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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
------------------------------
For the Quarter Ended March 31, 2003 Commission File No. 0-12957
-------------- -------
ENZON PHARMACEUTICALS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 22-2372868
- -------------------------------- ------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
685 Route 202/206, Bridgewater, New Jersey 08807
- ------------------------------------------ --------------
(Address of principal executive offices) (Zip Code)
(908) 541-8600
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(Registrant's telephone number, including area code:)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- ------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-a of the Exchange Act). Yes X No
------ ------
As of May 9, 2003, there were 43,454,885 shares of common stock, par value $.01
per share, outstanding.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, 2003 and June 30, 2002
(in thousands, except share and per share data)
March 31, June 30,
2003 2002
(unaudited) *
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 71,807 $ 113,858
Short-term investments 27,754 75,165
Accounts receivable 33,412 26,050
Inventories 11,557 2,214
Other current assets 2,474 4,175
--------- ---------
Total current assets 147,004 221,462
--------- ---------
Property and equipment 38,243 19,230
Less accumulated depreciation and amortization 10,679 9,128
--------- ---------
27,564 10,102
--------- ---------
Other assets:
Marketable securities 38,782 295,991
Cost method equity investments 21,145 48,382
Debt issue costs, net 9,575 10,946
Deferred tax asset 10,614 8,342
Intangible assets, net 216,448 14,610
Goodwill 150,782 --
Other assets 1,873 913
--------- ---------
449,219 379,184
--------- ---------
Total assets $ 623,787 $ 610,748
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,289 $ 4,526
Accrued expenses 14,265 6,175
Accrued interest 4,500 9,000
--------- ---------
Total current liabilities 27,054 19,701
--------- ---------
Accrued rent 474 552
Notes payable 400,000 400,000
--------- ---------
400,474 400,552
--------- ---------
Stockholders' equity:
Preferred stock-$.01 par value, authorized
3,000,000 shares; issued and outstanding
7,000 shares at March 31, 2003 and June 30, 2002
(liquidation preference aggregating $357
at March 31, 2003 and $347 at June 30, 2002) -- --
Common stock-$.01 par value, authorized 90,000,000 shares,
issued and outstanding 43,452,348 shares at
March 31, 2003 and 42,999,823 shares at June 30, 2002 435 429
Additional paid-in capital 267,883 262,854
Accumulated other comprehensive income (loss) (256) 1,096
Deferred compensation (4,295) (1,202)
Accumulated deficit (67,508) (72,682)
--------- ---------
Total stockholders' equity 196,259 190,495
--------- ---------
Total liabilities and stockholders' equity $ 623,787 $ 610,748
========= =========
* Condensed from audited financial statements.
The accompanying notes are an integral part of these unaudited consolidated
condensed financial statements.
2
ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Three and Nine Months Ended March 31, 2003 and 2002
(in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
Revenues:
Net sales $ 26,637 $ 5,712 $ 41,746 $ 16,666
Royalties 16,242 14,089 57,565 33,706
Contract revenue 284 43 417 218
-------- -------- -------- --------
Total revenues 43,163 19,844 99,728 50,590
-------- -------- -------- --------
Costs and expenses:
Cost of sales 11,080 1,376 17,859 4,223
Research and development expenses 5,132 5,063 14,886 12,548
Selling, general and administrative expenses 9,481 3,623 20,786 12,199
Merger expenses 1,398 -- 1,398 --
Amortization of acquired intangibles 3,960 36 5,288 107
Write-down of carrying value of investments -- -- 27,237 --
-------- -------- -------- --------
Total costs and expenses 31,051 10,098 87,454 29,077
-------- -------- -------- --------
Operating income 12,112 9,746 12,274 21,513
-------- -------- -------- --------
Other income (expense):
Investment and other income, net 635 7,110 8,433 18,037
Interest expense (4,957) (4,956) (14,871) (14,871)
-------- -------- -------- --------
(4,322) 2,154 (6,438) 3,166
-------- -------- -------- --------
Income before taxes 7,790 11,900 5,836 24,679
Tax expense (benefit) 156 (267) 662 (364)
-------- -------- -------- --------
Net income $ 7,634 $ 12,167 $ 5,174 $ 25,043
======== ======== ======== ========
Basic earnings per common share $ 0.18 $ 0.28 $ 0.12 $ 0.59
======== ======== ======== ========
Diluted earnings per common share $ 0.17 $ 0.28 $ 0.12 $ 0.57
======== ======== ======== ========
Weighted average number of common shares
outstanding-basic 43,192 42,969 43,061 42,636
======== ======== ======== ========
Weighted average number of common shares and
dilutive potential common shares outstanding 43,634 43,934 43,611 43,900
======== ======== ======== ========
The accompanying notes are an integral part of these unaudited consolidated
condensed financial statements.
3
ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended March 31, 2003 and 2002
(in thousands)
(unaudited)
Nine Months Ended
March 31,
----------------------
2003 2002
--------- ---------
Cash flows from operating activities:
Net income $ 5,174 $ 25,043
Adjustment for depreciation and amortization,
including debt issue costs 7,895 2,022
Non-cash expense for issuance of common stock 468 230
Deferred income taxes (2,272) --
Loss on retirement of assets -- 4
Amortization of bond premium/discount 1,154 (2,978)
Non-cash write down of carrying value of investment 27,237 --
Changes in operating assets and liabilities 1,255 (7,925)
--------- ---------
Net cash provided by operating activities 40,911 16,396
--------- ---------
Cash flows from investing activities:
Capital expenditures (5,306) (6,038)
Purchase of ABELCET business (369,062) --
Purchase of DEPOCYT product (12,181) --
Purchase of cost method equity investments -- (40,000)
Proceeds from sale of marketable securities 350,318 252,249
Maturities of marketable securities 53,000 88,365
Purchases of marketable securities (101,203) (497,441)
--------- ---------
Net cash used in investing activities (84,434) (202,865)
--------- ---------
Cash flows from financing activities:
Proceeds from exercise of common stock options 1,472 4,868
--------- ---------
Net decrease in cash and cash equivalents (42,051) (181,601)
Cash and cash equivalents at beginning of period 113,858 310,224
--------- ---------
Cash and cash equivalents at end of period $ 71,807 $ 128,623
========= =========
The accompanying notes are an integral part of these unaudited consolidated
condensed financial statements.
4
ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
(1) Organization and Basis of Presentation
The unaudited consolidated condensed financial statements have been
prepared from the books and records of Enzon Pharmaceuticals, Inc. (the
"Company") and its subsidiaries in accordance with accounting principles
generally accepted in the United States of America for interim financial
information pursuant to Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required for complete annual
financial statements. In the opinion of management, all adjustments (consisting
only of normal and recurring adjustments) considered necessary for a fair
presentation have been included. Certain prior year balances were reclassified
to conform to the current period presentation. Interim results are not
necessarily indicative of the results that may be expected for the year. The
interim consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's latest annual report on Form 10-K.
(2) Comprehensive Income (Loss)
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income", requires unrealized gains and losses on the
Company's available-for-sale securities to be included in other comprehensive
income.
The following table reconciles net income to comprehensive income (loss)
(in thousands):
Three Months Ended Nine Months Ended
March 31 March, 31,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income $ 7,634 $ 12,167 $ 5,174 $ 25,043
Other comprehensive income (loss):
Unrealized holding gain (loss)
arising during the period 167 (3,036) 966 (5,188)
Less: reclassification adjustment
for net gain realized in net income (203) -- (2,318) --
-------- -------- -------- --------
Total other comprehensive income (loss) (36) (3,036) (1,352) (5,188)
-------- -------- -------- --------
Total comprehensive income $ 7,398 $ 9,131 $ 3,822 $ 19,855
======== ======== ======== ========
(3) Earnings Per Common Share
Basic earnings per share is computed by dividing the net income
available to common stockholders adjusted for cumulative undeclared preferred
stock dividends for the relevant period, by the weighted average number of
shares of Common Stock issued and outstanding during the periods. For purposes
of calculating diluted earnings per share for the three and nine months ended
March 31, 2003 and 2002, the denominator includes both the weighted average
number of shares of Common Stock outstanding and the number of dilutive Common
Stock equivalents. The number of dilutive Common Stock equivalents includes the
effect of non-qualified stock options calculated using the treasury stock method
and the number of shares issuable upon conversion of the outstanding Series A
Preferred Stock. The number of shares issuable upon conversion of the Company's
5
ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
4.5% Convertible Subordinated Notes due 2008 (the "Notes") and the effect of the
vesting of certain restricted stock using the treasury stock method have not
been included as the effect of their inclusion would be anti-dilutive. As of
March 31, 2003, the Company had 6,875,000 dilutive potential common shares
outstanding that could potentially dilute future earnings per share
calculations.
The following table reconciles the basic and diluted earnings (loss)
per share calculations (in thousands):
Three Months Ended Nine Months Ended
March 31, March 31,
----------------- -----------------
2003 2002 2003 2002
------- ------- ------- -------
Net income $ 7,634 $12,167 $ 5,174 $25,043
Less: Preferred stock dividends 4 4 11 11
------- ------- ------- -------
Net income available to common
stockholders $ 7,630 $12,163 $ 5,163 $25,032
======= ======= ======= =======
Weighted average number of common
shares outstanding-basic 43,192 42,969 43,061 42,636
Effect of dilutive securities:
Conversion of preferred stock 16 16 16 16
Assumed exercise of non-
qualified stock options and
restricted stock 426 949 534 1,248
------- ------- ------- -------
Weighted average number of common
shares and dilutive potential common
shares outstanding 43,634 43,934 43,611 43,900
======= ======= ======= =======
(4) Stock Based Compensation
As permitted by the Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock Based Compensation", the Company
accounts for stock-based compensation arrangements in accordance with provisions
of Accounting Principles Board ("APB") Opinion No. 25 "Accounting for Stock
Issued to Employees". Compensation expense for stock options issued to employees
is based on the difference on the date of grant, between the fair value of the
Company's stock and the exercise price of the option. No stock-based employee
compensation cost is reflected in net income, as all options granted under those
plans had exercise prices equal to the market value of the underlying common
stock at the date of grant.
In December 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure, an amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosure in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The provisions of SFAS No. 148 are effective for
fiscal years ending after December 15, 2002 and the interim disclosure
provisions are effective for interim periods beginning after December 15, 2002.
The Company continues to apply the intrinsic-value based method to account for
stock options and complies with the new disclosure requirements beginning with
the third quarter of its fiscal year ending June 30, 2003.
6
ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123 to stock based compensation (in thousands, except per share data):
Three Months Ended Nine Months Ended
March 31 March 31
----------------------- ------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income, as reported $ 7,634 $ 12,167 $ 5,174 $ 25,043
Add: Stock-based employee
compensation expense included in
reported net income, net of related
tax effects 250 75 458 226
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (4,609) (4,018) (11,844) (17,708)
---------- ---------- ---------- ----------
Pro forma net income (loss) $ 3,275 $ 8,224 ($ 6,212) $ 7,561
========== ========== ========== ==========
Earnings per share:
Basic - as reported $ 0.18 $ 0.28 $ 0.12 $ 0.59
========== ========== ========== ==========
Basic - pro forma $ 0.08 $ 0.19 ($ 0.14) $ 0.18
========== ========== ========== ==========
Diluted - as reported $ 0.17 $ 0.28 $ 0.12 $ 0.57
========== ========== ========== ==========
Diluted - pro forma $ 0.08 $ 0.19 ($ 0.14) $ 0.17
========== ========== ========== ==========
(5) Inventories
The composition of inventories at March 31, 2003 and June 30, 2002 is
as follows (in thousands):
March 31, 2003 June 30, 2002
-------------- -------------
Raw materials $4,754 $ 827
Work in process 4,498 1,043
Finished goods 2,305 344
--------- --------
$11,557 $2,214
======= ======
7
ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
(6) Cash Flow Information
The Company considers all highly liquid securities with original
maturities of three months or less to be cash equivalents. Cash payments for
interest were approximately $9,000,000 for each of the nine months ended March
31, 2003 and 2002. There were no income tax payments made for the nine months
ended March 31, 2003 and 2002.
(7) Income Taxes
The Company recognized a tax provision for the three and nine months
ended March 31, 2003 and 2002 which represents the Company's anticipated
Alternative Minimum Tax liability based on the anticipated taxable income for
the full fiscal year. For the three and nine months ended March 31, 2002 the
provision was offset by a tax benefit of $505,000 and $857,000, respectively
related to the sale of certain New Jersey state net operating loss carryforwards
totaling approximately $6,410,000 and $10,888,000, respectively.
(8) Business Segments
A single management team that reports to the Chief Executive Officer
comprehensively manages the business operations. The Company does not operate
separate lines of business or separate business entities with respect to any of
its approved products or product candidates. In addition, the Company does not
conduct any operations outside of the United States. The Company does not
prepare discrete financial statements with respect to separate product areas.
Accordingly, the Company does not have separately reportable segments as defined
by SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information".
(9) Business Combinations
(a) Acquisition of Abelcet Product Line
On November 22, 2002, the Company acquired the North American rights
and operational assets associated with the development, manufacture, sales and
marketing for ABELCET(R) (Amphotericin B Lipid Complex Injection) (the "ABELCET
Product Line") from Elan Corporation, plc, for $360 million plus certain
out-of-pocket expenses. The acquisition is being accounted for by the purchase
method of accounting in accordance with SFAS No. 141 "Business Combinations".
The total purchase price of the acquisition was (in thousands):
Cash $ 360,000
Out of pocket expenses, primarily legal,
investment banking and accounting fees 9,062
-----------
$ 369,062
===========
The purchase price was allocated to the tangible and identifiable
intangible assets acquired based on their estimated fair values at the
acquisition date. The excess of the purchase price over the fair value of
identifiable assets and liabilities acquired amounted to $150.8 million and was
allocated to goodwill.
8
ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
The following table summarizes the estimated fair values of the assets acquired
as of the acquisition date (in thousands):
Inventories $ 8,572
Property, plant and equipment 13,707
Intangible assets 196,000
Goodwill 150,783
----------
$ 369,062
==========
Property, plant and equipment and intangible assets were recorded at
the estimated fair value of the assets acquired as determined by a preliminary
third party valuation report. These values are based on preliminary results by
third party appraisals which are still being finalized. Therefore, actual
results may differ materially from preliminary results. Intangible assets
include the following components (in thousands):
Product Patented Technology (12 year estimated life) $ 64,400
Manufacturing Patent (12 year estimated life) 18,300
NDA Approval (12 year estimated life) 31,100
Marketing Intangibles (15 year estimated life) 80,000
Manufacturing Contract (3 year estimated life) 2,200
----------
$ 196,000
==========
Amortization expense for the next five fiscal years is expected to be
approximately $15.5 million per year. Goodwill will not be amortized but will be
tested for impairment at least annually.
The acquisition was accounted for as a purchase in accordance with the
guidance in SFAS 141, Business Combinations, with the results of operations and
cash flows for the ABELCET Product Line included in the Company's consolidated
results from the date of the acquisition.
(b) Pro Forma Financial Information
The unaudited pro forma results of operations is presented for
illustrative purposes only and is not necessarily indicative of the operating
results that would have occurred if the transaction had been consummated at the
dates indicated, nor is it necessarily indicative of future operating results of
the combined companies and should not be construed as representative of these
amounts for any future dates or periods.
The following unaudited pro forma results of operations of the Company
for the three and nine-month periods ended March 31, 2003 and 2002,
respectively, assumes the acquisition of the ABELCET Product Line has been
accounted for using the purchase method of accounting as of July 1, 2002 and
2001, respectively, and assumes the purchase price has been allocated to the
assets purchased based on fair values at the date of acquisition.
The ABELCET Product Line's results of operations included in these pro
forma financial statements are derived from Elan's unaudited financial
statements for the three and nine-month periods ended March 31, 2002 and July 1,
2002 through September 27, 2002 plus the estimated results until the acquisition
date based on prior year results, respectively. The ABELCET Product Line's
financial statements included in the unaudited pro forma information as of all
dates and for all periods presented have been adjusted, where appropriate, to
present the ABELCET Product Line's financial position and results of operations
in accordance with generally accepted accounting principles in the United
States.
9
ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
The following unaudited pro forma information presents a summary of the
Company's consolidated results of operations for the three and nine months ended
March 31, 2003 and March 31, 2002 as if the ABELCET Product Line acquisition had
taken place at the beginning of each fiscal year presented (in thousands, except
per share information):
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Product sales $ 26,637 $ 28,772 $ 78,148 $ 82,899
Total revenues 43,163 42,904 136,130 116,823
Net income (loss) 7,634 15,187 (8,028) 31,579
Pro forma earnings (loss) per share:
Basic $ 0.18 $ 0.35 $ (0.19) $ 0.74
Diluted $ 0.17 $ 0.35 $ (0.19) $ 0.72
(10) Write-down of Investment
In January 2002, the Company entered into a broad strategic alliance
with Nektar Therapeutics (Nektar) (formerly Inhale Therapeutic Systems, Inc.) to
co-develop products utilizing both companies' proprietary drug delivery
platforms. As a part of this agreement, the Company purchased $40 million of
newly issued Nektar convertible preferred stock which is currently convertible
into Nektar common stock at a conversion price of $22.79 per share. Under the
cost method of accounting, investments are carried at cost and are adjusted only
for other-than-temporary declines in fair value, distributions of earnings and
additional investments.
As a result of the continued decline in the price of Nektar's common
stock, the Company determined that the decline in the value of its investment in
Nektar was other than temporary. Accordingly, during the second quarter of its
fiscal year 2003, the Company recorded a write down of the carrying value of its
investment in Nektar, which resulted in a non-cash charge of $27.2 million. The
adjustment was calculated based on an assessment of the fair value of the
investment.
The estimated fair value of the Nektar preferred stock was determined
during the quarter ended December 31, 2002 by multiplying the number of shares
of common stock that would be received based on the conversion rate in place as
of the date of the agreement, January 2002 ($22.79 per share) by the closing
price of Nektar common stock on December 31, 2002, less a 10% discount to
reflect the fact that the shares were not convertible as of December 31, 2002,
the valuation date. In addition the investment represented approximately 3% of
Nektar's equivalent common shares outstanding.
(11) License Agreement
Effective December 31, 2002, Enzon obtained an exclusive license for
the right to sell, market and distribute SkyePharma PLC's ("SkyePharma")
DEPOCYT(R), an injectable chemotherapeutic approved for the treatment of
patients with lymphomatous meningitis in the United States and Canada.
Enzon paid a license fee of $12 million for the North American rights
to DEPOCYT in January 2003. SkyePharma will manufacture DEPOCYT and Enzon will
purchase the finished product at a purchase price equal to 35% of net sales,
which percentage of net sales can be reduced should certain defined sales
targets be exceeded. Enzon is required to purchase minimum levels of finished
product for calendar year 2003 of 90% of the previous year's sales by SkyePharma
and $5,000,000 for each subsequent calendar year. SkyePharma is also entitled to
a milestone payment of $5 million if Enzon's sales of the product are over a
$17.5 million annual run rate for four consecutive quarters and an additional
milestone payment of $5 million if Enzon's sales exceed an annualized run rate
of $25 million for four consecutive quarters. The Company is also responsible
for
10
ENZON PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
a $10 million milestone payment if the product receives approval for Neo-plastic
Meningitis prior to December 31, 2006. This milestone payment is incrementally
reduced if the approval is received subsequent to December 31, 2006 to a minimum
payment of $5 million for an approval after December 31, 2007. Enzon's license
is for an initial term of ten years and is automatically renewable for
successive two year terms thereafter. The Company has recorded the $12 million
payment in intangible assets which is being amortized over a ten year period.
On January 2, 2003, the Company and SkyePharma also entered into a
strategic alliance based on a broad technology access agreement. The two
companies will draw on their combined drug delivery technology and expertise to
jointly develop up to three products for future commercialization. These
products will be based on SkyePharma's proprietary platforms in the areas of
oral, injectable and topical drug delivery, supported by technology to enhance
drug solubility and Enzon's proprietary PEG modification technology, for which
Enzon received a $3.5 million technology access fee. This non-refundable upfront
license fee is being ratably recognized as revenue over the development
agreement period of four years. SkyePharma will receive a $2 million milestone
payment for each product based on its own proprietary technology that enters
Phase II clinical development. Research and development costs related to the
technology alliance will be shared equally based on an agreed upon annual
budget, as will future revenues generated from the commercialization of any
jointly-developed products.
(12) Merger with NPS Pharmaceuticals, Inc.
On February 19, 2003, the Company entered into an agreement and plan of
merger with NPS Pharmaceuticals, Inc. ("NPS"). The new corporation under which
the businesses of the Company and NPS will operate as subsidiaries is named
Momentum Merger Corporation ("Momentum"), which name will be changed prior to
the completion of the merger. NPS' objective is to build a profitable
biopharmaceutical company by discovering, developing and commercializing small
molecule drugs and recombinant proteins. NPS' current product candidates are
primarily for the treatment of bone and mineral disorders, gastrointestinal
disorders and central nervous system disorders. If the merger becomes
effective NPS' stockholders will receive one share of Momentum Common Stock for
each share of NPS Common Stock they own and Enzon's stockholders will receive
0.7264 shares of Momentum Common Stock for each share of Enzon Common Stock they
own. The transaction is subject to approval by NPS and Enzon stockholders and
other customary closing conditions. The mergers will be accounted for under the
purchase method of accounting and based on the exchange ratios, Enzon will be
deemed to be the acquiree and therefore the assets and liabilities of Enzon will
be recorded, as of the completion of the merger, at their respective fair
values. The costs incurred by Enzon in connection with the merger are not
capitalizable under the purchase method of accounting and have therefore, been
included in net income for the period in which they were incurred. During the
quarter ended March 31, 2003, the Company incurred $1.4 million of merger
related expenses.
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Information contained herein contains "forward-looking statements" which can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy. We cannot assure you that the future results covered by the
forward-looking statements will be achieved. The matters set forth in the "Risk
Factors" section of the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 2002, which is incorporated herein by reference, constitute
cautionary statements identifying important factors with respect to such
forward-looking statements, including certain risks and uncertainties, that
could cause actual results to vary materially from the future results indicated
in such forward-looking statements. Other factors, including without limitation
those set forth herein, could also cause actual results to vary materially from
the future results indicated in such forward-looking statements.
Acquisition of ABELCET Business
On November 22, 2002, we acquired the North American rights and
operational assets associated with the development, manufacture, sales and
marketing of ABELCET(R) (Amphotericin B Lipid Complex Injection) ("the ABELCET
Product Line") from Elan Corporation, plc ("Elan") for $360 million plus
out-of-pocket expenses. This transaction is being accounted for as a business
combination.
Unless otherwise indicated, the discussions in this report of the results
of operations for the three and nine months ended March 31, 2003 and financial
condition at March 31, 2003 include the results of operations of the ABELCET
Product Line commencing from November 23, 2002. Comparisons are made to the
results of operations for the three and nine months ended March 31, 2002, and
financial condition as of June 30, 2002, which include only the historical
results of Enzon Pharmaceuticals, Inc.
Results of Operations
Three months ended March 31, 2003 vs. Three months ended March 31, 2002
Revenues. Revenues for the three months ended March 31, 2003 increased by 118%
to $43,163,000, as compared to $19,844,000 for the three months ended March 31,
2002. The components of revenues are net sales, royalties we earn on the sale of
our products by others and contract revenues. Net sales increased 366% to
$26,637,000 for the three months ended March 31, 2003, as compared to $5,712,000
for the three months ended March 31, 2002. The increase in net sales was due to
our commencing of sales of ABELCET in North America in November 2002 and sales
of DEPOCYT(R) in January 2003, and increased sales of ADAGEN(R) and ONCASPAR(R).
During November 2002, we acquired the North American rights and operational
assets associated with the development, manufacture, sales and marketing for
ABELCET from Elan. During the three months ended March 31, 2003, we recorded
$18,267,000 of sales related to ABELCET, of which $13,505,000 related to sales
of the product in North America and $4,762,000 related to the shipment of the
product which we manufactured for Elan for the International market, and other
contract manufacturing revenue. During December 2002, we obtained an exclusive
license for the right to sell, market and distribute SkyePharma's DEPOCYT.
During the three months ended March 31, 2003, we recorded DEPOCYT sales of
$1,238,000. There were no sales of ABELCET or DEPOCYT during the three months
ended March 31, 2002. Sales of ONCASPAR increased by 27% to $2,822,000 for the
three months ended March 31, 2003 from $2,220,000 for the three months ended
March 31, 2002 as a result of our reacquisition of the rights to market and
distribute ONCASPAR in certain territories which we had previously licensed to
Aventis. Sales of ADAGEN increased by 23% for the three months ended March 31,
2003 to $4,310,000, as compared to $3,492,000 for the three months ended March
31, 2002 due to an increase in the number of patients.
Royalties for the three months ended March 31, 2003 increased to
$16,242,000, as compared to $14,089,000 for the three months ended March 31,
2002. The increase was primarily due to increased sales of PEG-INTRON(R) by our
marketing partner Schering-Plough.
12
PEG-INTRON royalties decreased as compared to the previous quarter
ended December 31, 2002. Information which we received from Schering-Plough
revealed that the current quarter's PEG-INTRON royalties were negatively
impacted by the reduction in trade inventories as a result of Schering-Plough's
elimination of its access assurance program and the related transition from a
sole distributor to multi-source distributors. Schering-Plough is responsible
for manufacturing, selling and marketing PEG-INTRON worldwide on a exclusive
basis. During December 2002, Hoffmann-La Roche's PEGASYS(R), a pegylated version
of its interferon product Roferon(R)-A, was approved in the United States as a
combination therapy with Roche's version of ribavirin, marketed as COPEGUS(TM)
for hepatitis C. PEGASYS is also approved for use as a monotherapy for the
treatment of Hepatitis C. Based upon Schering-Plough's historical market share
of the alpha interferon market for hepatitis C, the published clinical results
of PEG-INTRON and PEGASYS, and the fact that Schering-Plough has been marketing
PEG-INTRON in the United States since February 2001 and in Europe since June
2000, we do not expect PEGASYS to displace PEG-INTRON as the market leader.
However, the competitive pressure from PEGASYS could continue to have an adverse
impact on sales of PEG-INTRON. We cannot assure you that the overall market for
pegylated alpha interferon products will increase or that Schering-Plough will
be able to effectively compete with Hoffman-LaRoche in this market.
While we commenced sales of ABELCET during the quarter ended December
31, 2002, sales of the product were limited until February 2003 in order to
bring down the level of product held by our wholesalers. Over the near term we
expect to see a decrease in ABELCET sales due to the introduction of new
products in the anti-fungal market. We believe that through a focused marketing
effort we will see an improved outlook for Abelcet sales in the second half of
calendar 2003. We expect sales of DEPOCYT, which are currently running at an
annual rate of approximately $5,000,000, to increase over the coming year. We
expect ADAGEN and ONCASPAR sales to grow over the next year at similar levels as
achieved during the previous twelve months. However, we cannot assure you that
any particular sales levels of ABELCET, ADAGEN, ONCASPAR, DEPOCYT or PEG-INTRON
will be achieved or maintained.
During the three months ended March 31, 2003, we had export sales and
royalties on export sales of $8,605,000, of which $7,502,000 were in Europe.
Export sales and royalties recognized on export sales for the three months ended
March 31, 2002 were $6,870,000, of which $6,561,000 were in Europe.
Cost of Sales. Cost of sales, as a percentage of net sales increased to 42% for
the three months ended March 31, 2003 as compared to 24% for the three months
ended March 31, 2002. The increase was due to higher cost of goods sold for
ABELCET, due to certain purchase accounting adjustments to the acquired
inventory and as a result of unabsorbed capacity costs. The increase was also
due to our reacquisition of ONCASPAR, which resulted in increased cost of goods
sold for the product. Under the reacquisition agreement we made a $15,000,000
payment to Aventis in June 2002 and we pay Aventis a 25% royalty on net
sales of ONCASPAR. The royalty and amortization of the $15,000,000 payment over
a 14 year period are included in cost of goods sold for the product, accounting
for an increase in cost of goods sold as a percentage of sales.
Research and Development. Research and development expenses increased by 1% to
$5,132,000 for the three months ended March 31, 2003 from $5,063,000 for the
three months ended March 31, 2002. The increase was primarily due to increased
payroll and related expenses due to increased headcount related to our internal
research activities and increased spending related to our collaboration with
Micromet AG to advance our SCA technology and develop the next generation of
antibody products. These increases were offset by a reduction in clinical and
related expenses due to our decision to suspend the development of
PEG-paclitaxel. Research and development activities are expected to increase
significantly as we continue the advancement of the current and additional Phase
II clinical trials for PROTHECAN(R) and we conduct preclinical and clinical
trials for additional compounds.
Selling, General and Administrative. Selling, general and administrative
expenses for the three months ended March 31, 2003 increased by 162% to
$9,481,000, as compared to $3,623,000 in the three months ended March 31, 2002.
This increase was due to: (i) increased selling expenses related to the ABELCET
acquisition and the sales force we hired from Elan; (ii) increased sales and
marketing costs due to the reacquisition of marketing and distribution rights
for ONCASPAR; and (iii) increased general and administrative personnel and
related costs. These increases were partially offset by a reduction in legal
expense related to the prior year's patent litigation with Nektar Therapeutics,
formerly Inhale Therapeutic Systems. During January 2002, we settled our patent
infringement suit with Nektar and entered into a broad-based technology
collaboration.
13
Merger expenses. During the three months ended March 31, 2003, we incurred
$1,398,000 of merger related expenses. Merger expenses represent costs incurred
to date related to our pending merger with NPS Pharmaceuticals. There were no
such costs in the previous period.
Amortization. Amortization expense for the three months ended March 31, 2003
increased to $3,960,000, as compared to $36,000 in the three months ended March
31, 2002. This increase was the result of the intangible assets acquired in
connection with the ABELCET acquisition in November 2002 and the DEPOCYT license
fee. Amortization of intangible assets is provided over their estimated useful
lives ranging from 3 to 15 years on a straight-line basis.
Other Income (Expense). Investment and other income for the three months ended
March 31, 2003 decreased to $635,000, as compared to $7,110,000 for the three
months ended March 31, 2002. The decrease was due in part to a decrease in other
income of approximately $3,215,000, principally due to a $3,000,000 payment
received during the three months ended March 31, 2002 pertaining to the
settlement of our patent infringement suit against Nektar Therapeutics. The
decrease also resulted from a decrease in interest bearing investments due to
our payment of $369,000,000 in connection with our purchase of the ABELCET
Product Line from Elan in November 2002 and a decline in interest rates on our
investments. Interest expense remained relatively unchanged as compared to the
same period last year. The majority of interest expense relates to $400,000,000
in 4.5% convertible subordinated notes which were outstanding for both periods.
Income Taxes. During the three months ended March 31, 2003 and 2002 we
recognized a tax provision that represents our anticipated Alternative Minimum
Tax liability based on our anticipated taxable income for the full fiscal year.
For the three months ended March 31, 2002 the provision was offset by a tax
benefit of $505,000 related to the sale of certain New Jersey state net
operating loss carryforwards totaling approximately $6,410,000.
Nine months ended March 31, 2003 vs. Nine months ended March 31, 2002
Revenues. Revenues for the nine months ended March 31, 2003 increased by 97% to
$99,728,000 as compared to $50,590,000 for the same period last year. The
components of revenues are net sales, royalties we earn on the sale of products
by others and contract revenues. Net sales increased by 150% to $41,746,000 for
the nine months ended March 31, 2003, as compared to $16,666,000 for the same
period last year. The increase in net sales was due to our commencing sales of
ABELCET in North America in November 2002 and sales of DEPOCYT in
January 2003 and increased sales of ADAGEN and ONCASPAR. During November 2002,
we acquired the North American rights and operational assets associated with the
development, manufacture, sales and marketing for ABELCET from Elan. During the
nine months ended March 31, 2003, we recorded $19,590,000 of sales related to
ABELCET, of which $14,094,000 related to sales of the product in North America
and $5,496,000 related to the shipment of the product which we manufacture for
Elan for the International market, and other contract manufacturing revenue.
During December 2002, we obtained an exclusive license for the right to sell,
market and distribute SkyePharma's DEPOCYT. During the nine months ended March
31, 2003 we recorded DEPOCYT sales of $1,238,000. There were no sales of ABELCET
and DEPOCYT during the nine months ended March 31, 2002. ONCASPAR sales for the
nine months ended March 31, 2003 increased to $8,674,000, or 25%, compared to
$6,921,000 in the same period last year due to our reacquisition of the rights
to market and distribute ONCASPAR in certain territories which we had previously
licensed to Aventis. ADAGEN sales increased by 26% to $12,244,000 for the nine
months ended March 31, 2003 compared to $9,745,000, in the prior year due to an
increase in the number of patients.
Royalties for the nine months ended March 31, 2003, increased to
$57,565,000 as compared to $33,706,000 in the same period last year. The
increase was primarily due to increased sales of PEG-INTRON by our marketing
partner Schering-Plough.
During the nine months ended March 31, 2003, we had export sales and
royalties on export sales of $24,236,000, of which $21,490,000 were in Europe.
Export sales and royalties recognized on export sales for the nine months ended
March 31, 2002 were $18,796,000, of which $17,915,000 were in Europe.
14
Cost of Sales. Cost of sales as a percentage of sales increased to 43% for the
nine months ended March 31, 2003, as compared to 25% for the nine months ended
March 31, 2002. This increase of cost of goods sold was due to the reacquisition
of ONCASPAR from Aventis. Under the reacquisition agreement, we made a
$15,000,000 payment to Aventis in June 2002 and pay Aventis a 25% royalty
on net sales of ONCASPAR. The royalty and amortization over a 14 year period of
the $15,000,000 payment are included in cost of goods sold for the product,
accounting for the increase in cost of goods sold as a percentage of sales. The
increase was also due to higher cost of goods sold for ABELCET, due to certain
purchase accounting adjustments to the acquired inventory and as a result of
unabsorbed capacity costs.
Research and Development. Research and development expenses increased by 19% to
$14,886,000, as compared to $12,548,000 for the nine months ended March 31,
2002. The increase was primarily due to increased payroll and related expenses
due to an increased headcount related to our internal research and preclinical
activities and increased spending related to our SCA technology collaboration
with Micromet.
Selling, General and Administrative. Selling, general and administrative
expenses for the nine months ended March 31, 2003 increased by 70% to
$20,786,000 as compared to $12,199,000 in the same period last year. The
increase was primarily due to: (i) increased selling expense related to the
ABELCET acquisition and the sales force we hired from Elan; (ii) increased sales
and marketing costs due to the reacquisition of marketing and distribution
rights for ONCASPAR; and (iii) increased general and administrative personnel
and related costs. These increases were partially offset by a reduction in legal
expense related to the prior year's patent litigation with Nektar Therapeutics.
During January 2002, we settled our patent infringement suit with Nektar and
entered into a broad based technology collaboration.
Merger expenses. During the nine months ended March 31, 2003, we incurred
$1,398,000 of merger related expenses. Merger expenses represent costs incurred
to date related to our pending merger with NPS Pharmaceuticals. There were no
such expenses in the previous period.
Amortization. Amortization expense increased to $5,288,000 for the nine months
ended March 31, 2003 as compared to $107,000 for the same period last year as a
result of the intangible assets acquired in connection with the ABELCET
acquisition during November 2002 and the DEPOCYT license fee. Amortization of
intangible assets is provided over their estimated lives ranging from 3-15 years
on a straight-line basis.
Write-down of Investment. In January 2002, the Company entered into a broad
strategic alliance with Nektar Therapeutics to co-develop products utilizing
both companies' proprietary drug delivery platforms. As a part of this
agreement, the Company purchased $40 million of newly issued Nektar preferred
convertible stock which is currently convertible into Inhale common stock at a
conversion price of $22.79 per share. Under the cost method of accounting,
investments are carried at cost and are adjusted only for other-than-temporary
declines in fair value, distributions of earnings and additional investments. As
a result of the continued decline in the price of Nektar's common stock, the
Company determined during the three months ended December 31, 2002 that the
decline in the value of its investment in Nektar was other than temporary.
Accordingly, the Company recorded a write down of the carrying value of its
investment in Nektar, which resulted in a non-cash charge of $27,237,000. The
adjustment was calculated based on an assessment of the fair value of the
investment.
The estimated fair value of the Nektar preferred stock was determined by
multiplying the number of shares of common stock that would be received based on
the conversion rate in place as of the date of the agreement, January 2002
($22.79 per share) by the closing price of Nektar common stock on December 31,
2002, less a 10% discount to reflect the fact that the shares were not
convertible as of December 31, 2002, the valuation date.
Other Income (Expense). Investment and other income for the nine months ended
March 31, 2003, decreased to $8,433,000, as compared to $18,037,000 for the same
period last year. Interest income for the period decreased by $6,390,000,
primarily due a decline in interest rates on our investments and a decrease in
interest bearing investments due to a $369,000,000 payment in connection with
our purchase of the ABELCET Product Line from Elan in November 2002. Other
income decreased by $3,214,000 for the nine months ended March 31, 2003 as
compared to the same period in the previous year as a result of a $3,000,000
payment received during the nine months ended March 31, 2002 from Nektar
Therapeutics for reimbursement for expenses incurred in defending Enzon's
branched PEG patent. Interest expense remained relatively unchanged as compared
to the same period last year. The majority of interest expense is related to
$400,000,000 in 4.5% convertible subordinated notes, which were outstanding for
both periods.
15
Income Taxes. During the nine months ended March 31, 2003 and 2002 we recognized
a tax provision that represents our Alternative Minimum Tax Liability based on
our anticipated taxable income for the full fiscal year. For the nine months
ended March 31, 2002 the provision was offset by a tax benefit of $857,000
related to the sale of certain New Jersey state net operating loss
carryforwards totaling approximately $10,888,000.
Liquidity and Capital Resources
Total cash reserves, which include cash, cash equivalents and
marketable securities, were $138,000,000 as of March 31, 2003, as compared to
$485,000,000 as of June 30, 2002. The decrease is primarily due to $369,000,000
paid as a result of the acquisition of the ABELCET Product Line acquisition. We
invest our excess cash primarily in rated fixed income securities.
To date, our sources of cash have been the proceeds from the sale of
our stock through public offerings and private placements, the issuance of the
4.5% convertible subordinated notes, sales of ADAGEN, ONCASPAR, DEPOCYT, and
ABELCET and royalties earned on sales of PEG-INTRON and other products, sales of
our products for research purposes, contract research and development fees,
technology transfer and license fees and royalty advances.
As of March 31, 2003, we had $400,000,000 of 4.5% convertible
subordinated notes outstanding. The notes bear interest at an annual rate of
4.5%. Interest is payable on January 1 and July 1 of each year beginning January
2, 2002. Accrued interest on the notes was approximately $4,500,000 as of March
31, 2003. The holders may convert all or a portion of the notes into common
stock at any time on or before July 1, 2008. The notes are convertible into our
common stock at a conversion price of $70.98 per share, subject to adjustment in
certain events. The notes are subordinated to all existing and future senior
indebtedness. On or after July 7, 2004, we may redeem any or all of the notes at
specified redemption prices, plus accrued and unpaid interest to the day
preceding the redemption date. The notes will mature on July 1, 2008 unless
earlier converted, redeemed at our option or redeemed at the option of the note
holder upon a fundamental change, as described in the indenture for the notes.
Neither we nor any of our subsidiaries are subject to any financial covenants
under the indenture. In addition, neither we nor any of our subsidiaries are
restricted under the indenture from paying dividends, incurring debt, or issuing
or repurchasing our securities.
The Company has a total capital expenditure commitment for the
remainder of the fiscal year ending June 30, 2003 of approximately $3.0 million.
During January 2003, we entered into a strategic alliance with
SkyePharma based on a broad technology access agreement. The two companies will
draw on their combined drug delivery technology and expertise to jointly develop
up to three products for future commercialization. Under the agreement we
received a non-refundable upfront license $3.5 million technology access fee.
Research and development costs related to the jointly developed products will be
shared equally based on an agreed upon annual budget, and future revenues
generated from the commercialization jointly-developed products will also be
shared equally. In addition, SkyePharma is entitled to a $2 million milestone
payment for each product based on its own proprietary technology that enters
Phase II clinical development.
Effective December 31, 2002, we obtained an exclusive license for the
right to sell, market and distribute SkyePharma PLC's ("SkyePharma") DEPOCYT(R).
Enzon paid a license fee of $12 million for the North American rights to DEPOCYT
in January 2003. Under the agreement we are required to purchase minimum levels
of finished product for calendar year 2003 of 90% of the previous year sales by
SkyePharma and a sales level of $5,000,000 for each subsequent calendar year.
Enzon paid a license fee of $12 million for the North American rights to DEPOCYT
in January 2003. SkyePharma is also entitled to a milestone payment of $5
million if Enzon's sales of the product are over a $17.5 million annual run rate
for four consecutive quarters and an additional milestone payment of $5 million
if Enzon's sales exceed an annualized run rate of $25 million for four
consecutive quarters. The Company is also responsible for a $10 million
milestone payment if the product receives approval for Neo-plastic Meningitis
prior to December 31, 2006. This milestone payment is incrementally reduced if
the approval is received subsequent to December 31, 2006 to a minimum payment of
$5 million for an approval after December 31, 2007.
As of March 31, 2003, 1,043,000 shares of Series A preferred stock had
been converted into 3,325,000 shares of common stock. Accrued dividends on the
converted Series A preferred stock in the aggregate amount of $3,770,000 were
settled by the issuance of 235,000 shares of common stock and cash payments of
$1,947,000. The preferred shares outstanding at March 31, 2003 are convertible
into approximately 16,000 shares of common stock. Dividends accrue on the
remaining outstanding shares of Series A preferred stock at a rate of $14,000
per year. As of March 31, 2003, there were accrued and unpaid dividends totaling
$182,000 on the 7,000 shares of Series A preferred stock outstanding. We have
the option to pay these dividends in either cash or common stock. As part of our
planned merger with NPS Pharmaceuticals we have agreed to redeem the outstanding
Series A preferred stock for cash.
16
Our current sources of liquidity are cash, cash equivalents, and
interest earned on such cash reserves, marketable securities, sales of ADAGEN,
ONCASPAR, DEPOCYT, and ABELCET, royalties earned on sales of PEG-INTRON and
other products and sales of our products for research purposes and license fees.
Based upon our currently planned research and development activities and related
costs and our current sources of liquidity, we anticipate our current cash
reserves and expected cash flow from operations will be sufficient to meet our
capital, debt service and operational requirements for the foreseeable future.
We may seek additional financing, through future offerings of equity or
debt securities or agreements with collaborators with respect to the development
and commercialization of products to fund future operations and potential
acquisitions. We cannot assure you, however, that we will be able to obtain
additional funds on acceptable terms, if at all.
Critical Accounting Policies
In December 2001, the SEC requested that all registrants discuss their most
"critical accounting policies" in management's discussion and analysis of
financial condition and results of operations. The SEC indicated that a
"critical accounting policy" is one which is both important to the portrayal of
the company's financial condition and results of operations and requires
management's most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain.
The consolidated financial statements are presented in accordance with
accounting principles that are generally accepted in the United States. All
professional accounting standards effective as of March 31, 2003 have been taken
into consideration in preparing the consolidated condensed financial statements.
The preparation of the consolidated condensed financial statements requires
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, expenses and related disclosures. Some of those estimates
are subjective and complex, and, consequently, actual results could differ from
those estimates. The following accounting policies have been highlighted as
significant because changes to certain judgments and assumptions inherent in
these policies could affect the Company's consolidated financial statements.
Revenues from the sale of the Company's products are recognized at the time of
shipment and provision is made at that time for estimated future credits,
chargebacks, sales discounts, rebates and returns. These sales provision
accruals are presented as a reduction of the accounts receivable balances. The
Company continually monitors the adequacy of the accruals by comparing the
actual payments to the estimates used in establishing the accrual.
Royalties under the Company's license agreements with third parties are
recognized when earned through the sale of the product by the licensor. The
Company does not participate in the selling or marketing of products for which
it receives royalties.
Contract revenues are recorded as the earnings process is completed.
Non-refundable milestone payments that represent the completion of a separate
earnings process are recognized as revenue when earned, upon the occurrence of
contract-specified events and when the milestone has substance. Non-refundable
payments received upon entering into license and other collaborative agreements
where the Company has continuing involvement are recorded as deferred revenue
and recognized ratably over the estimated service period.
17
Under the asset and liability method of Statement of Financial Accounting
Standards ("SFAS") No. 109, deferred tax assets and liabilities are recognized
for the estimated future tax consequences attributable to differences between
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. A
valuation allowance on net deferred tax assets is provided for when it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The Company has significant net deferred tax assets, primarily related
to net operating loss carryforwards, and continues to analyze what level of the
valuation allowance is needed.
The Company assesses the carrying value of its cost method investments in
accordance with SFAS No. 115 and SEC Staff Accounting Bulletin No. 59. An
impairment write-down is recorded when a decline in the value of an investment
is determined to be other-than-temporary. These determinations involve a
significant degree of judgment and are subject to change as facts and
circumstances change.
Recently Issued Accounting Standards
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34. This
interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
interpretation are applicable to guarantees issued or modified after December
31, 2002 and are not expected to have a material effect on the Company's
financial statements or disclosure requirements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following discussion about our exposure to market risk of financial
instruments contains forward-looking statements. Actual results may differ
materially from those described.
Our holdings of financial instruments are comprised of debt securities
and time deposits. All such instruments are classified as available-for-sale
securities. We do not invest in portfolio equity securities or commodities or
use financial derivatives for trading purposes. Our debt security portfolio
represents funds held temporarily pending use in our business and operations. We
manage these funds accordingly. We seek reasonable assuredness of the safety of
principal and market liquidity by investing in rated fixed income securities
while at the same time seeking to achieve a favorable rate of return. Our market
risk exposure consists principally of exposure to changes in interest rates. Our
holdings are also exposed to the risks of changes in the credit quality of
issuers. We typically invest the majority of our investments in the shorter-end
of the maturity spectrum, and at March 31, 2003, all of our holdings were in
instruments maturing in four years or less.
18
The table below presents the principal amounts and related weighted
average interest rates by year of maturity for our investment portfolio as of
March 31, 2003 (in thousands):
Fair
2003 2004 2005 2006 Total Value
---------- ------- ---------- ------- ------- -------
Fixed Rate $ 27,466 $15,768 $ 17,900 $ 1,000 $62,134 $62,536
Average Interest Rate 3.22% 2.52% 2.07% 3.15% 2.71% --
Variable Rate -- 2,000 -- 2,000 4,000 4,000
Average Interest Rate -- 1.26% -- 1.23% 1.24% --
---------- ------- ---------- ------- ------- -------
$ 27,466 $17,768 $ 17,900 $ 3,000 $66,134 $66,536
========== ======= ========== ======= ======= =======
Our 4.5% convertible subordinated notes in the principal amount of
$400,000,000 due July 1, 2008 have fixed interest rates. The fair value of the
notes is affected by changes in interest rates and by changes in the price of
our common stock.
19
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-14(c) under the Exchange Act) as of a date
(the "Evaluation Date") within 90 days prior to the filing date of this report.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the Evaluation Date, our disclosure controls and
procedures were effective in timely alerting them to the material information
relating to us required to be included in our periodic SEC filings.
(b) Changes in internal controls.
There were no significant changes made in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their last evaluation.
20
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits (numbered in accordance with Item 601 of Regulation S-K).
Page Number
or
Exhibit Incorporation
Number Description By Reference
- ------ ----------- ----------------
2.1 Agreement and Plan of Reorganization by and among NPS +(2.1)
Pharmaceuticals, Inc., Enzon Pharmaceuticals, Inc., Momentum
Merger Corporation, Newton Acquisition Corporation and Einstein
Acquisition Corporation, dated as of February 19, 2003.
3(i) Certificate of Incorporation, as amended ^^^
3(i)(a) Amendment to Certificate of Incorporation ^^^^(A)
3(ii) By laws, as amended ^^(3(ii))
4.1 Indenture dated as of June 26, 2001, between the Company and
Wilmington Trust Company, as trustee, including the form of 41/2%
Convertible Subordinated Note due 2008 attached as Exhibit A thereto ++++(4.1)
4.2 Registration Rights Agreement dated as of June 26, 2001, between the
Company and the initial purchasers ++++(4.2)
4.3 Rights Agreement dated May 17, 2002 between the Company and
Continental Stock Transfer Trust Company, as rights agent ^(1)
4.4 First Amendment to the Rights Agreement, dated as of February 19, ++(1)
2003 between the Company and Continental Stock Transfer &
Trust Company, as rights agent.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 o
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 o
o Filed herewith.
++++ Previously filed as an exhibit to the Company's Registration
Statement on Form S-3 (File No. 333-67509) filed with the Commission
and incorporated herein by reference thereto.
^ Previously filed as an exhibit to the Company's Form 8-A (File No.
000-12957) filed with the Commission on May 22, 2002 and incorporated
herein by reference thereto.
^^ Previously filed as an exhibit to the Company's Current Report on
Form 8-K filed with the Commission on May 22, 2002 and incorporated
herein by reference thereto.
^^^ Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002 and incorporated
herein by reference thereto.
^^^^ Previously filed as an exhibit to the Company's Current Report on
Form 8-K filed on December 10, 2002 and incorporated herein by
reference thereto.
21
+ Previously filed as an exhibit to the Company's Current Report on
Form 8-K filed with the Commission on February 21, 2003 and
incorporated herein by reference thereto.
++ Previously filed as an exhibit to the Company's Form 8-A12G/A (File
No. 000-12957) filed with the Commission on February 20, 2003 and
incorporated herein by reference thereto.
(b) Reports on Form 8-K
On January 6, 2003, we filed with the Commission a Current Report on
Form 8-K, dated January 6, 2003, reporting our strategic alliance with
SkyePharma PLC.
On February 4, 2003, we filed with the Commission a Current Report on
Form 8-K, dated February 4, 2003, reporting our financial results for the
second quarter ended December 31, 2002.
On February 7, 2003, we filed with the Commission a Current Report on
Form 8-K/A dated February 7, 2003 which amended our Report on Form 8-K,
filed with the Securities and Exchange Commission on December 9, 2002, to
update and file the financial statements and pro forma financial
information relating to our acquisition of the ABELCET Product Line
required by Item 7 of Form 8-K.
On February 18, 2003, we filed with the Commission a Current Report
on Form 8-K, dated February 18, 2003, reporting a non-cash revision to
our previously announced financial results for the quarter ended December
31, 2002 to reflect a reduction in the carrying amount of our investment
in Nektar Therapeutics, formerly Inhale Therapeutics.
On February 21, 2003, we filed with the Commission a Current Report
on Form 8-K, dated February 20, 2003, reporting our agreement and plan of
reorganization setting forth the proposed merger of equals of NPS and
Enzon.
On March 24, 2003, we filed with the Commission a Current Report on
Form 8-K, dated March 24, 2003, reporting data presented at the annual
scientific meeting, Focus on Fungal Infections (FOFI) 13, held in Maui,
Hawaii, suggesting possible new roles for ABELCET(R) (amphotericin B
lipid complex injection) in the management of invasive fungal infections
(IFIS).
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: May 15, 2003 ENZON PHARMACEUTICALS, INC.
---------------------------
(Registrant)
By: /s/Arthur J. Higgins
---------------------------------
Arthur J. Higgins
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
Date: May 15, 2003 By: /s/Kenneth J. Zuerblis
---------------------------------
Kenneth J. Zuerblis
Vice President Finance,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
and Corporate Secretary
23
CERTIFICATION PURSUANT TO
18 U.S.C. ss.1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Arthur J. Higgins, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Enzon
Pharmaceuticals, Inc. and Subsidiaries;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements and financial
information included in this quarterly report fairly present, in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared; b)
evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and c) presented in this quarterly report our
conclusions about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and b)
any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
May 15, 2003 By: /s/Arthur J. Higgins
---------------------------------------
Arthur J. Higgins
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
24
CERTIFICATION PURSUANT TO
18 U.S.C. ss.1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kenneth J. Zuerblis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Enzon
Pharmaceuticals, Inc. and Subsidiaries;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements and financial
information included in this quarterly report fairly present, in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared; b.
evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and c. presented in this quarterly report our
conclusions about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and b.
any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
May 15, 2003 By: /s/Kenneth J. Zuerblis
-----------------------
Kenneth J. Zuerblis
Vice President Finance,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
and Corporate Secretary
25