-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M4cG3q9p8QryQ6ObQHXHdnDPVLcwWYv7DbQL3bvBUkroAQUoQbCjDi/barzAxnEv Ewj5qo4K49o3m86tzQvW0g== 0000950135-97-003469.txt : 19970815 0000950135-97-003469.hdr.sgml : 19970815 ACCESSION NUMBER: 0000950135-97-003469 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENZYME CORP CENTRAL INDEX KEY: 0000732485 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 061047163 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-14680 FILM NUMBER: 97660201 BUSINESS ADDRESS: STREET 1: ONE KENDALL SQ CITY: CAMBRIDGE STATE: MA ZIP: 02139 BUSINESS PHONE: 6172527500 MAIL ADDRESS: STREET 1: ONE KENDALL SQUARE CITY: CAMBRIDGE STATE: MA ZIP: 02139 10-Q 1 GENZYME CORPORATION 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-Q --------- (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 ------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from_______________to_______________ Commission file number 0-14680 ------- GENZYME CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Massachusetts 06-1047163 - -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) One Kendall Square, Cambridge, Massachusetts 02139 - -------------------------------------------------------------------------------- (Address of principal executive offices) (zip code) (617) 252-7500 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares outstanding of each of the issuer's series of common stock as of July 31, 1997:
Series Outstanding at July 31, 1997 ------ ---------------------------- Genzyme General Division Common Stock ("GGD Stock") 76,730,738 Genzyme Tissue Repair Division Common Stock ("GTR Stock") 15,715,885 Genzyme Molecular Oncology Division Common Stock ("GMO Stock") 3,928,571
2 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, JUNE 30, 1997 NOTE REGARDING FORWARD-LOOKING STATEMENTS: This report on Form 10-Q for Genzyme Corporation ("Genzyme" or the "Company") contains forward-looking statements concerning the Company's future revenues, operations and expenditures. These statements represent the expectations of Genzyme's management as of the filing date of this Form 10-Q. The Company's actual results could differ materially from those forward-looking statements due to a number of factors, including (i) the Company's ability to successfully complete preclinical and clinical development and obtain timely regulatory approval and patent and other proprietary rights protection for its products and services, (ii) decisions made by the U.S. Food and Drug Administration (the "FDA") regarding the indications for which the Company's products may be approved, (iii) the actual size of markets to be addressed by the Company's products and services, (iv) market acceptance of the Company's products and services, (v) the Company's ability to obtain reimbursement for its products from third-party payers, where appropriate, (vi) the accuracy of the Company's information concerning the products and competition and (vii) the risks and uncertainties described under the caption "Factors Affecting Future Operating Results" under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1996 (the "1996 Genzyme 10-K/A"). 2 3 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, JUNE 30, 1997 TABLE OF CONTENTS
PAGE NO. -------- PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements GENZYME GENERAL Combined Statements of Operations for the Three and Six Months Ended June 30, 1997 and 1996.................... 4 Combined Balance Sheets as of June 30, 1997 and December 31, 1996.............................................. 5 Combined Statements of Cash Flows for the Six Months Ended June 30, 1997 and 1996.............................. 6 Notes to Unaudited Combined Financial Statements............................................................... 7 GENZYME TISSUE REPAIR Combined Statements of Operations for the Three and Six Months Ended June 30, 1997 and 1996.................... 9 Combined Balance Sheets as of June 30, 1997 and December 31, 1996.............................................. 10 Combined Statements of Cash Flows for the Six Months Ended June 30, 1997 and 1996.............................. 11 Notes to Unaudited Combined Financial Statements............................................................... 12 GENZYME MOLECULAR ONCOLOGY Statements of Operations for the Three and Six Months Ended June 30, 1997 and 1996 and Cumulative from December 1, 1994 (Date of Inception) through June 30, 1997 .................................................. 13 Balance Sheets as of June 30, 1997 and December 31, 1996....................................................... 14 Statements of Cash Flows for the Six Months Ended June 30, 1997 and 1996 and Cumulative from December 1, 1994 (Date of Inception) through June 30, 1997................................................... 15 Notes to Unaudited Financial Statements........................................................................ 16 GENZYME CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations for the Three and Six Months Ended June 30, 1997 and 1996............... 18 Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996.......................................... 20 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1997 and 1996.......................... 21 Notes to Unaudited Consolidated Financial Statements........................................................... 22 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 25 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk............................................ 30 PART II. OTHER INFORMATION ITEM 2. Changes in Securities................................................................................. 31 ITEM 4. Submission of Matters to a Vote of Security Holders................................................... 31 ITEM 6. Exhibits and Reports on Form 8-K...................................................................... 33 Signatures........................................................................................................... 34
3 4 GENZYME GENERAL COMBINED STATEMENTS OF OPERATIONS (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------- ----------------------- 1997 1996 1997 1996 -------- -------- -------- -------- Revenues: Net product sales............................................ $131,636 $ 91,087 $259,792 $183,902 Net service sales............................................ 14,295 16,761 29,051 29,668 Revenues from research and development contracts............. 1,683 6,140 3,377 12,201 -------- -------- -------- -------- Total revenues.............................................. 147,614 113,988 292,220 225,771 Operating costs and expenses: Cost of products sold........................................ 45,498 29,164 92,010 62,488 Cost of services sold........................................ 8,979 11,424 18,295 19,651 Selling, general and administrative.......................... 40,801 31,747 81,673 63,057 Research and development..................................... 18,976 16,215 36,300 31,551 Amortization of intangibles.................................. 3,164 1,520 6,360 2,536 Acquisition restructuring costs.............................. - 1,465 - 1,465 -------- -------- -------- -------- Total operating costs and expenses.......................... 117,418 91,535 234,638 180,748 -------- -------- -------- -------- Operating income................................................. 30,196 22,453 57,582 45,023 Other income and (expenses): Equity in net loss of unconsolidated subsidiaries............ (783) (1,121) (853) (2,058) Gain on investment........................................... - 1,711 - 1,711 Investment income............................................ 2,594 4,226 4,912 8,144 Interest expense............................................. (1,719) (186) (4,000) (395) -------- -------- -------- -------- Total other income (expenses)............................... 92 4,630 59 7,402 -------- -------- -------- -------- Income before income taxes....................................... 30,288 27,083 57,641 52,425 Provision for income taxes....................................... (11,533) (11,104) (22,159) (20,909) -------- -------- -------- -------- Net income....................................................... 18,755 15,979 35,482 31,516 Allocated tax benefit generated by Genzyme Tissue Repair......... 4,327 4,305 8,838 7,802 Allocated tax benefit generated by Genzyme Molecular Oncology.... 201 - 201 - -------- -------- -------- -------- Net income attributable to Genzyme General Stock................. $ 23,283 $ 20,284 $ 44,521 $ 39,318 ======== ======== ======== ======== Income per Genzyme General common and common equivalent share: Net income................................................... $ 0.30 $ 0.27 $ 0.57 $ 0.54 ======== ======== ======== ======== Average shares outstanding................................... 78,130 73,908 78,184 72,880 ======== ======== ======== ======== Income per Genzyme General common share assuming full dilution: Net income................................................... $ 0.30 $ 0.27 $ 0.57 $ 0.53 ======== ======== ======== ======== Average fully diluted shares outstanding..................... 78,791 73,934 78,514 74,300 ======== ======== ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. 4 5 GENZYME GENERAL COMBINED BALANCE SHEETS (UNAUDITED, IN THOUSANDS)
JUNE 30, DECEMBER 31, 1997 1996 ---------- ---------- ASSETS Current assets: Cash and cash equivalents ................................................... $ 79,187 $ 77,220 Short-term investments ...................................................... 47,243 56,290 Accounts receivable, less allowance for doubtful accounts ................... 118,655 115,156 Inventories ................................................................. 135,299 123,442 Prepaid expenses and other .................................................. 16,108 99,953 Due from Genzyme Tissue Repair .............................................. 228 1,604 Due from Genzyme Molecular Oncology ......................................... 1,564 - Deferred tax assets - current ............................................... 17,493 17,493 ---------- ---------- Total current assets ...................................................... 415,777 491,158 Property, plant and equipment, net ............................................. 369,410 371,610 Other assets: Long-term investments ....................................................... 26,618 38,215 Note receivable - Genzyme Molecular Oncology ................................ 2,500 - Intangibles, net ............................................................ 247,923 247,745 Deferred tax assets - noncurrent ............................................ 50,341 42,221 Other ....................................................................... 38,292 38,570 ---------- ---------- Total other assets ......................................................... 365,674 366,751 ---------- ---------- Total assets ................................................................... $1,150,861 $1,229,519 ========== ========== LIABILITIES AND DIVISION EQUITY Current liabilities: Accounts payable ............................................................ $ 17,287 $ 20,522 Accrued expenses ............................................................ 56,728 67,645 Income taxes payable ........................................................ 27,554 17,926 Deferred revenue ............................................................ 2,860 2,693 Current portion of long-term debt and capital lease obligations ............. 837 999 ---------- ---------- Total current liabilities ................................................. 105,266 109,785 Long-term debt and capital lease obligations ................................... 123,215 223,998 Other noncurrent liabilities ................................................... 1,573 11,511 ---------- ---------- Total liabilities .......................................................... 230,054 345,294 Division equity ................................................................ 920,807 884,225 ---------- ---------- Total liabilities and division equity .......................................... $1,150,861 $1,229,519 ========== ==========
The accompanying notes are an integral part of these unaudited, combined financial statements. 5 6 GENZYME GENERAL COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED, IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, ----------------------------- 1997 1996 --------- -------- OPERATING ACTIVITIES: Net income .................................................................. $ 35,482 $ 31,516 Reconciliation of net income to net cash from operating activities: Depreciation and amortization ............................................. 14,830 11,708 Provision for bad debts ................................................... 2,260 3,641 Gain on sale of investment ................................................ - (1,711) Accrued interest/amortization on bonds .................................... 578 102 Equity in net loss of unconsolidated affiliates ........................... 884 1,719 Other ..................................................................... 471 (69) Increase (decrease) in cash from changes in working capital: Accounts receivable ..................................................... (9,102) (10,315) Inventories ............................................................. (13,194) (11,525) Prepaid expenses and other .............................................. (2,547) (116) Accounts payable, accrued expenses and deferred revenue ................. (634) 12,425 Due from Genzyme Tissue Repair .......................................... 1,375 (185) Due from Genzyme Molecular Oncology ..................................... (430) - --------- -------- Net cash provided by operating activities ............................. 29,973 37,190 INVESTING ACTIVITIES: Cash allocated to Genzyme Tissue Repair ..................................... (13,977) (10,000) Cash allocated to Genzyme Molecular Oncology ................................ (5,000) - Investment in unconsolidated affiliate ...................................... - (1,674) Loans to affiliate .......................................................... - (1,468) Purchases of investments .................................................... (25,424) (70,931) Sales and maturities of investments ......................................... 45,444 37,172 Purchases of property, plant and equipment .................................. (15,891) (22,161) Other assets and other liabilities .......................................... (9,495) (2,987) --------- -------- Net cash used by investing activities ................................. (24,343) (72,049) FINANCING ACTIVITIES: Proceeds from issuance of Genzyme General Stock ............................. 100,792 15,773 Payments of debt and capital lease obligations .............................. (102,798) (420) --------- -------- Net cash (used by) provided by financing activities ................... (2,006) 15,353 Effect of exchange rate changes on cash ........................................ (1,657) 1,229 --------- -------- Increase (decrease) in cash and cash equivalents ............................... 1,967 (18,277) Cash and cash equivalents, beginning of period ................................. 77,220 103,631 --------- -------- Cash and cash equivalents, end of period ....................................... $ 79,187 $ 85,354 ========= ========
The accompanying notes are an integral part of these unaudited, combined financial statements. 6 7 GENZYME GENERAL NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION These unaudited, combined financial statements should be read in conjunction with the 1996 Genzyme 10-K/A and the financial statements and footnotes for Genzyme General Division ("Genzyme General") included therein. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission rules and regulations. The financial statements for the three and six months ended June 30, 1997 and 1996 are unaudited but include, in management's opinion, all adjustments (consisting only of normally recurring accruals) necessary for a fair presentation of the results for the periods presented. 2. INVENTORIES (IN THOUSANDS)
June 30, 1997 December 31, 1996 ------------- ----------------- Raw materials................................... $ 35,033 $ 30,243 Work-in-process................................. 41,130 36,516 Finished products............................... 59,136 56,683 -------- -------- $135,299 $123,442 ======== ========
3. ALLOCATIONS BY GENZYME GENERAL Pursuant to its option to allocate up to $20.0 million to Genzyme Tissue Repair Division ("Genzyme Tissue Repair" or "GTR"), in exchange for shares of GTR Stock at $10 per share, Genzyme General allocated $10.0 million of cash to GTR in June 1997 and 1,000,000 shares of GTR Stock were reserved for distribution or sale at the discretion of the Genzyme Board of Directors (the "Genzyme Board") for the benefit of Genzyme General or its stockholders ("GTR Designated Shares"). In the six months ended June 30, 1997, Genzyme General allocated $4.1 million to GTR to fund GTR's investment in Diacrin/Genzyme LLC, a joint venture with Diacrin, Inc. ("Diacrin"), in exchange for 401,256 GTR Designated Shares which have been reserved for issuance at the Genzyme Board's discretion for the benefit of Genzyme General or its stockholders. 4. PROVISION FOR INCOME TAXES The tax provisions for the three and six months ended June 30, 1997 vary from the U.S. statutory tax rate because of the provision for state income taxes, nondeductible amortization of intangibles, Genzyme General's share of losses of unconsolidated affiliates and taxes on foreign earnings. The effective tax rate was 38.1% and 38.4% for the three and six months ended June 30, 1997, respectively, a slight decrease over the corresponding periods in 1996. The allocated tax benefit generated by GTR and Genzyme Molecular Oncology Division ("Genzyme Molecular Oncology" or "GMO") for the three and six months ended June 30, 1997 of $4.5 million and $9.0 million, respectively, reduced Genzyme General's tax rate to 23.1% and 22.8%, respectively. 5. NEW ACCOUNTING PRONOUNCEMENT In February 1997, The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". SFAS No. 128 establishes a different method of computing net income per share ("EPS") than is currently required under the provisions of Accounting Principles Board Opinion No. 15 ("APB 15"). Under SFAS No. 128, Genzyme will be required to present both basic EPS and diluted EPS attributable to GGD Stock (the principal difference being that common stock equivalents would not be considered in the computation of basic EPS). Basic EPS for Genzyme General for the quarter ended June 30, 1997 and June 30, 1996, would have been $0.31 and $0.30, respectively, and $0.59 for each of the six months ended June 30, 1997 and 1996. The impact of SFAS No. 128 on the calculation of diluted EPS for these quarters is not expected to be materially different than fully diluted EPS. Genzyme plans to adopt SFAS No. 128 in its fiscal quarter ending December 31, 1997 and at that time all historical EPS data presented will be restated to conform to the provisions of SFAS No. 128. 6. GMO The merger of PharmaGenics, Inc. ("PharmaGenics"), with and into Genzyme (the "Merger") was consummated on June 18, 1997 (see "Genzyme Molecular Oncology, Notes to Unaudited Financial Statements") herein. In connection with the Merger, Genzyme established GMO, a new division of Genzyme, which consists of all of PharmaGenics's business, several programs previously allocated to Genzyme General in the area of molecular oncology and Genzyme's rights under agreements with third parties relating to gene therapies for the treatment of cancer. As compensation to Genzyme General for its contribution to GMO, 6,000,000 shares of GMO Stock have been reserved for issuance at the discretion of the Genzyme Board for 7 8 GENZYME GENERAL NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS 6. GMO (CONTINUED) the benefit of Genzyme General or its stockholders ("GMO Designated Shares"). The Genzyme Board may issue the GMO Designated Shares as a stock dividend to the holders of GGD Stock or it may sell such shares in a public or private sale and allocate all of the proceeds to Genzyme General. Genzyme's management and accounting policies require Genzyme to distribute GMO Designated Shares to holders of GGD Stock no later than November 30, 1998 or 360 days following completion of an initial public offering of GMO Stock, although Genzyme may elect to distribute these shares at any time. As of the date of the Merger, PharmaGenics had borrowed $2.5 million from Genzyme under a credit facility (the "PharmaGenics Note") which Genzyme had made available to PharmaGenics to fund PharmaGenics's documented operating costs. Upon consummation of the Merger, the PharmaGenics Note became a liability allocated to GMO, and the $2.5 million of outstanding principal is considered an intracompany loan by Genzyme General to GMO, due on February 10, 2002 and convertible at any time prior thereto, at the Genzyme Board's option, into GMO Designated Shares. The number of GMO Designated Shares resulting from any conversion of the PharmaGenics Note will be determined by dividing the principal and interest being converted by the GMO Conversion Price. See Note 2 -- "Genzyme Molecular Oncology, Notes to Unaudited Financial Statements." Genzyme allocated to Genzyme General a deferred tax asset of $2.9 million resulting from net operating losses available from the acquisition of PharmaGenics. 7. JOINT VENTURE WITH GELTEX PHARMACEUTICALS, INC. ("GELTEX") In June 1997, Genzyme General and GelTex established RenaGel LLC, a joint venture for the final development and commercialization of RenaGel(R) non-absorbed phosphate binder, a novel approach to control the elevated serum phosphate levels that cause serious complications in chronic kidney failure patients. Funding for the joint venture will be provided equally by Genzyme and GelTex. The joint venture has rights to commercialize RenaGel(R) worldwide, except in Japan and certain Pacific Rim countries. GelTex contributed RenaGel(R) and the product's underlying patents and technologies to the joint venture. Pursuant to the terms of the joint venture agreement, Genzyme General will pay GelTex a total of $27.5 million, consisting of a $2.5 million equity investment (100,000 unregistered shares of GelTex common stock at $25.00 per share, which represent a less than 1% ownership in GelTex) which was made in June 1997, a $15.0 million payment on receipt of FDA marketing approval for RenaGel(R) and a $10.0 million payment one year following FDA marketing approval for RenaGel(R). Genzyme, as exclusive distributor for RenaGel LLC, will market and sell products for the joint venture pursuant to the terms of the joint venture agreement. 8. DISTRIBUTION OF GTR DESIGNATED SHARES As of June 30, 1997, 3,160,939 GTR Designated shares had been allocated to Genzyme General as a result of cash and other assets allocated from Genzyme General to GTR since GTR's inception, of which 466,501 shares represent the remaining shares reserved for issuance upon the exercise of Genzyme General options and warrants outstanding as of December 1, 1994 ("GTR Date of Inception"). On June 30, 1997, the Genzyme Board declared a dividend of 2,685,941 GTR Designated Shares, which were distributed on July 22, 1997 to Genzyme General stockholders of record as of July 11, 1997 in a tax-free distribution of approximately .03 share of GTR Stock for each share of GGD Stock owned. In total, 2,294,613 shares of GTR Stock were issued to Genzyme General stockholders in the distribution and 391,328 shares of GTR Stock have been reserved for issuance upon the exercise of Genzyme General stock options and warrants outstanding on the record date. 9. SUBSEQUENT EVENTS In July 1997, Genzyme General purchased 1,153,846 shares of ABIOMED, Inc. common stock for $13.00 per share for an aggregate investment of $14,999,998. As a result of the investment, Genzyme owns approximately 14% of ABIOMED, Inc. Pursuant to the Convertible Debt and Development Funding Agreement between Genzyme and Genzyme Transgenics Corporation ("GTC") as described in the 1996 Genzyme 10-K/A, Genzyme General has been funding GTC's development of transgenic antithrombin III ("ATIII"), a plasma protein that helps regulate blood clotting, since April 1, 1996. In July 1997, Genzyme and GTC announced that an agreement in principal had been reached on the key terms of a joint venture for further development, marketing and distribution of transgenic ATIII worldwide, excluding Asia. Genzyme General will provide 70% of the development costs up to a maximum of $33.0 million. GTC will fund the remaining 30% of the development costs. Both companies will fund equally any costs in excess of that level, and profits will be split equally. 8 9 GENZYME TISSUE REPAIR COMBINED STATEMENTS OF OPERATIONS (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------------- --------------------------- 1997 1996 1997 1996 -------- -------- -------- -------- Revenues: Net service sales ................................ $ 2,654 $ 1,647 $ 4,641 $ 3,361 Operating costs and expenses: Cost of services sold ............................ 3,135 3,456 5,991 5,882 Selling, general and administrative .............. 6,204 6,730 12,658 12,976 Research and development ......................... 2,228 2,350 4,996 4,704 -------- -------- -------- -------- Total operating costs and expenses .............. 11,567 12,536 23,645 23,562 -------- -------- -------- -------- Operating loss ....................................... (8,913) (10,889) (19,004) (20,201) Other income (expenses): Interest income .................................. 212 390 398 964 Interest expense ................................. (861) (1) (1,238) (5) Equity in loss of joint venture .................. (1,827) - (3,416) - -------- -------- -------- -------- Total other income (expenses) ................... (2,476) 389 (4,256) 959 -------- -------- -------- -------- Net loss ............................................. $(11,389) $(10,500) $(23,260) $(19,242) ======== ======== ======== ======== Per Genzyme Tissue Repair common share: Net loss ......................................... $ (0.86) $ (0.83) $ (1.76) $ (1.55) ======== ======== ======== ======== Average shares outstanding ....................... 13,238 12,576 13,208 12,411 ======== ======== ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. 9 10 GENZYME TISSUE REPAIR COMBINED BALANCE SHEETS (UNAUDITED, IN THOUSANDS)
JUNE 30, DECEMBER 31, 1997 1996 ------- ------- ASSETS Current Assets: Cash and cash equivalents ................................................... $20,900 $16,230 Accounts receivable, less allowance for doubtful accounts ................... 2,281 1,677 Inventories ................................................................. 1,458 1,823 Prepaid expenses and other .................................................. 231 334 ------- ------- Total current assets ...................................................... 24,870 20,064 Property, plant and equipment, net ............................................. 20,829 22,229 Other .......................................................................... 1,561 300 ------- ------- Total assets ................................................................... $47,260 $42,593 ======= ======= LIABILITIES AND DIVISION EQUITY Current liabilities: Accounts payable ............................................................ $ 1,414 $ 1,749 Accrued expenses ............................................................ 3,394 2,479 Payable to Genzyme General .................................................. 228 1,604 ------- ------- Total current liabilities ................................................. 5,036 5,832 Long-term debt ................................................................. 30,099 18,000 Other noncurrent liabilities ................................................... 602 677 ------- ------- Total liabilities .......................................................... 35,737 24,509 Division equity ................................................................ 11,523 18,084 ------- ------- Total liabilities and division equity .......................................... $47,260 $42,593 ======= =======
The accompanying notes are an integral part of these unaudited, combined financial statements. 10 11 GENZYME TISSUE REPAIR COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED, IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, ---------------------------- 1997 1996 -------- -------- OPERATING ACTIVITIES: Net loss .................................................................... $(23,260) $(19,242) Reconciliation of net loss to net cash used by operating activities: Depreciation and amortization ............................................. 1,214 258 Provision for bad debts ................................................... 135 156 Accretion of debt discount ................................................ 407 - Equity in net loss of joint venture ....................................... 3,416 - Other ..................................................................... 77 48 Increase (decrease) in cash from working capital: Accounts receivable ..................................................... (739) 466 Inventories ............................................................. 366 (613) Prepaid expenses and other .............................................. 103 (245) Accounts payable, accrued expenses and deferred revenue ................. 803 (191) Due to Genzyme General .................................................. (1,375) 185 -------- -------- Net cash used by operating activities ................................. (18,853) (19,178) INVESTING ACTIVITIES: Purchases of investments .................................................... - (5,004) Sales and maturities of investments ......................................... - 9,762 Investment in unconsolidated affiliate ...................................... (4,130) - Purchases of property, plant and equipment .................................. (183) (18,979) Sale of property, plant and equipment ....................................... 202 - Other assets and other liabilities .......................................... (487) 217 -------- -------- Net cash used by investing activities ................................. (4,598) (14,004) FINANCING ACTIVITIES: Proceeds from issuance of GTR Stock ......................................... 1,144 1,538 Proceeds from issuance of debt .............................................. 13,000 23,000 Payments of debt and capital lease obligations .............................. - (8,132) Cash allocated from Genzyme General ......................................... 13,977 10,000 Other ....................................................................... - 12 -------- -------- Net cash provided by financing activities ............................. 28,121 26,418 -------- -------- Increase (decrease) in cash and cash equivalents ............................... 4,670 (6,764) Cash and cash equivalents, beginning of period ................................. 16,230 40,741 -------- -------- Cash and cash equivalents, end of period ....................................... $ 20,900 $ 33,977 ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. 11 12 GENZYME TISSUE REPAIR NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION These unaudited, condensed, combined financial statements should be read in conjunction with the 1996 Genzyme 10-K/A and the financial statements and footnotes for GTR included therein. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission rules and regulations. The financial statements for the three and six months ended June 30, 1997 and 1996 are unaudited but include, in management's opinion, all adjustments (consisting only of normally recurring accruals) necessary for a fair presentation of the results for the periods presented. 2. INVENTORIES (IN THOUSANDS)
June 30, 1997 December 31, 1996 ------------- ----------------- Raw materials................................... $ 213 $ 136 Work-in-process................................. 1,245 1,687 ------ ------ $1,458 $1,823 ====== ======
3. ALLOCATIONS BY GENZYME GENERAL TO GTR FOR GTR DESIGNATED SHARES Pursuant to its option to allocate up to $20.0 million to GTR, at $10 per GTR Designated Share, Genzyme General allocated $10.0 million of cash to GTR in June 1997 and 1,000,000 GTR Designated Shares were reserved for distribution or sale at the discretion of the Genzyme Board for the benefit of Genzyme General or its stockholders. In the six months ended June 30, 1997, Genzyme General allocated a total of $4.1 million to GTR to fund GTR's participation in Diacrin/Genzyme LLC, a joint venture with Diacrin, in exchange for 401,256 GTR Designated Shares. 4. NEW ACCOUNTING PRONOUNCEMENT In February 1997, The FASB issued SFAS No. 128, "Earnings Per Share". SFAS No. 128 establishes a different method of computing EPS than is currently required under the provisions of APB 15. Under SFAS No. 128, Genzyme will be required to present both basic EPS and diluted EPS attributable to GTR Stock (the principal difference being that common stock equivalents would not be considered in the computation of basic EPS). Basic EPS data for Genzyme Tissue Repair for the three and six months ended June 30, 1997 and June 30, 1996 would have been the same as EPS for each respective period computed under the provisions of APB 15. The impact of SFAS No. 128 on the calculation of diluted EPS for the periods presented is not expected to be material. Genzyme plans to adopt SFAS No. 128 in its fiscal quarter ending December 31, 1997 and at that time all historical EPS data presented will be restated to conform to the provisions of SFAS No. 128. 5. DISTRIBUTION OF GTR DESIGNATED SHARES As of June 30, 1997, 3,160,939 GTR Designated Shares had been reserved for issuance by the Genzyme Board on behalf of Genzyme General or its stockholders as a result of cash and other assets allocated from Genzyme General to GTR since GTR's inception, of which 466,501 shares represent the remaining shares reserved for issuance upon the exercise of Genzyme General options and warrants outstanding at the GTR Date of Inception. On June 30, 1997, the Genzyme Board declared a dividend of 2,685,941 GTR Designated Shares which were distributed on July 22, 1997 to Genzyme General stockholders of record as of July 11, 1997 in a tax-free distribution of approximately .03 share of GTR Stock for each share of GGD Stock owned. In total, 2,294,613 shares of GTR Stock were issued to Genzyme General stockholders in the distribution and 391,328 shares of GTR Stock have been reserved for issuance upon the exercise of Genzyme General stock options and warrants outstanding on the record date. 6. GTR PRIVATE PLACEMENT On February 28, 1997, GTR raised $13 million through the private placement of a 5% convertible note (the "GTR Note"), to an affiliate of Credit Suisse First Boston due February 27, 2000. The GTR Note is convertible beginning May 29, 1997 into shares of GTR Stock and, beginning August 1997, at a discount to the average of the closing bid prices of the GTR Stock on the Nasdaq National Market for the 25 trading days immediately preceding the conversion date (the "Average GTR Stock Price"). The discount will start at 2% beginning six months from the date the GTR Note was issued and will increase to 11% at 15 months after the date of issue. Thereafter, the conversion price will be the lesser of 89% of the Average GTR Stock Price preceding the conversion date or the date 15 months after the date of issue. In the first quarter of 1997, Genzyme Tissue Repair recorded $11.5 million of proceeds attributed to the value of the debt and $1.5 million attributed to the value of the conversion feature (recorded as an increase to division equity). The $11.5 million will be accreted to the face value of the debt by a charge to interest expense over the term of the initial 15 month conversion period. 7. SUPPLEMENTAL EARNINGS PER SHARE The historical loss per share data for GTR does not reflect the effect of the July 1997 distribution of GTR Designated Shares as described in Note 5. The following table presents pro forma loss per share data and pro forma weighted average shares outstanding for GTR as if the 2,294,613 GTR Designated Shares had been distributed on January 1, 1996:
Three Months Ended Six Months Ended June 30, June 30, ------------------ ----------------- 1997 1996 1997 1996 ---- ---- ---- ---- Pro forma loss per GTR common share..... $(0.73) $(0.71) $(1.50) $(1.31) ====== ====== ====== ====== Pro forma average shares outstanding.... 15,533 14,871 15,503 14,706 ====== ====== ====== ======
12 13 GENZYME MOLECULAR ONCOLOGY (A DEVELOPMENT STAGE ENTERPRISE) STATEMENTS OF OPERATIONS (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CUMULATIVE FROM DECEMBER 1, 1994 (DATE THREE MONTHS ENDED SIX MONTHS ENDED OF INCEPTION) JUNE 30, JUNE 30, THROUGH ---------------------- --------------------- JUNE 30, 1997 1996 1997 1996 1997 ------ ------ ------ ------ -------- Operating costs and expenses: General and administrative ..................... $ 166 $ 38 $ 275 $ 78 $ 555 Research and development ....................... 1,031 181 1,549 370 2,773 Amortization of intangibles .................... 228 - 228 - 228 Charge for in-process technology ............... 7,000 - 7,000 - 7,000 ------- ------ ------- ------ -------- Total operating costs and expenses ............ 8,425 219 9,052 448 10,556 ------- ------ ------- ------ -------- Operating loss ..................................... (8,425) (219) (9,052) (448) (10,556) Interest expense ................................... (17) - (17) - (17) ------- ------ ------- ------ -------- Loss before income taxes............................ (8,442) (219) (9,069) (448) (10,573) Deferred tax benefit................................ 50 - 50 - 50 ------- ------ ------- ------ -------- Net loss ........................................... $(8,392) $ (219) $(9,019) $ (448) $(10,523) ======= ====== ======= ====== ======== Pro forma per Genzyme Molecular Oncology common share: Pro forma net loss ............................. $ (2.14) $(0.06) $ (2.30) $(0.11) $ (2.68) ======= ====== ======= ====== ======== Pro forma shares outstanding ................... 3,929 3,929 3,929 3,929 3,929 ======= ====== ======= ====== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. 13 14 GENZYME MOLECULAR ONCOLOGY (A DEVELOPMENT STAGE ENTERPRISE) BALANCE SHEETS (UNAUDITED, IN THOUSANDS)
JUNE 30, DECEMBER 31, 1997 1996 ------- ------- ASSETS Current Assets: Cash and cash equivalents.................................................. $ 5,009 $ - Other...................................................................... 6 - ------- ------- Total current assets..................................................... 5,015 - Property, plant and equipment, net............................................ 208 - Intangibles, net.............................................................. 35,254 - Other......................................................................... 131 - ------- ------- Total assets.................................................................. $40,608 $ - ======= ======= LIABILITIES AND DIVISION EQUITY Current liabilities: Accounts payable........................................................... $ 85 $ - Accrued expenses........................................................... 3,553 - Payable to Genzyme General................................................. 1,564 - Current portion of capital lease obligations............................... 13 - ------- ------- Total current liabilities................................................ 5,215 - Long-term debt............................................................. 5,000 - Note payable to Genzyme General............................................ 2,500 - Deferred tax liability..................................................... 7,550 Other noncurrent liabilities............................................... 468 - ------- ------- Total liabilities......................................................... 20,733 - Division equity............................................................... 19,875 - Parent company investment - Genzyme General................................... - 1,504 Accumulated deficit........................................................... - (1,504) ------- ------- Total division equity..................................................... 19,875 - ------- ------- Total liabilities and division equity......................................... $40,608 $ - ======= =======
The accompanying notes are an integral part of these unaudited financial statements. 14 15 GENZYME MOLECULAR ONCOLOGY (A DEVELOPMENT STAGE ENTERPRISE) CONDENSED COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED, IN THOUSANDS)
CUMULATIVE FROM DECEMBER 1, 1994 (DATE OF INCEPTION) SIX MONTHS ENDED JUNE 30, THROUGH ------------------------- JUNE 30, 1997 1996 1997 ------- ----- -------- OPERATING ACTIVITIES: Net loss .................................................................... $(9,019) $(448) $(10,523) Reconciliation of net loss to net cash used by operating activities: Amortization .............................................................. 228 - 228 Charge for in-process technology .......................................... 7,000 - 7,000 Increase in cash from working capital changes: Accounts payable, accrued expenses and deferred taxes ................... (33) - (33) Due to Genzyme General .................................................. 430 - 430 ------- ----- -------- Net cash used by operating activities ................................ (1,394) (448) (2,898) INVESTING ACTIVITIES: Acquisition of PharmaGenics, Inc. net of acquired cash ...................... 9 - 9 ------- ----- -------- Net cash provided by investing activities ............................ 9 - 9 FINANCING ACTIVITIES: Allocation of debt from Genzyme General ..................................... 5,000 - 5,000 Parent company investment - Genzyme General ................................. 1,394 448 2,898 ------- ----- -------- Net cash provided by financing activities ............................ 6,394 448 7,898 ------- ----- -------- Increase in cash and cash equivalents .......................................... 5,009 0 5,009 Cash and cash equivalents, beginning of period ................................. - - - ------- ----- -------- Cash and cash equivalents, end of period ....................................... $ 5,009 $ 0 $ 5,009 ======= ===== ========
The accompanying notes are an integral part of these unaudited financial statements. 15 16 GENZYME MOLECULAR ONCOLOGY NOTES TO UNAUDITED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION These unaudited financial statements should be read in conjunction with the Company's Registration Statement on Form S-4 (Registration No. 333-26351) and the financial statements and footnotes of GMO included therein. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission rules and regulations. The financial statements for the three and six months ended June 30, 1997 and 1996 are unaudited but include, in management's opinion, all adjustments (consisting only of normally recurring accruals) necessary for a fair presentation of the results for the periods presented. 2. PHARMAGENICS MERGER On June 18, 1997, pursuant to an agreement between Genzyme and PharmaGenics, PharmaGenics merged with and into Genzyme. As consideration for the Merger, the stockholders of PharmaGenics received approximately 3,929,000 shares of GMO Stock. The GMO Stock is intended to reflect the value and track the performance of GMO, a new division established by Genzyme in connection with the Merger. GMO consists of all of PharmaGenics's business, several programs previously allocated to Genzyme General in the area of molecular oncology and Genzyme's rights under agreements with third parties relating to gene therapies for the treatment of cancer. As compensation to Genzyme General for its contribution to GMO, 6,000,000 GMO Designated Shares have been reserved for issuance for the benefit of Genzyme General or its stockholders. The Genzyme Board may issue the GMO Designated Shares as a stock dividend to the holders of GGD Stock or it may sell such shares in a public or private sale and allocate all of the proceeds to Genzyme General. Genzyme's management and accounting policies require Genzyme to distribute GMO Designated Shares to holders of GGD Stock no later than November 30, 1998 or 360 days following completion of an initial public offering of GMO Stock, although Genzyme may elect to distribute these shares at any time. The aggregate purchase price of $27.5 million (net of $0.5 million which represents the estimated fees payable by PharmaGenics in connection with the Merger), plus estimated acquisition costs of $2.2 million and assumed liabilities of $5.4 million has been allocated to the acquired tangible and intangible assets based on their estimated respective fair values (amounts in thousands): Property, plant & equipment................................. $ 208 Other assets................................................ 50 Completed technology rights (to be amortized over 5 years).. 20,000 Goodwill (to be amortized over 5 years)..................... 15,482 Deferred tax liability (to be amortized over 5 years)....... (7,600) In-process technology....................................... 7,000 ------- $35,140 =======
The amount allocated to in-process technology of $7.0 million represents the value assigned to PharmaGenics's programs which are still in the development stage and for which there is no alternative use. The value assigned to these programs has been determined by selecting the maximum anticipated value of these programs, as provided by an independent valuation of the PharmaGenics business, based on comparable technologies. The amount allocated to in-process technology was charged to operations in June 1997, the period in which the Merger was consummated. The deferred tax liability of $7.6 million results from the temporary difference between the book and tax basis of the completed technology computed at a 38% incremental tax rate. As of the date of the Merger, PharmaGenics had borrowed $2.5 million from Genzyme under a credit facility which Genzyme had made available to PharmaGenics to fund PharmaGenics's documented operating costs. Upon consummation of the Merger, the PharmaGenics Note became a liability allocated to GMO, and the $2.5 million of outstanding principal is considered as an intracompany loan by Genzyme General to GMO, due on February 10, 2002 and convertible at any time prior thereto, at the Genzyme Board's option, into GMO Designated Shares. The number of GMO Designated Shares resulting from any conversion of the PharmaGenics Note will be determined by dividing the principal and interest being converted by the conversion price (the "GMO Conversion Price") in effect on the date of conversion. The initial GMO Conversion Price will be determined upon the closing of the first public offering of GMO securities in which the aggregate gross proceeds to GMO equal or exceed $10.0 million (an "Offering"), and will be equal to (i) the per share price of the GMO Stock sold in the Offering or, if GMO Stock is not sold in the Offering, (ii) the initial conversion price of the security convertible into GMO Stock that is sold in the Offering, provided that if any portion of the PharmaGenics Note is converted prior to any Offering, the initial GMO Conversion Price is $7.00. The GMO Conversion Price is subject to adjustment upon declaration of any stock dividend or on completion of any subdivision or combination of the GMO Stock. If the acquisition had taken place at the beginning of the six months ended June 30, 1997 and 1996, after giving effect to adjustments for increased amortization, increased interest expense, the tax benefit from the amortization of the deferred tax liability and the one time charge for in-process technology, the pro forma revenues, net loss and net loss per share for GMO would have been the following (amounts in thousands, except per share amounts):
Six Months Ended June 30, ------------------------ 1997 1996 -------- -------- Pro forma revenues.................................... $ 75 $ 859 ======== ======== Pro forma net loss.................................... $(19,833) $(12,373) ======== ======== Pro forma net loss per share.......................... $ (5.05) $ (3.15) ======== ======== Pro forma weighted average shares outstanding......... 3,929 3,929 ======== ========
16 17 GENZYME MOLECULAR ONCOLOGY NOTES TO UNAUDITED FINANCIAL STATEMENTS 3. NET LOSS PER SHARE Historical loss per share information is omitted as there were no shares of GMO Stock outstanding prior to June 18, 1997 and pro forma net loss per share is disclosed for all periods presented. The pro forma shares outstanding represent the shares of GMO Stock issued to effect the Merger. 4. REVOLVING CREDIT FACILITY Genzyme has a revolving credit facility (the "Revolving Credit Facility") with a syndicate of commercial banks administered by Fleet National Bank in the amount of $225.0 million. Amounts drawn under this facility may be allocated among Genzyme General, GTR or GMO. As of June 30, 1997, GMO had $5.0 million of debt outstanding under the Revolving Credit Facility. 5. NEW ACCOUNTING PRONOUNCEMENT In February 1997, The FASB issued SFAS No. 128, "Earnings Per Share". SFAS No. 128 establishes a different method of computing EPS than is currently required under the provisions of APB 15. Under SFAS No. 128, Genzyme will be required to present both basic EPS and diluted EPS attributable to GMO Stock (the principal difference being that common stock equivalents would not be considered in the computation of basic EPS). Pro forma basic EPS per share data for GMO for the three and six months ended June 30, 1997 and 1996 and cumulative from December 1, 1994 (date of inception) through June 30, 1997 would have been the same as pro forma EPS per share for each respective period computed under the provisions of APB 15. The impact of SFAS No. 128 on the calculation of diluted EPS for the periods presented is not expected to be material. Genzyme plans to adopt SFAS No. 128 in its fiscal quarter ending December 31, 1997 and at that time all historical EPS data presented will be restated to conform to the provisions of SFAS No. 128. 6. SUBSEQUENT EVENT In July 1997, StressGen/Genzyme LLC was established as a joint venture among Genzyme, StressGen Biotechnologies Corp. ("StressGen") and the Canadian Medical Discoveries Fund Inc. ("CMDF") to develop stress gene therapies for the treatment of cancer. CMDF provided $10.0 million (Canadian) in funding in connection with the joint venture through the combination of a capital contribution to StressGen/Genzyme LLC in the amount of $1.0 million (Canadian), the purchase of warrants from Genzyme in the amount of $1.0 million (Canadian), the purchase of warrants and preferred stock from StressGen in the amount of $1.4 million (Canadian) and a limited recourse loan bearing interest at 0.125% per annum to StressGen in the amount of $6.6 million (Canadian). Each of Genzyme and StressGen (through a U.S. subsidiary) also made a capital contribution to StressGen/Genzyme LLC in the amount of $1.0 million (Canadian) and a limited recourse loan was made by the U.S. subsidiary of StressGen to StressGen/Genzyme LLC in the amount of $7.0 million (Canadian). In addition, Genzyme and StressGen have agreed to provide in equal shares any additional capital required by the joint venture in excess of the initial $10.0 million (Canadian) in funding. The warrants sold to CMDF by Genzyme are described in Part II, Item 2. "Changes in Securities." Genzyme and StressGen have an option (the "Purchase Option"), payable in equal shares, to purchase CMDF's membership interest in StressGen/Genzyme LLC at any time during the three-year period beginning July 31, 1999 and ending July 31, 2002. The exercise price of the Purchase Option initially will be $15.6 million (Canadian) in July 1999 and will increase monthly thereafter to a final exercise price of $30.5 million (Canadian) in July 2002. The limited recourse loan made by CMDF will be retired in connection with the exercise of the Purchase Option. If the Purchase Option is not exercised on or before July 31, 2002, CMDF may require Genzyme and StressGen to repay $2.0 million (Canadian) each of the limited recourse loan. In addition, at any time during the 30-day period commencing on the date when not less than 75% of the initial funding provided by CMDF has been spent by the joint venture, but in no event later than July 31, 1999, CMDF shall have the right (the "Mandatory Purchase Right") to require Genzyme and StressGen to purchase its membership interest at an aggregate purchase price of $10.0 million (Canadian) plus interest thereon at a rate per annum equal to the Canadian prime rate plus 1%. The Mandatory Purchase Right will terminate if not exercised by CMDF during such 30-day period. Genzyme's share of any amounts payable to CMDF upon exercise of the Purchase Option, the Mandatory Purchase Right or repayment of the limited recourse loan may be paid in cash, Genzyme common stock or any combination thereof at the discretion of Genzyme. Prior to the repurchase of CMDF's membership interest in StressGen/Genzyme LLC, profits from the joint venture will be shared in proportion to the capital contributions of the three parties. Following the repurchase of CMDF's membership interest, profits will be shared equally by StressGen and Genzyme. 17 18 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED, IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ----------------------- 1997 1996 1997 1996 -------- -------- -------- -------- Revenues: Net product sales......................................... $131,636 $ 91,087 $259,792 $183,902 Net service sales......................................... 16,949 18,408 33,692 33,029 Revenues from research and development contracts.......... 1,683 6,140 3,377 12,201 -------- -------- -------- -------- Total revenues.......................................... 150,268 115,635 296,861 229,132 Operating costs and expenses: Cost of products sold..................................... 45,498 29,164 92,010 62,488 Cost of services sold..................................... 12,114 14,880 24,286 25,533 Selling, general and administrative....................... 47,047 38,477 94,373 76,033 Amortization of intangibles............................... 3,392 1,520 6,588 2,536 Research and development (including research and development related to contracts).................... 21,592 18,565 41,684 36,255 Charge for in-process technology.......................... 7,000 - 7,000 - Acquisition restructuring costs........................... - 1,465 - 1,465 -------- -------- -------- -------- Total operating costs and expenses....................... 136,643 104,071 265,941 204,310 -------- -------- -------- -------- Operating income.............................................. 13,625 11,564 30,920 24,822 Other income and (expenses): Equity in net loss of unconsolidated affiliates........... (2,610) (1,121) (4,269) (2,058) Gain on investment........................................ - 1,711 - 1,711 Investment income......................................... 2,806 4,616 5,310 9,103 Interest expense.......................................... (2,597) (187) (5,255) (395) -------- -------- -------- -------- Total other income (expenses)............................ (2,401) 5,019 (4,214) 8,361 -------- -------- -------- -------- Income before income taxes.................................... 11,224 16,583 26,706 33,183 Provision for income taxes.................................... (6,955) (6,799) (13,070) (13,107) -------- -------- -------- -------- Net income.................................................... $ 4,269 $ 9,784 $ 13,636 $ 20,076 ======== ======== ======== ========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. 18 19 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED) (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------- ---------------------- 1997 1996 1997 1996 -------- -------- -------- -------- ATTRIBUTABLE TO GENZYME GENERAL: Net income ......................................................... $ 18,755 $ 15,979 $ 35,482 $ 31,516 Allocated tax benefit generated by Genzyme Tissue Repair ........... 4,327 4,305 8,838 7,802 Allocated tax benefit generated by Genzyme Molecular Oncology ...... 201 - 201 - -------- -------- -------- -------- Net income attributable to Genzyme General ....................... $ 23,283 $ 20,284 $ 44,521 $ 39,318 ======== ======== ======== ======== Income per Genzyme General common and common equivalent share: Net income ........................................................ $ 0.30 $ 0.27 $ 0.57 $ 0.54 ======== ======== ======== ======== Average shares outstanding ........................................ 78,130 73,908 78,184 72,880 ======== ======== ======== ======== Income per Genzyme General Common Share assuming full dilution: Net income ........................................................ $ 0.30 $ 0.27 $ 0.57 $ 0.53 ======== ======== ======== ======== Average fully diluted shares outstanding .......................... 78,791 73,934 78,514 74,300 ======== ======== ======== ======== ATTRIBUTABLE TO GENZYME TISSUE REPAIR: Net loss attributable to Genzyme Tissue Repair Stock ............... $(11,389) $(10,500) $(23,260) $(19,242) ======== ======== ======== ======== Per common share: Net loss ......................................................... $ (0.86) $ (0.83) $ (1.76) $ (1.55) ======== ======== ======== ======== Average shares outstanding ....................................... 13,238 12,576 13,208 12,411 ======== ======== ======== ======== ATTRIBUTABLE TO GENZYME MOLECULAR ONCOLOGY: Net loss attributable to Genzyme Molecular Oncology Stock .......... $ (8,392) $ (219) $ (9,019) $ (448) ======== ======== ======== ======== Per pro forma common share: Pro forma net loss ............................................... $ (2.14) $ (0.06) $ (2.30) $ (0.11) ======== ======== ======== ======== Pro forma shares outstanding ..................................... 3,929 3,929 3,929 3,929 ======== ======== ======== ========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. 19 20 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED, IN THOUSANDS)
JUNE 30, DECEMBER 31, 1997 1996 ---------- ---------- ASSETS Current Assets: Cash and cash equivalents.................................................. $ 105,096 $ 93,450 Short-term investments..................................................... 47,243 56,290 Accounts receivable, less allowance for doubtful accounts.................. 120,936 116,833 Inventories................................................................ 136,757 125,265 Prepaid expenses and other current assets.................................. 16,345 100,287 Deferred tax assets - current.............................................. 17,493 17,493 ---------- ---------- Total current assets..................................................... 443,870 509,618 Property, plant and equipment, net............................................ 390,447 393,839 Long-term investments......................................................... 26,618 38,215 Intangibles, net of accumulated amortization.................................. 280,277 247,745 Deferred tax assets - noncurrent.............................................. 42,791 42,221 Other......................................................................... 39,984 38,870 ---------- ---------- Total assets.................................................................. $1,223,987 $1,270,508 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable........................................................... $ 18,786 $ 22,271 Accrued expenses........................................................... 63,674 70,124 Income taxes payable....................................................... 27,555 17,926 Deferred revenue........................................................... 2,860 2,693 Current portion of long-term debt and capital lease obligations............ 850 999 ---------- ---------- Total current liabilities................................................ 113,725 114,013 Long-term debt and capital lease obligations............................... 158,314 241,998 Other liabilities.......................................................... 2,643 12,188 ---------- ---------- Total liabilities......................................................... 274,682 368,199 Stockholders' Equity: Genzyme General Stock, $.01 par value...................................... 764 755 Genzyme Tissue Repair Stock, $.01 par value................................ 134 132 Genzyme Molecular Oncology Stock, $.01 par value........................... 39 - Additional paid-in capital - Genzyme General............................... 868,033 871,020 Additional paid-in capital - Genzyme Tissue Repair......................... 139,082 122,385 Additional paid-in capital - Genzyme Molecular Oncology.................... 30,359 - Treasury Stock - at cost................................................... (901) (890) Accumulated deficit........................................................ (76,394) (89,975) Foreign currency translation adjustments................................... (9,498) (745) Unrealized net losses on investments....................................... (2,313) (373) ---------- ---------- 949,305 902,309 ---------- ---------- $1,223,987 $1,270,508 ========== ==========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. 20 21 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, --------------------------- 1997 1996 --------- -------- OPERATING ACTIVITIES: Net income ................................................................. $ 13,636 $ 20,076 Reconciliation of net income to net cash provided by operating activities: Depreciation and amortization ........................................... 16,272 11,966 Provision for bad debts ................................................. 2,395 3,797 Gain on sale of investment .............................................. - (1,711) Accrued interest/amortization on bonds .................................. 578 102 Accretion of debt discount .............................................. 407 - Charge for incomplete technology ........................................ 7,000 - Equity in net loss of unconsolidated affiliates ......................... 4,300 1,719 Other ................................................................... 548 (21) Increase (decrease) in cash from working capital: Accounts receivable .................................................. (9,841) (9,849) Inventories .......................................................... (12,828) (12,138) Prepaid expenses and other current assets ............................ (2,444) (361) Accounts payable, accrued expenses and deferred revenue .............. (8,903) 4,432 --------- -------- Net cash provided by operating activities ........................... 11,120 18,012 INVESTING ACTIVITIES: Purchases of investments ................................................... (25,424) (75,935) Sales and maturities of investments ........................................ 45,444 46,934 Investment in unconsolidated affiliate ..................................... (4,130) (1,674) Acquisition of PharmaGenics, net of acquired cash .......................... 9 - Loans to affiliate ......................................................... - (1,468) Purchases of property, plant and equipment ................................. (16,074) (41,140) Sale of property, plant and equipment ...................................... 202 - Other noncurrent assets and other noncurrent liabilities ................... (9,982) (2,758) --------- -------- Net cash used by investing activities ............................... (9,955) (76,041) FINANCING ACTIVITIES: Proceeds from issuance of common stock ..................................... 101,936 17,311 Proceeds from issuance of debt ............................................. 13,000 23,000 Payments of long-term debt and capital lease obligations ................... (102,798) (8,552) --------- -------- Net cash provided by financing activities ........................... 12,138 31,759 Effect of exchange rate changes on cash ........................................ (1,657) 1,229 --------- -------- Increase (decrease) in cash and cash equivalents ............................... 11,646 (25,041) Cash and cash equivalents at beginning of period ............................... 93,450 144,372 --------- -------- Cash and cash equivalents at end of period ..................................... $ 105,096 $119,331 ========= ========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. 21 22 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION These unaudited, consolidated financial statements should be read in conjunction with the 1996 Genzyme 10-K/A and the financial statements and footnotes included therein. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission rules and regulations. Certain items in the 1996 financial statements have been reclassified to conform with the 1997 presentation. The financial statements for the three and six months ended June 30, 1997 and 1996 are unaudited but include, in management's opinion, all adjustments (consisting only of normally recurring accruals) necessary for a fair presentation of the results for the periods presented. 2. INVENTORIES (IN THOUSANDS)
June 30, 1997 December 31, 1996 ------------- ----------------- Raw materials................................... $ 35,246 $ 30,379 Work-in-process................................. 42,375 38,203 Finished products............................... 59,136 56,683 -------- -------- $136,757 $125,265 ======== ========
3. REVOLVING CREDIT FACILITY Genzyme has a Revolving Credit Facility with a syndicate of commercial banks administered by Fleet National Bank in the amount of $225.0 million. Amounts drawn under this facility may be allocated to either Genzyme General, GTR or GMO. As of June 30, 1997, the Company had $118.0 million of debt outstanding under the Revolving Credit Facility, which had been allocated $95.0 million to Genzyme General, $18.0 million to GTR and $5.0 million to GMO. 4. PROVISION FOR INCOME TAXES The tax provisions for the three and six months ended June 30, 1997 vary from the U.S. statutory tax rate because of the provision for state income taxes, nondeductible intangible amortization, losses of unconsolidated affiliates, tax credits and taxes on foreign earnings. The effective tax rate was 38.4% and 38.9%, respectively for the three and six months ended June 30, 1997 as compared to 41.0% and 39.5%, respectively, for the corresponding periods in 1996. 5. NEW ACCOUNTING PRONOUNCEMENT In February 1997, The FASB issued SFAS No. 128, "Earnings Per Share". SFAS No. 128 establishes a different method of computing EPS than is currently required under the provisions of APB 15. Under SFAS No. 128, Genzyme will be required to present both basic EPS and diluted EPS attributable to GGD Stock, GTR Stock and GMO Stock (the principal difference being that common stock equivalents would not be considered in the computation of basic EPS). Basic EPS for Genzyme General for the quarter ended June 30, 1997 and June 30, 1996, would have been $0.31 and $0.30, respectively, and $0.59 for each of the six months ended June 30, 1997 and 1996. Basic EPS for GTR and GMO for the three and six months ended June 30, 1997 and June 30, 1996 and in the case of GMO for the cumulative period from December 1, 1994 (date of inception) through June 30, 1997, would have been the same as EPS for each division for each respective period computed under the provisions of APB 15. The impact of SFAS No. 128 on the calculation of diluted EPS for these quarters is not expected to be materially different than fully diluted EPS. Genzyme plans to adopt SFAS No. 128 in its fiscal quarter ending December 31, 1997 and at that time all historical EPS data presented will be restated to conform to the provisions of SFAS No. 128. 22 23 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 6. AMENDMENTS TO GENZYME'S ARTICLES OF ORGANIZATION In June 1997, Genzyme amended its Articles of Organization (the "Genzyme Charter") to (i) redesignate each of Genzyme's then existing classes of common stock as a separate series of a single class of common stock with substantially the same features as the shares of each of Genzyme's then existing classes of common stock and (ii) authorize 150,000,000 shares of undesignated common stock that may be issued from time to time by the Genzyme Board in one or more series. Upon completion of the Merger, 40,000,000 shares of Genzyme undesignated common stock were designated as GMO Stock. 7. PHARMAGENICS MERGER On June 18, 1997, pursuant to the Merger Agreement between Genzyme and PharmaGenics, PharmaGenics merged with and into Genzyme. As consideration for the Merger, the stockholders of PharmaGenics received approximately 3,929,000 shares of GMO Stock. The GMO Stock is intended to reflect the value and track the performance of GMO, a new division established by Genzyme in connection with the Merger. GMO consists of all of PharmaGenics's business, several Genzyme programs in the area of molecular oncology and Genzyme's rights under agreements with third parties relating to gene therapies for the treatment of cancer. The aggregate purchase price of $27.5 million (net of $0.5 million which represents the estimated fees payable by PharmaGenics in connection with the Merger), plus estimated acquisition costs of $2.2 million and assumed liabilities of $5.4 million has been allocated to the acquired tangible and intangible assets based on their estimated respective fair values (amounts in thousands): Property, plant & equipment ................................ $ 208 Other assets ............................................... 50 Completed technology rights (to be amortized over 5 years).. 20,000 Goodwill (to be amortized over 5 years)..................... 12,582 Deferred tax asset ......................................... 2,900 Deferred tax liability (to be amortized over 5 years)....... (7,600) In-process technology ...................................... 7,000 ------- $35,140 =======
The amount allocated to in-process technology of $7.0 million represents the value assigned to PharmaGenics's programs which are still in the development stage and for which there is no alternative use. The value assigned to these programs has been determined by selecting the maximum anticipated value of these programs, as provided by an independent valuation of the PharmaGenics business, based on comparable technologies. The amount allocated to in-process technology was charged to operations in June 1997, the period in which the Merger was consummated. The deferred tax asset of $2.9 million results from the net operating losses available from the acquisition of PharmaGenics. The deferred tax liability of $7.6 million results from the temporary difference between the book and tax basis of the completed technology computed at a 38% incremental tax rate. If the acquisition had taken place at the beginning of the six months ended June 30, 1997 and 1996, after giving effect to adjustments for increased amortization, increased interest expense, the tax benefit from the amortization of the deferred tax liability and the one time charge for in-process technology, the pro forma revenues, net loss and net loss per share for GMO would have been the following (amounts in thousands, except per share amounts):
Six Months Ended June 30, ------------------------ 1997 1996 -------- -------- Pro forma revenues.................................... $ 75 $ 859 ======== ======== Pro forma net loss.................................... $(19,833) $(12,373) ======== ======== Pro forma net loss per share.......................... $ (5.05) $ (3.15) ======== ======== Pro forma weighted average shares outstanding......... 3,929 3,929 ======== ========
23 24 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 8. JOINT VENTURE WITH GELTEX In June 1997, Genzyme General and GelTex established RenaGel LLC, a joint venture for the final development and commercialization of RenaGel(R) non-absorbed phosphate binder, a novel approach to control the elevated serum phosphate levels that cause serious complications in chronic kidney failure patients. Funding for the joint venture will be provided equally by Genzyme and GelTex. The joint venture has rights to commercialize RenaGel(R) worldwide, except in Japan and certain Pacific Rim countries. GelTex contributed RenaGel(R) and the product's underlying patents and technologies to the joint venture. Pursuant to the terms of the joint venture agreement, Genzyme General will pay GelTex a total of $27.5 million, consisting of a $2.5 million equity investment (100,000 unregistered shares of GelTex common stock at $25.00 per share, which represent a less than 1% ownership interest in GelTex) which was made in June 1997, a $15.0 million payment on receipt of FDA marketing approval for RenaGel(R) and a $10.0 million payment one year following FDA marketing approval for RenaGel(R). Genzyme, as exclusive distributor for RenaGel LLC, will market and sell products for the joint venture pursuant to the terms of the joint venture agreement. 9. SUPPLEMENTAL EARNINGS PER SHARE The historical loss per share data for GTR does not reflect the effect of the July 1997 distribution of GTR Designated Shares as described in Note 5. The following table presents pro forma loss per share and pro forma weighted average shares outstanding for GTR as if the 2,294,613 GTR Designated Shares had been distributed on January 1, 1996.
Three Months Ended Six Months Ended June 30, June 30, ------------------------ ------------------------ 1997 1996 1997 1996 -------- -------- ------- ------- Pro forma loss per GTR common share........ $ (0.73) $(0.71) $ (1.50) $ (1.31) ======= ====== ======= ======= Pro forma average shares outstanding....... 15,533 14,871 15,503 14,706 ======= ====== ======= =======
10. GTR PRIVATE PLACEMENT On February 28, 1997, GTR raised $13.0 million through the private placement of the GTR Note to an affiliate of Credit Suisse First Boston due February 27, 2000. The GTR Note is convertible beginning May 29, 1997 into shares of GTR Stock and, beginning August 1997, at a discount to the average of the closing bid prices of the GTR Stock on the Nasdaq National Market for the 25 trading days immediately preceding the conversion date (the "Average GTR Stock Price"). The discount will start at 2% beginning six months from the date the GTR Note was issued and will increase to 11% at 15 months after the date of issue. Thereafter, the conversion price will be the lesser of 89% of the Average GTR Stock Price preceding the conversion date or the date 15 months after the date of issue. In the first quarter of 1997, Genzyme Tissue Repair recorded $11.5 million of proceeds attributed to the value of the debt and $1.5 million attributed to the value of the conversion feature (recorded as an increase to division equity). The $11.5 million will be accreted to the face value of the debt by a charge to interest expense over the term of the initial 15 month conversion period. 12. SUBSEQUENT EVENTS In July 1997, Genzyme General purchased 1,153,846 shares of ABIOMED, Inc. common stock for $13.00 per share for an aggregate investment of $14,999,998. As a result of the investment, Genzyme owns approximately 14% of ABIOMED, Inc. Pursuant to the Convertible Debt and Development Funding Agreement between Genzyme and GTC, as described in the 1996 Genzyme 10-K/A, Genzyme General has been funding GTC's development of transgenic ATIII, a plasma protein that helps regulate blood clotting, since April 1, 1996. In July 1997, Genzyme and GTC announced that an agreement in principal had been reached on the key terms of a joint venture for further development, marketing and distribution of transgenic ATIII worldwide, excluding Asia. Genzyme General will provide 70% of the development costs up to a maximum of $33.0 million. GTC will fund the remaining 30% of the development costs. Both companies will fund equally any costs in excess of that level, and profits will be split equally. 24 25 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30,1997 The following discussion is a summary of the key factors management considers necessary in reviewing the Company's results of operations, liquidity and capital resources. GENZYME CORPORATION AND SUBSIDIARIES Since the operating results of Genzyme and its subsidiaries reflect the combined operations of Genzyme General, GTR and GMO, this discussion summarizes the key factors management considers necessary in reviewing Genzyme's consolidated results of operations. Detailed discussion and analysis of each Division's results of operations are provided below under separate headings. REVENUES Total revenues for the three and six months ended June 30, 1997 were $150.3 million and $296.9 million, respectively, increases of 30% over each of the corresponding periods in 1996. Product revenues consist solely of product sales by Genzyme General and for the three months ended June 30, 1997 increased 45% to $131.6 million from $91.1 million for the corresponding period in 1996. Product revenues increased 41% to $259.8 million for the six months ended June 30, 1997 from $183.9 million for the corresponding period in 1996. The increase was due primarily to the addition of sales through the acquisition of Deknatel Snowden Pencer, Inc. ("DSP"), which was acquired in July 1996, and to increased sales of Ceredase(R) enzyme and Cerezyme(R) enzyme. Service revenues consist of sales of genetic testing services by the Genzyme Genetics business unit and sales of Genzyme Tissue Repair's CARTICEL(R) and Epicel(SM) Services. Service revenues for the three months ended June 30, 1997 decreased 8% to $16.9 million from $18.4 million for the corresponding period in 1996. Service revenues for the six months ended June 30, 1997 increased 2% to $33.7 million from $33.0 million for the corresponding period in 1996. The change for the three and six months ended June 30, 1997 was due primarily to increased sales of GTR's Carticel(R) Service and higher unit volumes attributable to the acquisition of Genetrix, Inc. ("Genetrix") which was added to Genzyme Genetics's revenues from May 1996, offset by the loss of revenues from Genzyme Genetics's identity testing services laboratory, Genetic Design, Inc. ("GDI"), which was sold in November 1996. Revenues from research and development contracts for the three and six months ended June 30, 1997 were attributable entirely to Genzyme General and decreased 73% and 72%, respectively, to $1.7 million and $3.4 million, respectively, as compared to $6.1 million and $12.2 million for the corresponding periods in 1996. The decrease resulted primarily from the loss of revenues from Neozyme II Corporation ("Neozyme II"), which was acquired by Genzyme in the fourth quarter of 1996. Neozyme II provided $5.2 million and $10.6 million of revenue for the three and six months ended June 30, 1996, respectively. MARGINS AND OPERATING EXPENSES Gross margins for the quarters ended June 30, 1997 and 1996 were 61% and 60%, respectively, and 60% and 59% for the six months ended June 30, 1997 and 1996, respectively. Product margins for the quarter and six months ended June 30, 1997 were 65% for both periods and for the corresponding periods in 1996 were 68% and 66%, respectively. The decrease primarily relates to decreased sales volume of Melatonin and the addition of lower margin sales of DSP. Service margins were 29% and 19% for the three months ended June 30, 1997 and 1996, respectively, and 28% and 23% for the six months ended June 30, 1997 and 1996, respectively. Genzyme provides a broad range of health care products and services, resulting in a broad range of gross margins depending on the particular market conditions of each product or service. Selling, general and administrative ("SG&A") expenses and amortization of intangibles for the three months ended June 30, 1997 increased 26% to $50.4 million from $40.0 million in the same period last year. SG&A and amortization of intangibles for the six months ended June 30, 1997 increased 28% to $101.0 million from $78.6 million in the same period last year. The increases resulted primarily from the acquisitions of Genetrix and DSP and increased staffing in support of the growth in several product lines, most notably in support of the North American introduction of Seprafilm(TM) and increased surgeon training costs related to CARTICEL(R). Research and development expenses for the three and six months ended June 30, 1997 were $28.6 million and $48.7 million, respectively, compared to $18.6 million and $36.3 million in the same periods last year, an increase of 54% and 34%, respectively. The increases were due to Genzyme General's commitment to fund development costs of the ATIII program being conducted by GTC and to the one time write-off of $7.0 million for in-process technology related to the acquisition of PharmaGenics by GMO in June 1997. OTHER EXPENSES Net other expenses were $2.4 million and $4.2 million for the three and six month periods ended June 30, 1997 compared to net other income of $5.0 million and $8.4 million for the same periods in 1996. The change was primarily the result of an increase in interest expense. The increase in interest expense is due primarily to approximately $1.6 million and $3.4 million of interest in the three and six months ended June 30, 1997, respectively on borrowings under the Revolving Credit Facility and a reduction of capitalized interest, due to the completion of Genzyme's Allston Landing manufacturing facility in June 1996. Interest expense for the three and six months ended June 30, 1997 was $2.6 million and $5.3 million, respectively, net of $0.4 million of capitalized interest on construction in progress in each period, as compared to interest expense of $0.2 million and $0.4 million for the three and six months ended June 30, 1996, respectively, net of capitalized interest of $0.5 million and $2.2 million, respectively. Investment income and gain on investment for the three and six months ended June 30, 1997 decreased 56% and 51%, respectively, compared to the same periods in 1996 due primarily to lower average cash balances and a $1.7 million gain on the sale of the Company's investment in North American Biologicals, Inc. ("NABI") recorded in June 1996. The tax provisions for the three and six months ended June 30, 1997 vary from the U.S. statutory tax rate due to the provision for state income taxes, nondeductible intangible amortization, losses of unconsolidated affiliates, tax credits and taxes on foreign earnings. The effective tax rate was 38.4% and 38.9% for the three and six months ended June 30, 1997, respectively, as compared to 41.0% and 39.5% for the corresponding periods in 1996. 25 26 GENZYME GENERAL REVENUES Total revenues for the three and six months ended June 30, 1997 were $147.6 million and $292.2 million, respectively, an increase of 29% over each of the corresponding periods in 1996. Product and service revenues were $145.9 million and $288.8 million, respectively, an increase of 35% over the same periods in 1996. Product revenues for the three and six months ending June 30, 1997 increased 45% and 41%, respectively, over the same periods in 1996, primarily due to the addition of sales through the acquisition of DSP and to increased sales of Ceredase(R) enzyme and Cerezyme(R) enzyme. Product sales for the Specialty Therapeutics business unit for the three and six months ended June 30, 1997 consisted entirely of sales of Ceredase(R) enzyme and Cerezyme(R) enzyme and increased 25% and 27%, respectively, over the corresponding periods in 1996 due to increased shipments resulting from successful market penetration efforts in Japan and continued growth in new patient accruals in existing markets. Genzyme General's results of operations are highly dependent on these products as they represented 61% and 60% of product sales for the three and six months ended June 30, 1997, respectively. Product sales for the Surgical Products business unit for the three and six months ended June 30, 1997, were $26.7 million and $53.7 million, respectively, and consisted primarily of sales by DSP. DSP's product sales for the three and six months ended June 30, 1996, which are not included in the results for Genzyme General, were $26.4 million and $54.1 million, respectively. Product sales for the three and six months ended June 30, 1997 by the Diagnostic Products business unit were level over the same period as 1996. Total Pharmaceutical product sales declined 21% and 43% in the three and six months ended June 30, 1997 as compared to 1996 as a result of a significant decline in sales of Melatonin. This was offset by a 27% and 37% increase for the same periods in sales of pharmaceutical grade hyaluronic acid ("HA") powder and other pharmaceutical products. Melatonin sales began to decline materially in the second half of 1996 due to reduced market demand, and Genzyme General does not expect that Melatonin sales will return to the levels experienced during the first half of 1996. Revenues for Genzyme Genetics decreased 15% and 2% for the three and six months ended June 30, 1997, respectively, as compared to the corresponding periods of 1996. The decrease for the three and six months ended June 30, 1997 was primarily from the loss of revenue from GDI, which was sold in November 1996, but was offset by higher unit volumes attributable to the acquisition of Genetrix which were added to Genzyme Genetics's revenues from May 1996. GDI contributed $3.6 million and $7.1 million, respectively, in revenues for the three and six months ended June 30, 1996. International sales for the three and six months ended June 30, 1997 and 1996 represented 39% and 38%, and 43% and 40%, respectively, of total product sales as the addition of domestic sales by DSP offset an increase in the combined international sales of Ceredase(R) and Cerezyme(R) enzymes of 26% and 33% for the three and six months ended June 30, 1997, respectively. Revenues from research and development contracts for the three and six months ended June 30, 1997 were $1.7 million and $3.4 million, respectively, as compared to $6.1 million and $12.2 million, respectively, for the corresponding periods in 1996. This represents a decrease of 72% for both periods due primarily to the absence of revenue from Neozyme II, which was acquired by Genzyme in the fourth quarter of 1996 and which provided $5.2 million and $10.6 million of revenue for the three and six month periods ended June 30, 1996, respectively. MARGINS AND OPERATING EXPENSES Gross margins were 63% and 62% for the three and six month periods ended June 30, 1997, respectively, compared to 62% for both the three and six month periods ended June 30, 1996. Genzyme General provides a broad range of health care products and services, resulting in a broad range of gross margins depending on the particular market conditions of each product or service. Product margins were 65% for both the three and six month periods ended June 30, 1997 compared to 68% and 66% for the three and six month periods ended June 30, 1996, respectively. The decrease primarily relates to decreased sales volume of Melatonin and the addition of lower margin sales of DSP. Service margins increased to 37% for both the three and six months ended June 30, 1997 from 32% and 34% for the corresponding periods in 1996 due to the completion of the consolidation of Genzyme Genetics with Genetrix, the sale of GDI, and the resulting elimination of redundant facilities and staffing. SG&A expenses for the three and six months ended June 30, 1997 were $40.8 million and $81.7 million, respectively, an increase of 29% and 30% over the same periods in 1996. The increase was due primarily to the acquisition of DSP and increased staffing in support of the growth in several product lines, most notably in support of the North American introduction of Seprafilm(TM). DSP added $9.8 million and $18.5 million in SG&A expenses for the three and six month periods ending June 30, 1997, respectively, which are not included in the results of Genzyme General for the same periods in 1996. Charges for the amortization of intangibles for the three and six month periods ended June 30, 1997 were $3.1 million and $6.4 million, respectively, as compared to $1.5 million and $2.5 million in the same periods of 1996 due to the addition of acquired patents and trade names and goodwill recorded as a result of the acquisitions of Genetrix and DSP. Research and development expenses for the three and six months ended June 30, 1997 were $19.0 million and $36.3 million, respectively, an increase of 17% and 15%, respectively, over the same periods in 1996 due to Genzyme General's funding of the development costs of the ATIII program being conducted by GTC and increased spending on internal programs, most notably Thyrogen(R). 26 27 OTHER INCOME AND EXPENSES Other income and expenses decreased substantially due to the combined effect of a decrease in investment income and an increase in interest expense related to funds borrowed under the Revolving Credit Facility. Investment income and gain on investment for the three and six months ended June 30, 1997 decreased to $2.6 million and $4.9 million, respectively, from $5.9 million and $9.9 million for the same periods in 1996 due primarily to lower average cash balances and a $1.7 million gain on the sale of Genzyme General's investment in NABI which was recorded in the second quarter of 1996. Interest expense for the three and six months ended June 30, 1997 was $1.7 million and $4.0 million, respectively, compared to $0.2 million and $0.4 million for the same periods in 1996. The increase resulted from interest on funds borrowed in 1996 to finance portions of the acquisitions of DSP and Neozyme II and a reduction of capitalized interest on construction in progress due to the completion of Genzyme's Allston Landing manufacturing facility in June 1996. The tax provisions for the three and six months ended June 30, 1997 vary from the U.S. statutory tax rate because of the provision for state income taxes, nondeductible amortization of intangibles, Genzyme General's share of losses of unconsolidated affiliates and taxes on foreign earnings. The effective tax rate was 38.1% and 38.4%, respectively, for the three and six months ended June 30, 1997, a slight decrease over the corresponding periods in 1996. The allocated tax benefit generated by Genzyme Tissue Repair and GMO for the three and six months ended June 30, 1997 of $4.5 million and $9.0 million, respectively, reduced Genzyme General's tax rate to 23.1% and 22.8%, respectively, for such periods. GENZYME TISSUE REPAIR REVENUES Service revenues for the three and six months ended June 30, 1997 were $2.7 million and $4.6 million, respectively, an increase of 61% and 38% over the same periods in 1996. Sales of the CARTICEL(R) Service were $1.6 million and $2.7 million, respectively, for the three and six months ended June 30, 1997 as compared to $0.9 million and $1.3 million, respectively, for the comparable periods in 1996. The growth in CARTICEL(R) sales is primarily attributable to increased acceptance of the service by surgeons and insurance companies and a continued increase in the number of surgeons trained in the procedure utilizing the service. Sales of the Epicel(SM) Service were $1.1 million and $1.9 million, respectively, in the three and six months ended June 30, 1997 compared to $0.8 million and $2.0 million for the same periods in 1996 due to a decrease in the number of burn incidents requiring the service. MARGINS AND OPERATING EXPENSES Genzyme Tissue Repair's cost of services sold exceeded revenue for the three and six months ended June 30, 1997 by $0.5 million and $1.4 million, respectively, compared to $1.8 million and $2.5 million, respectively, for the same periods in 1996 primarily due to the higher sales volume and efficiencies gained in the manufacturing process. SG&A expenses were $6.2 million and $12.7 million for the three and six months ended June 30, 1997, respectively, a decrease of 8% and 2% over the same periods in 1996 due primarily to a small reduction in staffing levels. Genzyme Tissue Repair incurs direct SG&A charges as well as an SG&A charge from Genzyme General for SG&A work performed by Genzyme General on behalf of Genzyme Tissue Repair. For the three and six months ended June 30, 1997, $2.0 million and $4.1 million, respectively, of SG&A services were provided by Genzyme General as compared to $1.7 million and $4.3 million for the same periods in 1996. Research and development expenses were $2.2 million and $5.0 million for the three and six months ended June 30, 1997, respectively, as compared to $2.4 million and $4.7 million for the same periods in 1996. Increased spending associated with the Biologics License Application for CARTICEL(R) was offset by a decline in costs related to the Vianain(R) program. For the three and six months ended June 30, 1997, $1.8 million and $3.7 million, respectively, of research and development services were provided to Genzyme Tissue Repair by Genzyme General, compared to $2.3 million and $3.3 million in the corresponding periods of 1996. OTHER INCOME AND EXPENSES Investment income declined to $0.2 million and $0.4 million for the three and six months ended June 30, 1997, respectively, from $0.4 million and $1.0 million in the same periods of 1996, due primarily to lower average cash balances. Interest expense for the three and six months ended June 30, 1997 increased to $0.9 million and $1.2 million, respectively, as a result of a 20% increase in borrowings under the Company's Revolving Credit Facility as compared to June 30, 1996 and the addition of $11.5 million of debt from the private placement of Genzyme Tissue Repair's 5% convertible note in February 1997 (see "Liquidity and Capital Resources"). In the three and six months ended June 30, 1997, Genzyme Tissue Repair provided $2.3 million and $4.1 million, respectively, of funding to, and realized a net loss of $1.8 million and $3.4 million, respectively, from Diacrin/Genzyme LLC, the joint venture established between Genzyme Tissue Repair and Diacrin to develop and commercialize products and processes using porcine fetal cells for the treatment of Parkinson's disease and Huntington's disease in humans. 27 28 GENZYME MOLECULAR ONCOLOGY (A DEVELOPMENT STAGE ENTERPRISE) GMO consists of all of PharmaGenics's business, several programs previously allocated to Genzyme General in the area of molecular oncology and Genzyme's rights under agreements with third parties relating to gene therapies for the treatment of cancer. Although the activities of Genzyme General that were allocated to GMO have been reflected in the separate statements of GMO shown herein, the GMO Stock was not issued until completion of the acquisition of PharmaGenics in June 1997. Approximately 3,929,000 shares of GMO Stock (subject to adjustment) were issued to the former stockholders of PharmaGenics in the Merger. As compensation to Genzyme General for its contribution to GMO, 6,000,000 GMO Designated Shares have been reserved for issuance by the Genzyme Board for the benefit of Genzyme General or its stockholders. The Genzyme Board may issue the GMO Designated Shares as a stock dividend to the holders of GGD Stock or it may sell such shares in a public or private sale and allocate the proceeds to Genzyme General. Genzyme's management and accounting policies require Genzyme to distribute GMO Designated Shares to holders of GGD Stock no later than November 30, 1998 or 360 days following completion of an initial public offering of GMO Stock, although Genzyme may elect to distribute these shares at any time. The aggregate purchase price was $27.5 million plus estimated acquisition costs of $2.2 million, assumed liabilities of $5.4 million and the recording of a deferred tax liability of $7.6 million resulting from the temporary difference between the book and tax basis of the completed technology. The portion of the purchase price allocated to the completed technology was $20.0 million which will be amortized over five years. GMO allocated $7.0 million to in-process technology which represents the value assigned to PharmaGenics's programs which are still in the development stage and for which there is no alternative use. The value assigned to these programs has been determined by selecting the maximum anticipated value of these programs, as provided by an independent valuation of the PharmaGenics business, based on comparable technologies. GMO charged the amount allocated to in-process technology to operations in June 1997, the period in which the Merger was consummated. RESULTS OF OPERATIONS In the three and six months ended June 30, 1997, GMO incurred $1.0 million and $1.5 million, respectively, of research and development costs as compared to $0.2 million and $0.4 million for the same periods in 1996. GMO has incurred $2.8 million of research and development costs from December 1, 1994 (date of inception) to June 30, 1997. For the three and six months ended June 30, 1997, GMO recorded a $7.0 million charge for the purchase of in-process technology which has no alternative future use, as part of the acquisition of PharmaGenics. GMO incurred $0.4 million and $0.5 million of general and administrative expenses in the three and six months ended June 30, 1997, respectively, of which $0.2 million in each period represents the amortization of completed technology related to the acquisition compared to $38,000 and $0.1 million for the corresponding periods of 1996. GMO has incurred $0.8 million of general and administrative expense from December 1, 1994 (date of inception) to June 30, 1997. LIQUIDITY AND CAPITAL RESOURCES GENZYME CORPORATION AND SUBSIDIARIES As of June 30, 1997, Genzyme had cash, cash equivalents and marketable securities of $179.0 million, a decline of $9.0 million from December 31, 1996, primarily due to repayment of $102.8 million of debt and capital lease obligations in the six months ended June 30, 1997, of which $100.0 million represents a reduction in Genzyme's outstanding debt under the Revolving Credit Facility, offset by $87.0 million of cash related to certain warrants exercised immediately prior to December 31, 1996 and classified as other current assets in Genzyme's balance sheet as of December 31, 1996. At June 30, 1997, $118.0 million was outstanding under the Revolving Credit Facility, of which $95.0 million was allocated to Genzyme General, $18.0 million was allocated to Genzyme Tissue Repair and $5.0 million was allocated to GMO. Genzyme generated $11.1 million of cash from operations for the six months ended June 30, 1997. Investing activities used $10.0 million of cash in the first six months of 1997. Turnover of the investment portfolio provided $20.0 million of cash, of which $16.1 million was used to finance manufacturing capacity expansion, $4.1 million was used to fund GTR's investment in Diacrin/Genzyme LLC, $2.5 million was loaned to PharmaGenics pursuant to the terms of a pre-acquisition credit facility provided to PharmaGenics by Genzyme, $2.5 million was used to make an equity investment in GelTex, $4.0 million was used to fund a non-compete agreement and $0.8 million was used to fund acquisition costs and other non current assets. Proceeds from the exercise of stock options, warrants and stock issued through the employee stock purchase plan were $101.9 million for the six months ended June 30, 1997. As of June 30, 1997, Genzyme had accounts receivable of $120.9 million, net of an allowance for doubtful accounts, an increase of $4.1 million from December 31, 1996 due to the growth in each of Genzyme's businesses. Genzyme had inventories of $136.8 million, an increase of $11.5 million over December 31, 1996. The increase was due primarily to support of increased business operations, most notably in the Specialty Therapeutics business unit inventories as a result of increased production of Cerezyme(R) and in the Surgical Products business unit in support of the introduction of Seprafilm(TM) in the North American marketplace. As of June 30, 1997, 2,694,438 GTR Designated Shares had been reserved for issuance at the discretion of the Genzyme Board for the benefit of Genzyme General or its stockholders and 466,501 Designated Shares had been reserved for issuance upon the exercise of Genzyme General stock options and warrants. On June 30, 1997, the Genzyme Board declared a dividend of 2,685,941 GTR Designated Shares which were distributed on July 22, 1997 to Genzyme General stockholders of record as of July 11, 1997, in a tax-free distribution of approximately .03 share of GTR Stock for each share of GGD Stock owned. A total of 2,294,613 shares of GTR Stock were issued to Genzyme General stockholders in the distribution and 391,328 shares of GTR Stock have been reserved for issuance upon the exercise of Genzyme General stock options and warrants outstanding on the record date. GENZYME GENERAL As of June 30, 1997, Genzyme General had cash, cash equivalents and marketable securities of $153.0 million, a decline of $18.7 million from December 31, 1996, primarily due to repayment of $102.8 million of debt and capital lease obligations in the six months ended June 30, 1997, of which $100.0 million represents a reduction in Genzyme General's outstanding debt under the Revolving Credit Facility, offset by $87.0 million of cash related to certain warrants exercised immediately prior to December 31, 1996 which were classified as Other current assets in Genzyme General's balance sheet as of December 31, 1996. Genzyme General generated $30.0 million of cash from operations in the six months ended June 30, 1997. Investing activities used $24.3 million of cash in the six months ended June 30, 1997. Turnover of the investment portfolio provided $20.0 million of cash, of which $15.9 million was used to finance manufacturing capacity expansion and $14.0 million was allocated to Genzyme Tissue Repair. Of the $14.0 million allocated to GTR, $4.1 million was allocated in exchange for 401,256 GTR Designated Shares which have been reserved for issuance at the Genzyme Board's discretion for the benefit of Genzyme General or its stockholders to fund GTR's investment in Diacrin/Genzyme LLC, a joint venture with Diacrin and $10.0 million was allocated pursuant to Genzyme General's remaining option to allocate up to $20.0 million in cash to GTR in exchange for GTR Designated Shares at $10 per GTR Designated Share. In addition, Genzyme General allocated $5.0 million of cash to GMO to fund operations, loaned $2.5 million of funds to PharmaGenics pursuant to the terms of a pre-acquisition credit facility provided to PharmaGenics by Genzyme, invested $2.5 million in GelTex, 28 29 used $4.0 million to fund a non-compete agreement and $0.4 million to fund acquisition costs and other noncurrent assets. Proceeds from the exercise of stock options, warrants and stock issued through the employee stock purchase plan were $100.8 million for the six months ended June 30, 1997. As of June 30, 1997, Genzyme General had accounts receivable of $118.7 million, net of an allowance for doubtful accounts, an increase of $3.5 million from December 31, 1996 due to the growth in each of Genzyme General's businesses. Genzyme General had inventories of $135.3 million, an increase of $11.9 million over December 31, 1996. The increase was due primarily to support of increased business operations, most notably in the Specialty Therapeutics business unit inventories as a result of increased production of Cerezyme(R) and in the Surgical Products business unit in support of the introduction of Seprafilm(TM) in the North American market place. On May 5, 1997, the General and Plastic Surgery Devices Panel of the FDA Medical Devices Advisory Committee recommended that Genzyme not be granted approval to market Sepracoat(TM) coating solution for the reduction of adhesions in abdominal and pelvic surgery. Genzyme General has since withdrawn the pre-market approval application for Seprecoat(TM). Although there are no current plans to submit a new application, Genzyme General plans to continue to market Sepracoat(TM) in Europe. In June 1997, Genzyme General formed a joint venture with GelTex for the final development and commercialization of RenaGel(R) non-absorbed phosphate binder, a novel approach to control the elevated serum phosphorus levels that cause serious complications in chronic kidney failure patients. Funding for the joint venture will be provided equally by Genzyme and GelTex. The agreement calls for Genzyme General to pay GelTex $27.5 million, consisting of a $2.5 million equity investment paid in June 1997, a $15.0 million payment on receipt of FDA marketing approval for RenaGel(R), and a $10.0 million payment one year following FDA marketing approval for RenaGel(R). Genzyme General expects that its available cash, investments and cash flow from research contracts and product and service sales will be sufficient to finance its planned operations and capital requirements for the foreseeable future. Although Genzyme General currently has substantial cash resources, it has committed to utilize a portion of its resources for certain purposes, such as completing the market introduction of the Sepra products in the United States and Europe and making certain payments to third parties in connection with strategic collaborations. Genzyme General's cash resources will also be diminished upon repayment of amounts borrowed, plus accrued interest, under the Revolving Credit Facility and if its option to acquire the partnership interests in Genzyme Development Partners, L.P. ("GDP") is exercised using cash to pay some or all of the exercise price. In addition, the liabilities or contingencies of GTR and GMO affect Genzyme's resources or financial condition and could affect the financial condition or results of operations of Genzyme General. As a result, Genzyme may have to obtain additional financing. There can be no assurance that such financing will be available on terms reasonably acceptable to Genzyme. GENZYME TISSUE REPAIR As of June 30, 1997, Genzyme Tissue Repair had cash, cash equivalents and marketable securities of $20.9 million, an increase of $4.7 million from December 31, 1996. Genzyme Tissue Repair used $18.9 million of cash for operations in the six months ended June 30, 1997. Investing activities used $4.7 million of cash in the six months ended June 30, 1997, of which $4.1 million represents GTR's additional investment in Diacrin/Genzyme LLC and $0.5 million represents investments in other noncurrent assets. These expenditures were financed primarily by $14.0 million of cash allocated to GTR from Genzyme General, of which $10.0 million represented cash allocated pursuant to Genzyme General's remaining option to allocate up to $20.0 million of cash to GTR in exchange for GTR Designated Shares at $10 per share and $4.1 million represented cash allocated to GTR to fund its investment in Diacrin/Genzyme LLC, and $13.0 million of proceeds from the February 1997 private placement of the GTR Note with an affiliate of Credit Suisse First Boston, due February 27, 2000. Of the $13.0 million in proceeds from the GTR Note, GTR recorded $11.5 million of proceeds attributable to the value of the debt and $1.5 million attributable to the value of the conversion feature (recorded as an increase to division equity). The $11.5 million will be accreted to the face value of the debt by a charge to interest expense over the term of the initial 15 month conversion period. Proceeds from the issuance of common stock through exercises of stock options and warrants and through the employee stock purchase plan contributed $1.1 million in the six months ended June 30, 1997 and as of June 30, 1997, $18.0 million of funds borrowed by Genzyme Tissue Repair in December 1996 under the Revolving Credit Facility remained outstanding. Genzyme Tissue Repair does not expect its available cash and investments will be sufficient to finance planned operations and capital requirements through the end of 1997 and must raise significant additional capital in order to continue operations at current levels. Genzyme Tissue Repair's plans to raise additional capital include consideration of the sale of additional equity securities, strategic alliances with third parties to fund further developments and marketing of the CARTICEL(R) Service and other business transactions that would generate capital resources to assure continuation of Genzyme Tissue Repair's operations and research programs. If these initiatives are not successful, Genzyme Tissue Repair may be required to delay, scale back or eliminate certain of its programs or to license third parties to commercialize technologies or products that the division would otherwise undertake itself. GENZYME MOLECULAR ONCOLOGY (A DEVELOPMENT STAGE ENTERPRISE) 29 30 As of June 30, 1997, GMO had cash and cash equivalents of $5.0 million. GMO used $1.4 million of cash for operations in the six months ended June 30, 1997 which was financed by Genzyme General. GMO anticipates that revenues generated from the sale of SAGE services, a high-speed, differential gene identification technology which was acquired upon consummation of the Merger, SAGE license fees and cash available for allocation to GMO from Genzyme General pursuant to the $25.0 million equity line approved by the Genzyme Board will be sufficient to fund GMO's operations through April 1998. Significant additional funds will be required to complete the clinical testing and commercialization of GMO's products and services. There can be no assurance that such additional funds will be available on favorable terms to GMO or to the existing holders of GMO stock, if at all. In addition, GMO's cash requirements may vary materially from those now planned as a result of factors including progress of GMO's research and development programs, the ability of GMO to establish and maintain additional strategic alliances and licensing arrangements, the progress of GMO's development programs, competing technological and marketing developments, the costs involved in enforcing patent claims and other intellectual property rights and the cost and timing of regulatory approvals. Insufficient funds may require GMO to delay, scale back or eliminate certain of its programs or to license to third parties to commercialize technologies or products that GMO would otherwise undertake itself. Such actions may adversely affect the value of the GMO Stock. SUBSEQUENT EVENTS In July 1997, Genzyme General purchased 1,153,846 shares of ABIOMED, Inc. common stock for $13.00 per share for an aggregate investment of $14,999,998. As a result of the investment, Genzyme owns approximately 14% of ABIOMED, Inc. Pursuant to the Convertible Debt and Development Funding Agreement between Genzyme and GTC, as described in the 1996 Genzyme 10-K/A, Genzyme General has been funding GTC's development of transgenic ATIII, a plasma protein that helps regulate blood clotting, since April 1, 1996. In July 1997, Genzyme and GTC announced an agreement in principal had been reached on the key terms of a joint venture for further development, marketing and distribution of transgenic ATIII worldwide, excluding Asia. Pursuant to the terms of the joint venture agreement, Genzyme General will provide 70% of the development costs up to a maximum of $33.0 million. GTC will fund the remaining 30% of the development costs. Both companies will fund equally any costs in excess of that level, and profits will be split equally. In July 1997, StressGen/Genzyme LLC was established as a joint venture among Genzyme, StressGen and CMDF to develop stress gene therapies for the treatment of cancer. CMDF provided a total of $10.0 million (Canadian) in funding in connection with the joint venture through the combination of a capital contribution to StressGen/Genzyme LLC in the amount of $1.0 million (Canadian), the purchase of warrants from Genzyme in the amount of $1.0 million (Canadian), the purchase of warrants and preferred stock from StressGen in the amount of $1.4 million (Canadian) and a limited recourse loan bearing interest at 0.125% per annum to StressGen in the amount of $6.6 million (Canadian). Each of Genzyme and StressGen (through a U.S. subsidiary) also made a capital contribution to StressGen/Genzyme LLC in the amount of $1.0 million (Canadian) and a limited recourse loan was made by the U.S. subsidiary of StressGen to StressGen/Genzyme LLC in the amount of $7.0 million (Canadian). In addition, Genzyme and StressGen have agreed to provide in equal shares any additional capital required by the joint venture in excess of the initial $10.0 million (Canadian) funding. The warrants sold to CMDF by Genzyme are described in Part II, Item 2. "Changes in Securities." Genzyme and StressGen have an option (the "Purchase Option"), payable in equal shares, to purchase CMDF's membership interest in StressGen/Genzyme LLC at any time during the three-year period beginning July 31, 1999 and ending July 31, 2002. The exercise price of the Purchase Option initially will be $15.6 million (Canadian) in July 1999 and will increase monthly thereafter to a final exercise price of $30.5 million (Canadian) in July 2002. The limited recourse loan made by CMDF will be retired in connection with the exercise of the Purchase Option. If the Purchase Option is not exercised, CMDF may require Genzyme and StressGen to repay $2.0 million (Canadian) each of the limited recourse loan. In addition, at any time during the 30-day period commencing on the date when not less than 75% of the initial funding provided by CMDF has been spent by the joint venture, but in no event later than July 31, 1999, CMDF shall have the right (the "Mandatory Purchase Right") to require Genzyme and StressGen to purchase its membership interest at an aggregate purchase price of $10.0 million (Canadian) plus interest thereon at a rate per annum equal to the Canadian prime rate plus 1%. The Mandatory Purchase Right will terminate if not exercised by CMDF during such 30-day period. Genzyme's share of any amounts payable to CMDF upon exercise of the Purchase Option, the Mandatory Purchase Right or repayment of the limited recourse loan may be paid in cash, Genzyme common stock or any combination thereof at the discretion of Genzyme. Prior to the repurchase of CMDF's membership interest in StressGen/Genzyme LLC, profits from the joint venture will be shared in proportion to the capital contributions of the three parties. Following the repurchase of CMDF's membership interest, profits will be shared equally by StressGen and Genzyme. ITEM 3. QUANTITATIVE AND QUALITATIVE ANALYSIS OF MARKET RISK. Not applicable. 30 31 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, JUNE 30, 1997 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES In June 1997, the Company amended and restated the Genzyme Charter to (i) authorize 150,000,000 shares of undesignated common stock (before designation of the GMO Stock) that could be issued by the Genzyme Board from time to time in one or more series and (ii) redesignate Genzyme's two separate then existing classes of common stock (GGD Stock and GTR Stock) as series of a single class of common stock. Each new series of common stock has substantially the same features as the class of common stock it replaced. Generally, the undesignated common stock may be issued by the Genzyme Board as one or more new series of common stock without further stockholder approval. The Genzyme Board is authorized to determine the number of shares of each new series and all rights and privileges of each new series, including dividend rights, exchange or redemption provisions, rights upon liquidation or merger, and voting rights, provided that the holders of any series of common stock will not be entitled to more than one vote per share at the time of initial issuance of shares of such series. The issuance of additional series of common stock could have the effect of discouraging potential takeover attempts and thus deprive stockholders of an opportunity to realize a premium for their shares. In connection with the PharmaGenics acquisition in June 1997, the Genzyme Board subsequently designated 40,000,000 shares of common stock as a new series of common stock, GMO Stock. The Genzyme Board designated 400,000 shares of preferred stock as a new series of preferred stock, Series C Junior Participating Preferred Stock, $0.01 par value, in connection with the amendment and restatement of the Restated Rights Agreement by and between the Company and American Stock Transfer & Trust Company, which was amended to reflect the change in the Company's capital structure. On July 31, 1997, Genzyme sold three warrants (the "Front-End Warrant", the "NDA Warrant", and the "Callable Warrant", collectively, the "Warrants") to purchase Genzyme common stock to CMDF for an aggregate purchase price of $724,000 ($1.0 million (Canadian). Each Warrant is initially exercisable for up to 40,000 shares of GGD Stock and will be converted automatically upon the closing date of the initial public offering (the "GMO IPO") of GMO Stock into warrants to purchase that number of shares of GMO Stock equal to 40,000 multiplied by a fraction, the numerator of which is $25.18 and the denominator of which is the lower of (a) the dollar amount determined by the following formula: $7.00 + [(IPO Price - $7.00) x 149/IPODATE], where IPO Price = the offering price of the GMO Stock in the GMO IPO, 149 represents the number of calendar days between the date on which the letter of intent for the joint venture StressGen/Genzyme was executed and the closing date of the initial capitalization of the joint venture, and IPODATE = the number of calendar days between the date on which the letter of intent for the joint venture was executed and the closing date of the GMO IPO or (b) IPO Price (the lower of (a) or (b) is herein referred to as the "GMO Conversion Price"). The Front-End Warrant is exercisable immediately and will terminate upon the earlier of the exercise of the Mandatory Purchase Right by CMDF or July 31, 2002. The exercise price of the Front-End Warrant is $30.18 per share of GGD Stock and, upon conversion following the GMO IPO, will be equal to one hundred twenty percent (120%) of the GMO Conversion Price per share of GMO Stock. The NDA Warrant will be exercisable during the one-year period following the filing of the first new drug application with the FDA for a product developed by StressGen/Genzyme LLC and will terminate upon the earliest of the exercise of the Mandatory Purchase Right by CMDF, the expiration of the Purchase Option or July 31, 2007. The exercise price of the NDA Warrants is $30.18 per share of GGD Stock and, upon conversion following the GMO IPO, will be equal to one hundred twenty percent (120%) of the GMO Conversion Price per share of GMO Stock. The Callable Warrant will be exercisable during the three-year period following the expiration of the Purchase Option and will terminate upon the earliest of the exercise of the Mandatory Purchase Right by CMDF, the exercise of the Purchase Option or July 31, 2005. The exercise price of the Callable Warrant per share of GGD Stock will be equal to the average of the closing sale prices of the GGD Stock on the Nasdaq National Market (or any securities exchange or over-the-counter market on which the GGD Stock is then listed or quoted) for the 20 trading days ending on the expiration date of the Purchase Option, and upon conversion following the GMO IPO, will be equal to the average of closing sale prices of the GMO Stock on the Nasdaq National Market (or any securities exchange or over-the-counter market on which the GMO Stock is then listed or quoted) for the 20 trading days ending on the expiration date of the Purchase Option. Genzyme believes the sale of the Warrants qualifies as a transaction by an issuer not involving a public offering within the meaning of Section 4(2) of the Securities Act (the "Act") based on the manner of offering (a negotiated sale to a single purchaser without general solicitation) and the purchaser's financial status, investment experience and investment intent, as represented to Genzyme. Genzyme further believes the offer and sale of the Warrants also qualifies for the safe harbor for offers and sales outside the United States provided under Rule 903 of Regulation S under the Act since (i) the offer and sale were made in an offshore transaction, (ii) no directed selling efforts were engaged in by Genzyme, (iii) offering restrictions were implemented and (iv) CMDF is not a U.S. person. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS I. The Company held an annual meeting of its stockholders on May 29, 1997. The following represents the results of the voting on proposals submitted to a vote of stockholders at such meeting: a. Proposal to elect two directors for a term of office expiring in 2000:
Nominee ------- Henri A. Termeer Number of Number of Number of Votes Number of Votes For Votes Withheld Abstaining Broker Non-Votes ---------- -------------- --------------- ---------------- GGD 58,318,091 520,720 0 0 GTR* 3,810,615 37,406 0 0 ---------- ------- -- -- Total 62,128,706 558,126 0 0
Nominee ------- Henry R. Lewis Number of Number of Number of Votes Number of Votes For Votes Withheld Abstaining Broker Non-Votes ---------- -------------- --------------- ---------------- GGD 58,318,872 519,939 0 0 GTR* 3,809,835 38,186 0 0 ---------- ------- -- -- Total 62,128,707 558,125 0 0
b. Proposal to amend the Company's 1990 Employee Stock Purchase Plan (the "ESPP") to increase the number of shares of GGD stock available shares for issuance under such plan from 1,500,000 to 2,000,000 shares.
Number of Number of Votes Number of Votes Number of Votes for Votes Against Abstaining Broker Non-Votes ---------- ------------- --------------- ---------------- GGD 46,595,790 11,943,850 299,171 0 GTR* 3,229,593 601,333 17,095 0 ---------- ---------- ------- -- Total 49,825,383 12,545,183 316,266 0
c. Proposal to amend the ESPP to increase the number of shares of GTR stock available for issuance under such plan from 600,000 to 1,100,000 shares.
Number of Number of Number of Votes Number of Votes for Votes Against Abstaining Broker Non-Votes ---------- ------------- --------------- ---------------- GGD 46,263,732 12,271,324 303,755 0 GTR* 3,100,525 729,356 18,140 0 ---------- ---------- ------- -- Total 49,364,257 13,000,680 321,895 0
d. Proposal to amend the Company's 1988 Director Stock Option Plan (the "Director Plan") to increase the number of shares of GGD stock available for issuance under such plan from 200,000 to 233,600 shares.
Number of Number of Number of Votes Number of Votes for Votes Against Abstaining Broker Non-Votes ---------- ------------- --------------- ---------------- GGD 51,891,846 6,658,603 288,362 0 GTR* 3,246,176 580,342 21,503 0 ---------- --------- ------- -- Total 55,138,022 7,238,945 309,865 0
31 32 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, JUNE 30, 1997 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (CONTINUED) e. Proposal to amend the Director Plan to increase the number of shares of GTR Stock available for issuance under such plan from 70,000 to 100,000 shares.
Number of Number of Number of Votes Number of Votes for Votes Against Abstaining Broker Non-Votes ---------- ------------- --------------- ---------------- GGD 51,894,710 6,653,286 290,815 0 GTR* 3,220,607 605,908 21,506 0 ---------- --------- ------- -- Total 55,115,317 7,259,194 312,321 0
---------- * Represents the actual number of shares of GTR Stock voted multiplied by .33. II. The Company held a special meeting of its stockholders on June 12, 1997. The following represents the results of the voting on proposals submitted to a vote of stockholders at such meeting: a. Proposal to approve the Merger Agreement between Genzyme and PharmaGenics which provides for the merger of PharmaGenics with and into Genzyme and the issuance of shares of GMO Stock in connection therewith.
Number of Number of Number of Votes Number of Votes for Votes Against Abstaining Broker Non-Votes ---------- ------------- --------------- ---------------- GGD 45,764,726 1,756,657 249,597 0 GTR* 2,347,090 114,015 34,843 0 ---------- --------- ------- -- Total 48,111,816 1,870,672 284,440 0
b. Proposal to amend and restate the articles of organization of Genzyme to redesignate Genzyme's existing classes of common stock as separate series of a single class of common stock and to authorize 150,000,000 shares of undesignated common stock that may be issued from time to time by the Genzyme Board in one or more series.
Number of Number of Number of Votes Number of Votes for Votes Against Abstaining Broker Non-Votes ---------- ------------- --------------- ---------------- GGD 39,859,153 881,042 220,400 GTR* 2,264,547 59,707 28,361 ---------- ------- ------- Total 42,123,700 940,749 248,761 6,953,718
c. Proposal to amend the 1990 Equity Incentive Plan to authorize the granting of awards under such plan relating to GMO stock.
Number of Number of Number of Votes Number of Votes for Votes Against Abstaining Broker Non-Votes ---------- ------------- --------------- ---------------- GGD 27,675,435 14,936,206 1,750,379 GTR* 1,662,846 794,153 38,948 ---------- ---------- --------- Total 29,338,281 15,730,359 1,789,327 3,408,961
d. Proposal to amend the Director Plan to authorize the granting of options to purchase GMO stock under such plan.
Number of Number of Number of Votes Number of Votes for Votes Against Abstaining Broker Non-Votes ---------- ------------- --------------- ---------------- GGD 30,770,739 13,280,794 310,487 GTR* 1,778,214 677,711 40,022 ---------- ---------- ------- Total 32,548,953 13,958,505 350,509 3,408,961
32 33 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, JUNE 30, 1997 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (CONTINUED) e. Proposal to amend the ESPP to authorize the granting of stock purchase rights under such plan relating to GMO stock.
Number of Number of Number of Votes Number of Votes for Votes Against Abstaining Broker Non-Votes ---------- ------------- --------------- ---------------- GGD 32,529,086 11,555,952 276,982 GTR* 1,912,640 544,172 39,135 ---------- ---------- ------- Total 34,441,726 12,100,124 316,117 3,408,961
f. Proposal to amend the Directors' Deferred Compensation Plan to authorize the distribution of shares of GMO stock credited to stock accounts under such plan.
Number of Number of Number of Votes Number of Votes for Votes Against Abstaining Broker Non-Votes ---------- ------------- --------------- ---------------- GGD 42,095,920 1,941,213 320,887 GTR* 2,327,073 127,984 40,890 ---------- --------- ------- Total 44,422,993 2,069,197 361,777 3,412,961
---------- * Represents the actual number of shares of GTR Stock voted multiplied by .33. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits See Exhibit Index following the signature page to this Form 10-Q. (b) Reports on Form 8-K On April l, 1997 the Company filed a Current Report on Form 8-K to provide certain pro forma financial information as of March 31, 1997 for Genzyme and Genzyme General. On June 30, 1997, the Company filed a Current Report on Form 8-K to (i) announce the completion of the PharmaGenics acquisition, (ii) announce the amendment of the Genzyme Charter and (iii) provide certain pro forma financial information as of March 31, 1997 for GMO. 33 34 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, JUNE 30, 1997 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. GENZYME CORPORATION DATE: August 14, 1997 By: /s/ David J. McLachlan ---------------------------------------- David J. McLachlan Duly Authorized Officer and Executive Vice President, Finance; Chief Financial Officer 34 35 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, JUNE 30, 1997 EXHIBIT INDEX Exhibit No. Description ------- ----------- 3.1 Restated Articles of Organization of Genzyme, as amended. Filed as Exhibit 1 to Genzyme's Registration Statement on Form 8-A dated June 18, 1997 (File No. 0-14680) and incorporated herein by reference. 4.1 Series Designation for Genzyme Molecular Oncology Division Common Stock, $.01 par value. Filed as Exhibit 2 to Genzyme's Registration Statement on Form 8-A dated June 18, 1997 (File No. 0-14680) and incorporated herein by reference. 4.2 Series Designation for Genzyme Series A, Series B and Series C Junior Participating Preferred Stock, $.01 par value. Filed as Exhibit 3 to Genzyme's Registration Statement on Form 8-A dated June 18, 1997 (File No. 0-14680) and incorporated herein by reference. 4.3 Amended and Restated Rights Agreement dated as of June 12, 1997 between Genzyme and American Stock Transfer & Trust Company. Filed as Exhibit 5 to Genzyme's Registration Statement on Form 8-A dated June 18, 1997 (File No. 0-14680) and incorporated herein by reference. 10.1* Collaboration Agreement dated as of June 17, 1997 by and among Genzyme, GelTex and RenaGel LLC. Filed as Exhibit 10.18 to GelTex's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1997 (File No. 0-26872) and incorporated herein by reference. 10.2* Purchase Agreement dated as of June 17, 1997 by and between Genzyme and GelTex. Filed as Exhibit 10.19 to GelTex's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1997 (File No. 0-26872) and incorporated herein by reference. 10.3* Operating Agreement of RenaGel LLC dated as of June 17, 1997 by and among Genzyme, GelTex and RenaGel, Inc. Filed as Exhibit 10.20 to GelTex's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1997 (File No. 0-26872) and incorporated herein by reference. 11 Computation of weighted average shares used in computing earnings per share amounts. Filed herewith. 27 Financial Data Schedules for Genzyme General and Genzyme Tissue Repair (for EDGAR filing purposes only). Filed herewith. - ---------------------- * Confidential treatment has been requested for the deleted portions of Exhibits 10.1, 10.2 and 10.3 35 EX-11 2 COMPUTATION OF WEIGHTED AVERAGE SHARES 1 GENZYME CORPORATION AND SUBSIDIARIES EXHIBIT 11 - COMPUTATION OF WEIGHTED AVERAGE SHARES USED IN COMPUTING INCOME PER SHARE AMOUNTS (Unaudited, in thousands)
THREE MONTHS ENDED -------------------------------------------------------------- JUNE 30, 1997 JUNE 30, 1996 ---------------------------- ------------------------- COMMON COMMON AND COMMON ASSUMING AND COMMON ASSUMING EQUIVALENT FULL EQUIVALENT FULL SHARES DILUTION SHARES DILUTION ---------- -------- ---------- -------- GENZYME GENERAL STOCK: Common stock outstanding, beginning of period.............................. 75,803 75,803 67,719 67,719 Weighted average common stock issued during the period......................... 262 262 1,016 1,016 Weighted average common stock assuming exercise of options..................... 2,060 2,713 2,979 2,979 Weighted average common stock assuming exercise of warrants.................... 5 13 2,194 2,220 ------ ------ ------ ------ Weighted average number of shares outstanding...................................... 78,130 78,791 73,908 73,934 ====== ====== ====== ====== SIX MONTHS ENDED -------------------------------------------------------------- JUNE 30, 1997 JUNE 30, 1996 ---------------------------- ------------------------- COMMON COMMON AND COMMON ASSUMING AND COMMON ASSUMING EQUIVALENT FULL EQUIVALENT FULL SHARES DILUTION SHARES DILUTION ---------- -------- ---------- -------- GENZYME GENERAL STOCK: Common stock outstanding, beginning of period........................................ 75,537 75,537 62,372 62,372 Weighted average common stock issued during the period................................ 319 319 4,248 4,248 Weighted average common stock assuming exercise of options.............................. 2,320 2,646 3,608 3,612 Weighted average common stock assuming exercise of warrants............................. 8 12 2,652 2,729 Weighted average common stock assuming conversion of 6 3/4% Convertible Subordinated Notes............................... - - - 1,339 ------ ------ ------ ------ Weighted average number of shares outstanding...................................... 78,184 78,514 72,880 74,300 ====== ====== ====== ======
EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED FINANCIAL STATEMENTS OF GENZYME CORPORATION FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996 AND AS OF JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AS INCLUDED IN THE FORM 10-Q FOR GENZYME CORPORATION DATED JUNE 30, 1997. 1,000 U.S. DOLLARS 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 1 105,096 47,243 130,344 9,400 136,757 443,870 488,654 98,207 1,223,987 113,725 0 0 0 937 948,368 1,223,987 259,792 296,861 92,010 116,296 147,250 2,395 5,255 26,706 13,070 13,636 0 0 0 13,636 0.57 0.57 FOOTNOTES: Genzyme Corporation has one class of common stock which currently consists of three series of common stock -- Genzyme General Division Common Stock ("GGD Stock"), Genzyme Tissue Repair Division Common Stock ("GTR Stock") and Genzyme Molecular Oncology Division Common Stock ("GMO Stock"). Earnings (loss) per share is reported separately for each series of common stock. For the three and six months ended June 30, 1997, primary EPS and fully diluted EPS for GGD Stock were $0.30 and $0.57, respectively. Loss per share for GTR Stock for the three and six months ended June 30, 1997 were $(0.86) and $(1.76), respectively, and in the case of GMO Stock $(2.14) and $(2.30), respectively.
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