficit (953,269) (10,944,224)
----------------------- -----------------------
Total stockholders' equity 17,557,183 3,139,585
----------------------- -----------------------
Total liabilities and stockholders' equity $ 17,968,292 $ 3,937,789
======================= =======================
</TABLE>
Approved on behalf of the Board of Directors:
Gwynn R. Williams John C. Klock, M.D.
The accompanying notes are an integral part of these statements.
5
<PAGE>
GLYKO BIOMEDICAL LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In U.S. dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1998 1997
-------------------- -----------------------
<S> <C> <C>
Revenues:
Sales of products and services $ 865,164 $ 1,175,699
Other revenues 294,752 860,935
------------------- -----------------------
Total revenues: 2,036,634
1,159,916
Expenses:
Cost of products and services 284,860 482,770
Research and development 646,419 549,015
Selling, general and administrative 689,617 562,888
Other (165,880) -
-------------------- -----------------------
Total expenses: 1,455,016 1,594,673
-------------------- -----------------------
Income (loss) from operations (295,100) 441,961
Equity in loss of BioMarin Pharmaceutical Inc. (5,421,361) (2,442,151)
Gain on dilution of ownership of BioMarin
Pharmaceutical Inc. 7,154,127 3,978,412
Gain on disposition of Glyko, Inc. 8,511,800 -
Interest income 42,822 12,610
Other loss (1,333) (1,219)
-------------------- -----------------------
Net income $ 9,990,955 $ 1,989,613
==================== =======================
Earnings per share - basic $ 0.42 $ 0.10
==================== =======================
Earnings per share - fully-diluted $ 0.34 $ 0.07
==================== =======================
Weighted average number of shares - basic 23,870,991 20,536,058
==================== =======================
Weighted average number of shares - fully-diluted 30,171,810 33,894,382
==================== =======================
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
GLYKO BIOMEDICAL LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In U.S. dollars)
<TABLE>
<CAPTION>
Common Stock Common Stock Accumulated
-------------------------------------
Shares Amount Warrants Deficit Total
------------------ ---------------- -------------- ---------------- ---------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 14,567,944 $ 11,304,356 $ 278,085 $ (11,357,978) $ 224,463
Net loss for the year - - - (1,575,859) (1,575,859)
Exercise of stock options 100 48 - - 48
Isssuance of common stock
and warrants in a private
placement financing, net of
issuance costs of $152,156 2,675,000 898,661 155,812 - 1,054,473
------------------ ----------------- -------------- --------------- ----------------------
Balance at December 31, 1996 17,243,044 $ 12,203,065 $ 433,897 $ (12,933,837) $ (296,875)
Net income for the year - - - 1,989,613 1,989,613
Exercise of stock options 50,000 22,976 - - 22,976
Issuance of common stock
and warrants in a private
placement financing, net of
issuance costs of $160,881 4,280,000 928,183 495,688 - 1,423,871
------------------- ------------------- -------------- ---------------- ----------------------
Balance at December 31, 1997 21,573,044 $ 13,154,224 $ 929,585 $ (10,944,224) $ 3,139,585
Net income for the year - - - 9,990,955 9,990,955
Issuance of common stock
pursuant to a licensing contract 100,000 70,740 - - 70,740
Issuance of common stock pursuant
to a consulting agreement 54,031 - - - -
Exercise of stock options 1,467,516 1,469,081 - - 1,469,081
Exercise of warrants 4,825,643 3,269,122 (382,300) - 2,886,822
-------------------- ------------------- ------------ ---------------- ----------------------
Balance at December 31, 1998 28,020,234 $ 17,963,167 $ 547,285 $ (953,269) $ 17,557,183
==================== =================== ============ ================ ========================
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE>
GLYKO BIOMEDICAL LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In U.S. dollars)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
1998 1997
--------------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,990,955 $ 1,989,613
Adjustments to reconcile net income to net cash
provided by (used in)operating activities:
Depreciation and amortization - 58,693
Equity in the loss of BioMarin Pharmaceutical Inc. 5,421,361 2,442,151
Gain on dilution of ownership of BioMarin
Pharmaceutical Inc. (7,154,127) (3,978,412)
Gain on disposition of Glyko, Inc. (8,511,800) -
Loss on disposal of property and equipment - 1,452
Change in assets and liabilities:
Trade receivables - 14,433
Inventories - (26,758)
Other assets (9,710) 10,840
Accounts payable - (135,816)
Accrued liabilities 27,556 (30,907)
Deferred revenue - -
Deferred rent and related costs - 96,162
--------------------- ------------------
Total adjustments (10,226,720) (1,548,162)
--------------------- ------------------
Net cash provided by (used in) operating activities (235,765) 441,451
Cash flows used in investing activities:
Investment in BioMarin Pharmaceutical Inc. (1,000,002) (1,500,000)
Purchases of property and equipment - (71,010)
Deconsolidation of Glyko, Inc. assets (267,347) -
Settlement of amounts due from Glyko, Inc. 1,212,278 -
--------------------- ------------------
Net cash used in investing activities (55,071) (1,571,010)
Cash flows from financing activities:
Notes receivable issued for the exercise of stock options (100,000) -
Net proceeds from the issuance of common stock pursuant
to a technology and license agreement 70,740 -
Net proceeds from the issuance of common stock and
warrants in private placement financings - 1,423,871
Proceeds from exercise of stock options and common stock
warrants 2,359,640 22,976
--------------------- ------------------
Net cash provided by financing activities 2,330,380 1,446,847
--------------------- ------------------
Net increase in cash 2,039,544 317,288
Cash and cash equivalents, beginning of period 528,280 210,992
--------------------- ------------------
Cash and cash equivalents, end of period $ 2,567,824 $ 528,280
===================== ==================
Supplemental disclosure of noncash financing activities:
Common stock and common stock warrants issued in - 840,000 share
exchange for financing services equivalents
Common stock issued for the exercise of stock options in 534,672 share -
exchange for a note receivable equivalents
</TABLE>
The accompanying notes are an integral part of these statements.
8
<PAGE>
GLYKO BIOMEDICAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company and Description of the Business
Glyko Biomedical Ltd. (the Company or GBL) is a Canadian company which
was established in 1992 to acquire all of the outstanding capital stock
of Glyko, Inc., a Delaware corporation. Both entities were under
common control and the share exchange was accounted for in a manner
similar to a pooling. Since its inception in October 1990, Glyko,
Inc. has engaged in research and development of new techniques to
analyze and manipulate carbohydrates for research, diagnostic and
pharmaceutical purposes. Glyko, Inc. has developed a line of
analytic instrumentation laboratory products that include an
imaging system, analysis software and chemical analysis kits.
In October 1996, GBL incorporated BioMarin Pharmaceutical Inc.
(BioMarin), a Delaware corporation in the development stage, to develop
the Company's pharmaceutical products. BioMarin began business on March
21, 1997 and issued 1,500,000 shares of common stock to GBL for $1.5
million. As consideration for a certain license agreement dated June
1997, BioMarin issued GBL 7,000,000 shares of BioMarin common stock.
Beginning in October 1997, BioMarin raised capital from third parties
with the result that at December 31, 1997, GBL's ownership interest in
BioMarin had been reduced to 41.3% of BioMarin's outstanding capital
stock. As of December 31, 1997, the Company began recording its share of
BioMarin's net loss utilizing the equity method of accounting. On June
30, 1998, BioMarin raised net proceeds of $3.3 million (598,535 shares)
including a $1.0 million investment from GBL. On August 3, 1998 BioMarin
raised an additional $8.1 million (1,416,800 shares) from third parties.
On September 4, 1998, BioMarin received $8 million from Genzyme Corp.
("Genzyme") upon execution of a joint venture agreement in which
BioMarin issued 1,333,333 shares of common stock to Genzyme. BioMarin
has a 50% interest in the income or loss of the joint venture,
BioMarin/Genzyme, LLC.
On October 7, 1998, GBL sold to BioMarin 100% of the outstanding capital
stock of Glyko, Inc. in exchange for 2,259,039 shares of BioMarin's
common stock. In addition, BioMarin agreed to assume options to purchase
up to 585,969 shares of GBL's common stock previously issued to
employees of Glyko, Inc. , and to pay GBL $500 in cash. As of December
31, 1998, GBL owned 41.7% of BioMarin's outstanding capital stock.
Since its inception, GBL has incurred a cumulative deficit of $953,269
and the Company expects to continue to incur losses during 1999 due to
its share of BioMarin's net loss resulting from the ongoing research and
development of BioMarin's pharmaceutical product candidates. As a result
of GBL's sale of Glyko, Inc. on October 7, 1998, GBL has no operating
activities and its principal asset is its investment in BioMarin.
Accordingly, without further investment in other companies or
technologies, management believes that GBL has sufficient cash to
sustain planned operations for the foreseeable future. BioMarin will
require additional capital. While GBL was not obligated to provide this
capital, the Company purchased BioMarin notes in the amount of
$4,300,000, as part of BioMarin's $26,000,000 convertible note financing
which was completed on April 13, 1999. While BioMarin has an accumulated
deficit of $14,889,994 at December 31, 1998 and is expected to incur
significant losses during 1999 and beyond, management of GBL believes
that there has not been any impairment of its investment in BioMarin.
2. Summary of Significant Accounting Policies
The accompanying consolidated financial statements and related footnotes
have been prepared in conformity with Canadian generally accepted
accounting principles using U.S. dollars. The consolidated financial
statements include the accounts and operations of the Company and Glyko,
Inc. for the year ended December 31, 1997 and for the period from
January 1, 1998 through October 7, 1998, the date of the sale of Glyko,
Inc. to BioMarin. The results of operations of BioMarin have been
reported in the Company's financial statements for the years ended
December 31, 1998 and 1997, based on the equity method of accounting.
Subsequent to October 7, 1998, the results of operations of Glyko, Inc.
have been consolidated into the results of operations of BioMarin. To
the extent that the issuance of stock by BioMarin to third parties
results in a decrease in the Company's ownership of the net assets of
BioMarin, the Company reflects this decrease as a gain or loss on
dilution of ownership of BioMarin in the consolidated statements of
operations.
All significant intercompany accounts and transactions have been
eliminated. Certain balances in the prior years have been reclassified
to conform with the current year presentation.
9
<PAGE>
GLYKO BIOMEDICAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates:
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make certain estimates and assumptions that effect the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the dates of the consolidated
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates. Significant estimates made by management at December 31,
1997, include allowance for doubtful accounts receivable, and certain
other reserves, including an accrual for deferred rent.
Cash and Cash Equivalents:
Cash and cash equivalents consist of amounts held with banks and
short-term investments with original maturities of 90 days or less.
Inventories:
Inventories consist of analytic kits and instrument-based systems held
for sale. Inventories are stated at the lower of cost (first-in,
first-out method) or estimated market value. The components of
inventories are as follows:
December 31,
1998 1997
----------------- ---------------
Raw materials $ - $90,647
Finished products - 4,563
================= ===============
$ - $95,210
================= ===============
Property, Plant and Equipment:
Property, plant and equipment are stated at cost. The cost and
accumulated depreciation for property, plant and equipment sold, retired,
or otherwise disposed of are relieved from the accounts, and the
resulting gains or losses are reflected in the consolidated statements of
operations. Depreciation is computed using the straight-line method over
the following estimated useful lives:
Office furniture 5 years
Computer equipment 3 years
Lab and production equipment 5 years
Sale of Glyko, Inc. and Investment in BioMarin Pharmaceutical Inc.
BioMarin acquired Glyko, Inc. from GBL through the exchange of BioMarin
stock for Glyko, Inc. stock and accounted for the acquisition based upon
the fair market value of the BioMarin stock issued, the assumption of
responsibility for certain stock options previously issued to Glyko, Inc.
employees (see Note 1), and $500 in cash. In consolidating Glyko, Inc.,
BioMarin recorded intangible assets, including goodwill, to the extent
that the fair market value of the stock issued exceeded the fair market
value of the tangible assets of Glyko, Inc. acquired. GBL recorded a gain
on disposition of Glyko, Inc. of $8,511,800 calculated as 58.3% of the
difference between the fair market value of the BioMarin stock issued to
GBL and the underlying book value of the net assets of Glyko, Inc. The
remaining 41.7% of the gain representing GBL's interest in BioMarin has
not been reflected in these financial statements. The Company accounts
for its investment in BioMarin using the equity method of accounting.
10
<PAGE>
GLYKO BIOMEDICAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, to the extent that the issuance of stock by BioMarin to
third parties results in a decrease in the Company's ownership of the net
assets of BioMarin, the Company reflects this decrease as a gain or loss
on dilution of ownership of BioMarin in the consolidated statements of
operations and an increase or decrease in its investment in BioMarin.
Foreign Exchange:
As all of the Company's operations are located in the United States, the
Company has adopted the U.S. dollar as its functional currency. The
Company's assets, liabilities, stockholders' equity and expenses have
been translated into U.S. dollars using the temporal method. Under this
method, monetary items have been translated at the year-end currency
exchange rate. Non-monetary items have been translated at the historic
rate of exchange. Expenses have been translated at the average rate of
exchange during the year. Foreign exchange gains and losses on monetary
assets and liabilities are included in the determination of earnings.
Transaction gains and losses included in the consolidated statements of
operations are immaterial.
Product Sales:
The Company recognizes product revenues and related cost of sales upon
shipment of products. Service revenues are recognized upon completion of
services as evidenced by the transmission of reports to customers. Other
revenues, principally licensing and distribution fees, are recognized
upon completion of applicable contractual obligations.
At times, the Company has received payments in advance for future product
shipments or hardware maintenance and service contracts. Such payments
are classified as deferred revenue on the accompanying consolidated
balance sheets. Upon shipment of products, revenue is recognized and the
corresponding liability (deferred revenue) is reduced. Revenues from
maintenance and service contracts are recognized monthly pro rata over
the period of the contract and the corresponding liability (deferred
revenue) is reduced.
During 1994, the Company recorded a charge to operations of $219,811 for
costs related to the termination of an agreement with one of its
stockholders. This charge was the estimated fair market value of 500,000
shares of common stock to be received by the stockholder in settlement of
the agreement. The Toronto Stock Exchange has not permitted the issuance
of the 500,000 shares because the transaction is not considered arms
length. The stockholder was a stockholder in the Company from 1990 until
April 1998. At December 31, 1998 the liability of $219,811 is included in
accrued liabilities in the accompanying consolidated balance sheets.
Income Taxes:
Income taxes are provided using the deferral method. The Company has
accumulated losses for financial reporting and income tax purposes which
are available to reduce Canadian taxable income in future years and for
which no future tax benefit has been recognized in the accounts.
At December 31, 1998, the Company has net operating loss carryforwards
for Canadian purposes of approximately $1.3 million which expire from
1999 to 2003.
Earnings per Share:
Earnings per share is based on the weighted average number of common
shares outstanding during each period. Potentially dilutive securities
outstanding at December 31, 1998 and 1997, respectively, include options
for the purchase of 548,290 and 2,424,402 shares of common stock and
warrants for the purchase of 5.8 million and 10.9 million shares of
common stock.
11
<PAGE>
GLYKO BIOMEDICAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Property, Plant and Equipment
Property, plant and equipment at December 31, 1998 and 1997 consisted of
the following:
December 31,
1998 1997
--------------- ---------------
Lab equipment $- $229,701
Computer equipment - 94,712
Production equipment - 37,164
Office furniture - 13,510
Leasehold improvements - 68,343
--------------- ---------------
- 443,430
Less accumulated depreciation - (324,520)
--------------- ---------------
Property, plant and equipment, net $- $118,910
=============== ===============
4. Investment in BioMarin Pharmaceutical Inc. (BioMarin)
The Company accounts for its investment in BioMarin using the equity
method of accounting. As of December 31, 1998, the Company owned 41.7
percent of BioMarin. During the first nine months of 1997, the Company
owned 100 percent of BioMarin and due to subsequent outside financings by
BioMarin in the fourth quarter of 1997, the Company's ownership
percentage decreased to 41.3 percent. Additional outside financings by
BioMarin in the second and third quarters of 1998, including the
Company's $1 million investment in BioMarin combined with the BioMarin
shares received for the sale of Glyko, Inc. increased the Company's
investment to 41.7 percent of BioMarin's outstanding common stock as of
December 31, 1998. In consolidating Glyko, Inc., BioMarin recorded
intangible assets, including goodwill, to the extent that the fair market
value of the stock issued exceeded the fair market value of the tangible
assets of Glyko, Inc. acquired. GBL recorded the stock of BioMarin
received at its fair market value except for the exclusion of 41.7% of
the gain on disposition of Glyko, Inc.
Below is a summary of BioMarin's financial condition as of December 31,
1998 and 1997:
December 31,
1998 1997
Assets $31,509,102 $ 7,662,130
Liabilities 2,114,582 281,664
Stockholders' Equity 29,394,520 7,380,466
Net Loss from March 21, 1997
(inception) to December 31, 1997 - (2,744,745)
Net Loss for 1998 (12,145,249) -
Shares issued and outstanding 26,176,180 20,566,500
Shares owned by Glyko Biomedical Ltd. 10,925,706 8,500,000
BioMarin began business on March 21, 1997 and it issued 1,500,000
shares of common stock to the Company for $1.5 million.
12
<PAGE>
GLYKO BIOMEDICAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BioMarin and the Company have entered into a License Agreement dated June
26, 1997, pursuant to which the Company granted BioMarin an exclusive,
worldwide, perpetual, irrevocable, royalty-free right and license to
certain worldwide patents, trade secrets, copyrights and other
proprietary rights to all know-how, processes, formulae, concepts, data
and other such intellectual property, whether patented or not, owned or
licensed by the Company and its subsidiaries as of the date of the
License Agreement for application in therapeutic uses, including, without
limitation, drug discovery and genomics. Under the same License
Agreement, BioMarin granted the Company an exclusive, worldwide,
perpetual, irrevocable, royalty-free cross-license to all improvements
BioMarin may make upon the licensed intellectual property. As
consideration for this license, BioMarin issued the Company 7,000,000
shares of BioMarin common stock.
In October 1997, BioMarin sold 3,740,000 shares of common stock to
outside investors for net proceeds of $3,647,000 (including $880,000 of
bridge loans received in the third quarter of 1997 which were converted
to common stock). Additionally, BioMarin issued to the placement agent
299,000 common shares and 299,000 warrants to purchase common shares
exercisable at $1.00 per share. Concurrently, BioMarin issued 2,500,000
shares of common stock to three executive officers of BioMarin including
800,000 shares to John Klock, MD and 400,000 shares to Christopher Starr,
Ph.D. both of whom were also executive officers of Glyko Biomedical Ltd.
at December 31, 1997 (Dr. Klock continues to serve as an executive
officer of the Company) for an aggregate of $2,500,000 in notes due on
July 31, 2000. Gwynn Williams, who is a major shareholder and director of
the Company, is also a director of BioMarin and owns 20,000 options to
purchase BioMarin stock at $1.00 per share.
In December 1997, BioMarin raised net proceeds of $5,016,000 from outside
investors in exchange for 5,527,500 shares (including 502,500 shares
issued to the placement agent for the financing). Additionally, BioMarin
issued to the placement agent 502,500 warrants to purchase common shares
exercisable at $1.00 per share. As a result of such share issuances, the
Company's ownership in BioMarin was reduced to 41.3 percent of BioMarin's
outstanding common stock.
On June 30, 1998, BioMarin raised net proceeds of $3.3 million (598,535
shares) including a $1.0 million investment from GBL. On August 3, 1998
BioMarin raised an additional $8.1 million (1,416,800 shares) from third
parties. On September 4, 1998, BioMarin received $8 million from Genzyme
Corp. ("Genzyme") upon execution of a joint venture agreement in which
BioMarin issued 1,333,333 shares of common stock to Genzyme. BioMarin
has a 50% interest in the income or loss of the joint venture,
BioMarin/Genzyme, LLC.
On October 7, 1998, GBL sold to BioMarin 100 percent of the outstanding
capital stock of Glyko, Inc. in exchange for 2,259,039 shares of
BioMarin's common stock. In addition, BioMarin agreed to assume options
to purchase up to 585,969 shares of GBL's common stock previously issued
to employees of Glyko, Inc. , and to pay GBL $500 in cash. As of
December 31, 1998, GBL owned 41.7 percent of BioMarin's outstanding
capital stock.
As a result of BioMarin's issuance of shares to third parties, the
Company recorded a gain on dilution of ownership of BioMarin of
$7,154,127 and $3,978,412 on the consolidated statements of operations at
December 31, 1998 and 1997, respectively. Future fundraising efforts of
BioMarin could result in a further reduction of Glyko Biomedical Ltd.'s
ownership percentage.
The Company purchased BioMarin notes in the amount of $4,300,000 as part
of BioMarin's $26,000,000 convertible note financing which was completed
on April 13, 1999. While BioMarin has an accumulated deficit of
$14,889,994 at December 31, 1998 and is expected to incur significant
losses during 1999 and beyond, management of GBL believes that there has
not been any impairment of its investment in BioMarin.
5. Note Receivable
As part of its compensation for certain services, GBL issued stock
options to a consulting group. GBL loaned $100,000 to the consulting
group in anticipation that the Toronto Stock Exchange would approve the
stock options. The excess of the fair market value of the GBL stock at
December 31, 1998 over the exercise price of the options significantly
exceeds the amount of the loan. The options are held as security for the
loan. Subsequent to year-end these options were approved by the Toronto
Stock Exchange, and the options were exercised in full and the loan was
repaid with interest.
In November 1998, GBL loaned $712,261 to an officer of the Company to
exercise expiring stock options. The loan is secured by the option
shares.
13
<PAGE>
GLYKO BIOMEDICAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Commitments and Contingencies
In July 1998, the claim by Millipore Corp. relating to a facilities
dispute and other matters was settled, resulting in a gain of $165,880 as
the amount of the ultimate settlement was less than the amount previously
provided for by the Company.
7. Stockholders' Equity
On March 21, 1997, the Company closed a Cdn.$2.0 million (USD$1.4
million) financing (the Q197 Financing) to fund the start-up of BioMarin
Pharmaceutical Inc. which was formed to develop the Company's
pharmaceutical products. As a result of this financing, the Company
issued 4.0 million units at Cdn.$0.50 per unit, each unit consisting of
one common share and one common share purchase warrant. Each warrant can
be exercised for one share of common stock at Cdn.$1.00 per share,
expiring on March 21, 1999. An additional 280,000 units and 280,000
warrants valued at approximately $161,000 were distributed to the brokers
in exchange for services rendered in connection with the Q197 Financing.
The Company utilized the Black-Scholes model to value all the warrants
issued in the Q197 Financing at approximately $496,000. The Company used
the proceeds of the offering and additional cash to purchase 1,500,000
common shares of BioMarin for $1.5 million.
BioMarin and the Company have entered into a License Agreement dated June
26, 1997, pursuant to which the Company granted BioMarin an exclusive,
worldwide, perpetual, irrevocable, royalty-free right and license to all
current and future worldwide patents, trade secrets, copyrights and other
proprietary rights to all know-how, processes, formulae, concepts, data
and other such intellectual property, whether patented or not, owned or
licensed by the Company and its subsidiaries as of the date of the
License Agreement for application in therapeutic uses, including, without
limitation, drug discovery and genomics. As consideration for this
license, BioMarin issued the Company 7,000,000 shares of BioMarin common
stock. Under the same License Agreement, BioMarin granted the Company. a
cross-license, similar in scope, to all improvements BioMarin may make
upon the licensed intellectual property.
On October 7, 1998, GBL sold to BioMarin 100 percent of the outstanding
capital stock of Glyko, Inc. in exchange for 2,259,039 shares of
BioMarin's common stock. In addition, BioMarin agreed to assume options
to purchase up to 585,969 shares of GBL's common stock previously issued
to employees of Glyko, Inc. , and to pay GBL $500 in cash. As a result
of this transaction, as of December 31, 1998, GBL's share of BioMarin's
outstanding capital stock increased from 36.2 percent to 41.7 percent.
The exercise of BioMarin options or warrants will result in a further
reduction of GBL's ownership percentage and future fundraising efforts
of BioMarin may result in a similar reduction of GBL's ownership
percentage.
8. Stock Option Plan
The Company has a stock option plan (the Plan) under which options to
purchase common stock may be granted by the Board of Directors to
directors, officers, consultants and key employees at not less than fair
market value, less any permissible discounts, on the date of grant.
Options granted under the Plan may be incentive stock options (as defined
under Section 422 of the U.S. Internal Revenue Code) or non-statutory
stock options. Options are exercisable over a number of years specified
at the time of the grant which cannot exceed ten years. The maximum
aggregate number of shares which may be granted and sold under the Plan
is 3,000,000 shares. In general, the Plan options vest over 48 months and
all options expire after 5 years or 90 days after employee termination.
14
<PAGE>
GLYKO BIOMEDICAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the Company's stock option plan at December
31, 1998 and 1997 and changes during the years then ended is presented in
the table and narrative below:
<TABLE>
<CAPTION>
1998 1997
Shares Wtd. avg. ex Shares Wtd. avg. ex
price (1) price (1)
---------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
Outstanding beginning
of year 2,424,402 Cdn. $1.22 2,254,597 Cdn. $ 1.36
Granted 314,550 Cdn. $2.40 528,870 Cdn. $ 0.71
Exercised (1,467,516) Cdn. $1.52 (50,000) Cdn. $ 0.65
Assumed (2) (585,969) Cdn. $1.51 - -
Canceled (137,177) Cdn. $1.38 (309,065) Cdn. $ 1.41
---------------- ----------------
Outstanding at end of
year 548,290 Cdn. $0.77 2,424,402 Cdn. $ 1.22
---------------- ----------------
Exercisable at end of year 548,290 2,045,312
<FN>
(1) The US$ equivalent of Canadian $1.00 at December 31, 1998 was
approximately $0.6535. The weighted average exercise price is
quoted in Cdn.$ as the Company's common stock is traded on the
Toronto Stock Exchange.
(2) In connection with the sale of Glyko, Inc. to BioMarin,
effective October 7, 1998, BioMarin agreed to assume 585,969
options to purchase common stock of GBL (exercisable into
255,540 shares of common stock of BioMarin.)
</FN>
</TABLE>
There are 2,065,906 options available for grant under the plan at December
31, 1998. The average remaining contractual life of the options
outstanding at December 31, 1998 is 2 years.
9. Common Stock Warrants
Below is a summary of common stock warrants outstanding as of December
31, 1998 and 1997:
<TABLE>
<CAPTION>
Number Exercise
Date of Issuance of Shares Price Expiry
---------------------------------- ------------------ ------------------ --------------------------
<S> <C> <C> <C>
April 3, 1995 3,396,500 Cdn$0.90 April 3, 2000
April 4, 1995 533,367 Cdn$0.90 April 4, 2000
May 5, 1995 200,000 Cdn$0.90 May 5, 2000
May 30, 1995 656,555 Cdn$0.90 May 30, 2000
June 5, 1996 1,587,500 Cdn$0.80 June 5, 1998
------------------
Subtotal December 31, 1996 6,373,922
March 21, 1997 4,556,000 Cdn$1.00 March 21, 1999
------------------
Subtotal December 31, 1997 10,929,922
Exercised 1995 Warrants (1,914,893) Cdn$0.90
Exercised 1996 Warrants (1,235,750) Cdn$0.80
Exercised 1997 Warrants (1,675,000) Cdn$1.00
Expired 1996 Warrants (351,750) Cdn$0.80
------------------
Total December 31, 1998 5,752,529
==================
</TABLE>
15
<PAGE>
GLYKO BIOMEDICAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Related Party Transactions
The Company has entered into certain transactions with its stockholders
since its inception. These transactions include the purchase of supplies
and equipment and rental of the Company's facilities. Total costs of
these transactions for the years ended December 31, 1998 and 1997 were
approximately $0 and, $20,000, respectively.
Prior to the sale of Glyko, Inc. to BioMarin, the Company subleased
office and lab space to, and performed certain administrative and
research and development functions for BioMarin. BioMarin reimbursed the
Company for rent, salaries and related benefits and other administrative
costs and the Company reimburses BioMarin for salaries and related
benefits. BioMarin reimbursed the Company a net $183,000 in 1998 and a
net $241,000 in 1997. The Company also provided analytical services and
products to BioMarin at a 27 percent discount in 1998 and 1997. Total
receipts to the Company from sales to BioMarin totaled $113,000 in 1998
and $39,000 in 1997.
11. Uncertainty Due To The Year 2000 Issue
Most entities depend on computerized systems and therefore are exposed to
the Year 2000 conversion risk, which, if not properly addressed, could
affect an entity's ability to conduct normal business operations.
Management is addressing this issue; however, given the nature of this
risk, it is not possible to be certain that all aspects of the Year 2000
issue affecting the Company and those with whom it deals, such as
customers, suppliers, or other third parties, will be fully resolved
without adverse impact on the Company's operations.
16
<PAGE>
Auditors' Report
To the Stockholders of Glyko Biomedical Ltd.:
We have audited the consolidated balance sheets of Glyko Biomedical Ltd. as
of December 31, 1998 and 1997, and the consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the years
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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December
31, 1998 and 1997, and the results of its operations and its cash flows for
the years then ended in accordance with generally accepted accounting
principles.
/s/Arthur Andersen LLP
Toronto, Canada Arthur Andersen LLP
March 17, 1999 (Except with respect to
the matter discussed in the fourth
paragraph of Note 1, as to which the
date is April 13, 1999)
17
<PAGE>
Glyko Biomedical Ltd.
Corporate Directory
Board of Directors: Corporate Officer:
R. William Anderson John C. Klock, M.D.
Director President, Chief Executive Officer
Vice President, Finance and Chief Financial Officer
and Administration
and Chief Financial Officer
BioMarin Pharmaceutical Inc.
John H. Craig
Secretary and Director
Partner, Cassels Brock & Blackwell
John S. Glass Auditors:
Director Arthur Andersen LLP, Toronto,
Vice President and Chief Financial Canada
Officer Arthur Andersen LLP
Milkhaus Laboratory, Inc. San Francisco, California USA
John C. Klock, M.D. Investor Relations:
Director Copies of the Company's 1998
President, Chief Executive Officer, Annual Report and other
and Chief Financial Officer information may be obtained
Glyko Biomedical Ltd. by telephone:
President, Secretary and Director 415-884-6799 (USA)
BioMarin Pharmaceutical Inc.
by mail:
Gwynn R. Williams Glyko Biomedical Ltd.
Director 371 Bel Marin Keys Blvd., Suite 210
Self-employed physicist Novato, CA 94949 USA
Mark Young by e-mail:
Assistant Secretary and Director [email protected]
Partner, Cassels Brock & Blackwell
via the world wide web:
Registrar and Transfer Agent: (http://www.glyko.com)
Montreal Trust Company of Canada
Toronto, Canada
General Counsel:
Cassels Brock & Blackwell
Toronto, Canada
Wilson, Sonsini, Goodrich and Rosati
Palo Alto, California USA
