-----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, BR6Ytfok25a2VD38dgG611MAPOwQbA0SB7z/WywNisXB0HtiOxbnhl/yJLdyoQOS +Ns7LvTsTInzKpNx7FZ0gw== 0000950135-98-004775.txt : 19980817 0000950135-98-004775.hdr.sgml : 19980817 ACCESSION NUMBER: 0000950135-98-004775 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 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: SEC FILE NUMBER: 000-14680 FILM NUMBER: 98689060 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, 1998 ------------- 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 classes of common stock as of July 31, 1998: Series ------ Genzyme General Division Common Stock ("GGD Stock") 78,948,594 Genzyme Tissue Repair Division Common Stock ("GTR Stock") 20,278,552 Genzyme Molecular Oncology Division Common Stock ("GMO Stock") 3,928,572 2 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, JUNE 30, 1998 NOTE REGARDING FORWARD-LOOKING STATEMENTS: This report on Form 10-Q for Genzyme Corporation ("Genzyme" or the "Company") contains forward-looking statements concerning, among other things, the Company's future revenues, operations and expenditures. All such forward-looking statements are necessarily only estimates of future results and the actual results may differ materially from these projections 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 of its products and services, (ii) the content and timing of 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 accuracy of the Company's estimates of the size and characteristics 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 resources of competitors and potential competitors and (vii) the risks and uncertainties described under the heading "Factors Affecting Future Operating Results" in the sections entitled (a) "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations" and "Management's Discussion and Analysis of Genzyme General's Financial Condition and Results of Operations" in the Genzyme General Annual Report for the fiscal year ended December 31, 1997 (the "1997 Genzyme General Annual Report"), (b) "Management's Discussion and Analysis of Genzyme Tissue Repair's Financial Condition and Results of Operations" in the Genzyme Tissue Repair Annual Report for the fiscal year ended December 31, 1997 (the "1997 GTR Annual Report") and (c) "Management's Discussion and Analysis of Genzyme Molecular Oncology's Financial Condition and Results of Operations" in the Genzyme Molecular Oncology Annual Report for the fiscal year ended December 31, 1997 (the "1997 GMO Annual Report"). The 1997 Genzyme General Annual Report, the 1997 GTR Annual Report and the 1997 GMO Annual Report were filed as Exhibits 13.1, 13.2 and 13.3, respectively, to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, as amended on Form 10-K/A (the "1997 Genzyme 10-K/A"). -2- 3 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, JUNE 30, 1998 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION
PAGE NO. -------- ITEM 1. Financial Statements GENZYME GENERAL Unaudited, Combined Balance Sheets as of June 30, 1998 and December 31, 1997.................................. 4 Unaudited, Combined Statements of Operations for the Three and Six Months Ended June 30, 1998 and 1997........ 5 Unaudited, Combined Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1997.................. 6 Notes to Unaudited, Combined Financial Statements............................................................. 7 GENZYME TISSUE REPAIR Unaudited, Combined Balance Sheets as of June 30, 1998 and December 31, 1997.................................. 10 Unaudited, Combined Statements of Operations for the Three and Six Months Ended June 30, 1998 and 1997........ 11 Unaudited, Combined Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1997.................. 12 Notes to Unaudited, Combined Financial Statements............................................................. 13 GENZYME MOLECULAR ONCOLOGY Unaudited, Combined Balance Sheets as of June 30, 1998 and December 31, 1997.................................. 15 Unaudited, Combined Statements of Operations for the Three and Six Months Ended June 30, 1998 and 1997........ 16 Unaudited, Combined Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1997.................. 17 Notes to Unaudited, Combined Financial Statements............................................................. 18 GENZYME CORPORATION AND SUBSIDIARIES Unaudited, Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997.............................. 20 Unaudited, Consolidated Statements of Operations for the Three and Six Months Ended June 30, 1998 and 1997 ... 21 Unaudited, Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1997 ............. 23 Notes to Unaudited, Consolidated Financial Statements.......................................................... 24 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 28 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.......................................... 36 PART II. OTHER INFORMATION ITEM 2. Changes in Securities and Use of Proceeds........................................................... 37 ITEM 4. Submission of Matters to a Vote of Security Holders................................................. 37 ITEM 6. Exhibits and Reports on Form 8-K ................................................................... 38 Signatures......................................................................................................... 39
-3- 4 GENZYME GENERAL COMBINED BALANCE SHEETS
JUNE 30, DECEMBER 31, (UNAUDITED, AMOUNTS IN THOUSANDS) 1998 1997 - ----------------------------------------------------------------------------------------- ------------ ASSETS Current assets: Cash and cash equivalents ............................................... $ 276,760 $ 66,276 Short-term investments .................................................. 34,938 35,294 Accounts receivable, net ................................................ 134,645 116,056 Inventories ............................................................. 133,489 137,708 Prepaid expenses and other current assets ............................... 17,779 15,941 Due from Genzyme Molecular Oncology ..................................... 5,540 5,434 Due from Genzyme Tissue Repair .......................................... 1,233 1,213 Deferred tax assets - current ........................................... 27,973 27,601 ---------- ---------- Total current assets ................................................. 632,357 405,523 Property, plant and equipment, net ......................................... 381,788 365,337 Long-term investments ...................................................... 159,490 91,627 Intangibles, net ........................................................... 245,672 243,071 Deferred tax assets - noncurrent ........................................... 36,028 35,988 Investment in equity securities ............................................ 26,730 30,047 Other ...................................................................... 36,441 31,463 ---------- ---------- Total assets ......................................................... $1,518,506 $1,203,056 ========== ========== LIABILITIES AND DIVISION EQUITY Current liabilities: Accounts payable ........................................................ $ 16,882 $ 18,409 Accrued expenses ........................................................ 66,639 66,865 Income taxes payable .................................................... 21,718 11,157 Current portion of long-term debt and capital lease obligations ......... 20,796 887 ---------- ---------- Total current liabilities ............................................. 126,035 97,318 Long-term debt and capital lease obligations ............................... 85,167 117,978 Convertible subordinated notes ............................................. 250,000 - Other ...................................................................... 8,017 6,884 ---------- ---------- Total liabilities ..................................................... 469,219 222,180 Division equity ............................................................ 1,049,287 980,876 ---------- ---------- Total liabilities and division equity ................................. $1,518,506 $1,203,056 ========== ==========
The accompanying notes are an integral part of these unaudited, combined financial statements -4- 5 GENZYME GENERAL COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------ (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1998 1997 - ----------------------------------------------------------------------------------------------- ------------------------ Total revenues ................................................. $168,980 $147,614 $323,103 $292,220 Operating costs and expenses: Cost of products and services sold ......................... 57,112 54,477 111,589 110,305 Selling, general and administrative ........................ 47,897 40,801 93,008 81,673 Research and development ................................... 21,104 18,976 39,522 36,300 Amortization of intangibles ................................ 3,300 3,164 6,499 6,360 -------- -------- -------- -------- Total operating costs and expenses ................... 129,413 117,418 250,618 234,638 -------- -------- -------- -------- Operating income ............................................... 39,567 30,196 72,485 57,582 Other income (expenses): Equity in net loss of unconsolidated affiliates ............ (4,087) (783) (6,992) (853) Gain on affiliate sale of stock ............................ 2,369 - 2,369 - Minority interest .......................................... 860 - 1,724 - Investment income .......................................... 4,856 2,594 7,776 4,912 Interest expense ........................................... (3,351) (1,719) (5,341) (4,000) -------- -------- -------- -------- Total other income (expenses) ........................... 647 92 (464) 59 -------- -------- -------- -------- Income before income taxes ..................................... 40,214 30,288 72,021 57,641 Provision for income taxes ..................................... (15,254) (11,533) (27,764) (22,159) -------- -------- -------- -------- Net income ..................................................... 24,960 18,755 44,257 35,482 Tax benefit allocated from Genzyme Tissue Repair ............... 3,390 4,327 7,796 8,838 Tax benefit allocated from Genzyme Molecular Oncology .......... 2,850 201 4,085 201 -------- -------- -------- -------- Net income ..................................................... $ 31,200 $ 23,283 $ 56,138 $ 44,521 ======== ======== ======== ======== Per Genzyme General common share: Net income per Genzyme General common share - basic .......... $ 0.40 $ 0.31 $ 0.72 $ 0.59 ======== ======== ======== ======== Weighted average shares outstanding ............................ 78,524 76,065 78,223 75,856 ======== ======== ======== ======== Net income per Genzyme General common and common equivalent share - diluted ................................. $ 0.39 $ 0.30 $ 0.70 $ 0.57 ======== ======== ======== ======== Adjusted weighted average shares outstanding ................... 80,679 78,130 80,520 78,184 ======== ======== ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. -5- 6 GENZYME GENERAL COMBINED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED (UNAUDITED, AMOUNTS IN THOUSANDS) JUNE 30, - --------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: 1998 1997 --------- --------- Net income .................................................................... $ 44,257 $ 35,482 Reconciliation of net income to net cash provided by operating activities: Depreciation and amortization .............................................. 23,351 14,830 Non-cash compensation expense .............................................. 31 - Accrued interest/amortization on bonds ..................................... (2,041) 578 Provision for bad debts and inventory ...................................... 3,136 2,260 Equity in net loss of unconsolidated affiliates, net ....................... 6,992 853 Gain on affiliate sale of stock ........................................... (2,369) - Minority interest in net loss of subsidiaries .............................. (1,724) - Other ...................................................................... 162 502 Increase (decrease) in cash from working capital changes: Accounts receivable ..................................................... (22,280) (9,102) Inventories ............................................................. 4,616 (13,194) Prepaid expenses and other current assets ............................... (1,887) (2,547) Accounts payable, accrued expenses, income taxes payable and deferred revenue .................................................... 21,992 (634) Due from Genzyme Tissue Repair .......................................... (20) 1,375 Due from Genzyme Molecular Oncology ..................................... (182) (430) --------- --------- Net cash provided by operating activities ............................... 74,034 29,973 INVESTING ACTIVITIES: Purchases of investments ...................................................... (106,047) (25,424) Sales and maturities of investments ........................................... 40,598 45,444 Acquisitions of property, plant and equipment ................................. (34,038) (15,891) Sales of property, plant and equipment ........................................ 588 - Acquisitions, net of acquired cash and assumed liabilities .................... (8,324) - Investment in unconsolidated affiliates ....................................... (3,707) - Repayment of loans by affiliates .............................................. 2,019 - Other ......................................................................... (502) (9,495) --------- --------- Net cash used in investing activities ................................... (109,413) (5,366) FINANCING ACTIVITIES: Proceeds from issuance of common stock ........................................ 16,656 100,792 Proceeds from issuance of debt, net ........................................... 243,676 - Payments of debt and capital lease obligations ................................ (14,068) (102,798) Net cash allocated to Genzyme Tissue Repair ................................... 84 (13,977) Net cash allocated to Genzyme Molecular Oncology .............................. - (5,000) Other ......................................................................... 1,370 - --------- --------- Net cash provided by (used in) financing activities ..................... 247,718 (20,983) Effect of exchange rate changes on cash ........................................... (1,855) (1,657) --------- --------- Increase in cash and cash equivalents ............................................. 210,484 1,967 Cash and cash equivalents at beginning of period .................................. 66,276 77,220 --------- --------- Cash and cash equivalents at end of period ........................................ $ 276,760 $ 79,187 ========= =========
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 1997 Genzyme 10-K/A and the financial statements and footnotes for both Genzyme General Division ("Genzyme General") and Genzyme Corporation and Subsidiaries ("Genzyme" or the "Company") 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 rules and regulations of the Securities and Exchange Commission. Certain items in the 1997 financial statements have been reclassified to conform with the 1998 presentation. The financial statements for the three and six months ended June 30, 1998 and 1997 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. FINANCIAL INFORMATION Financial information specific to Genzyme General is presented in these Genzyme General unaudited, combined financial statements. Accounting policies and financial information relevant to Genzyme, Genzyme General, Genzyme Tissue Repair Division ("GTR" or "Genzyme Tissue Repair") and Genzyme Molecular Oncology Division ("GMO" or "Genzyme Molecular Oncology"), collectively, are presented in the unaudited, consolidated financial statements of Genzyme. 3. NEW ACCOUNTING PRONOUNCEMENTS For a discussion of new accounting pronouncements, see Note 2., "New Accounting Pronouncements", to Genzyme Corporation and Subsidiaries' Unaudited, Consolidated Financial Statements (the "Unaudited, Consolidated Financial Statements"), which is incorporated herein by reference. 4. INVENTORIES (IN THOUSANDS)
June 30, 1998 December 31, 1997 ------------- ----------------- Raw materials.................. $ 49,258 $ 48,149 Work-in-process................ 28,566 30,264 Finished products.............. 55,665 59,295 -------- -------- Total ..................... $133,489 $137,708 ======== ========
5. EQUITY LINE OF CREDIT In June 1998, the Board of Directors of Genzyme (the "Genzyme Board") increased the amount of the equity line of credit available from Genzyme General to GTR from $13.0 million to $50.0 million. Under the terms of the equity line, GTR may draw down funds as needed on a quarterly basis in exchange for shares of GTR Stock that are not outstanding but are issuable from time to time for the benefit of Genzyme General or its stockholders ("GTR Designated Shares"). 6. 5.25% CONVERTIBLE SUBORDINATED NOTES The disclosures related to Genzyme's private placement in May 1998 of $250.0 million of 5.25% Convertible Subordinated Notes due June 1, 2005 (the "GGD Notes"), are included in Note 5., "5.25% Convertible Subordinated Notes", to the Unaudited, Consolidated Financial Statements, which is incorporated herein by reference. 7. MINORITY INTEREST The minority interest of $860,000 and $1,724,000 for the three and six months ended June 30, 1998, respectively, relate to the portion of the results of operations of ATIII, LLC, the joint venture between Genzyme and Genzyme Transgenics Corporation ("GTC"), that Genzyme does not record. There were no corresponding amounts in the prior periods. -7- 8 GENZYME GENERAL NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS 8. REVOLVING CREDIT FACILITY In May 1998, Genzyme General repaid $13.0 million of borrowings allocated to it under Genzyme's $225.0 million revolving credit facility with a syndicate of commercial banks (the "Revolving Credit Facility"). See Note 4., "Revolving Credit Facility", to the Unaudited, Consolidated Financial Statements, which is incorporated herein by reference. 9. NET INCOME PER SHARE The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
Three Months Ended Six Months Ended June 30, June 30, --------------------- --------------------- 1998 1997 1998 1997 ------- ------- ------- ------- Genzyme General: Net income attributable to GGD Stock-basic and diluted ... $31,200 $23,283 $56,138 $44,521 ======= ======= ======= ======= Shares used in net income per common share-basic ......... 78,524 76,065 78,223 75,856 Effect of dilutive securities: Employee and director stock options ................... 2,152 2,060 2,291 2,320 Warrants .............................................. 3 5 6 8 ------- ------- ------- ------- Dilutive potential common shares ......................... 2,155 2,065 2,297 2,328 ------- ------- ------- ------- Shares used in net income per common share-diluted ....... 80,679 78,130 80,520 78,184 ======= ======= ======= ======= Net income per common share - basic ...................... $ 0.40 $ 0.31 $ 0.72 $ 0.59 ======= ======= ======= ======= Net income per common share - diluted .................... $ 0.39 $ 0.30 $ 0.70 $ 0.57 ======= ======= ======= =======
Certain securities were not included in the computation of Genzyme General's diluted earnings per share for the three and six months ended June 30, 1998 and 1997. For the three months ended June 30, 1998 and 1997, such securities include options to purchase 3,829,926 and 5,173,854 shares of GGD Stock, respectively, outstanding during the periods then ended but with exercise prices greater than the average market price of GGD Stock during each respective period. For the three months ended June 30, 1998, such securities also include (i) warrants to purchase 80,000 shares of GGD Stock exercisable as of June 30, 1998 with an exercise price greater than the average market price of GGD Stock during the three months ended June 30, 1998; and (ii) 6,313,131 shares of GGD Stock reserved in May 1998 for issuance upon conversion of the GGD Notes which were not included in the computation because inclusion of such shares would have an anti-dilutive effect on Genzyme General's net income per share. For the six months ended June 30, 1998 and 1997, such securities include options to purchase 3,844,830 and 4,633,768 shares of GGD Stock, respectively, outstanding during the periods then ended but with exercise prices greater than the average market price of GGD Stock during each respective period. For the six months ended June 30, 1998, such securities also include (i) warrants to purchase 80,000 shares of GGD Stock exercisable as of June 30, 1998 with an exercise price greater -8- 9 GENZYME GENERAL NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS 9. NET INCOME PER SHARE (CONTINUED) than the average market price of GGD Stock during the six months ended June 30, 1998; and (ii) 6,313,131 shares of GGD Stock reserved in May 1998 for issuance upon conversion of the GGD Notes which were not included in the calculation because inclusion of such shares would have an anti-dilutive effect on Genzyme General's net income per share. 10. COMPREHENSIVE INCOME Effective January 1, 1998, Genzyme General adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting and displaying comprehensive income and its components in a set of financial statements. SFAS 130 requires that all items recognized under accounting standards as components of comprehensive earnings be reported on one of the following: a statement of income and comprehensive income or a statement of stockholders' equity. Components of comprehensive income are net income and all other non-owner changes in equity such as the change in the cumulative translation adjustment. Presentation of comprehensive income for earlier periods is provided for comparative purposes. Genzyme presents such information related to Genzyme General in its statement of stockholders' equity on an annual basis and in a footnote in its quarterly reports. Comprehensive income for Genzyme General for the three and six months ended June 30, 1998 and 1997 is as follows (in thousands):
Three Months Ended Six Months Ended June 30, June 30, ---------------------- --------------------- 1998 1997 1998 1997 ------- ------- ------- ------- Genzyme General: Net income .............................. $31,200 $23,283 $56,138 $44,521 Cumulative translation adjustment ....... 542 117 (156) (8,753) Unrealized gain (loss) on investments ... (4,971) (1,275) (3,644) (1,940) ------- ------- ------- ------- Comprehensive income..................... $26,771 $22,125 $52,338 $33,828 ======= ======= ======= =======
11. SUBSEQUENT EVENTS On July 1, 1998, Genzyme General completed the sale of the primary assets of its research products business to TECHNE Corp. and its wholly-owned subsidiary, Research and Diagnostic Systems, Inc. (together, "TECHNE"). On July 17, 1998, Genzyme General made an equity investment of approximately $14.0 million in Pharming Group N.V. ("Pharming") a Dutch publicly traded company. The disclosures related to the sale of the research product business assets and equity investment in Pharming are included in Note 9., "Subsequent Events" to the Unaudited, Consolidated Financial Statements, which is incorporated herein by reference. -9- 10 GENZYME TISSUE REPAIR COMBINED BALANCE SHEETS
(UNAUDITED, AMOUNTS IN THOUSANDS) JUNE 30, DECEMBER 31, - --------------------------------------------------------------------------------------------------------- 1998 1997 ------- ------- ASSETS Current assets: Cash and cash equivalents ........................................... $25,404 $21,120 Short-term investments .............................................. 3,127 10,795 Accounts receivable, net ............................................ 2,929 2,221 Inventories ......................................................... 2,299 1,973 Prepaid expenses and other current assets ........................... 1,185 732 ------- ------- Total current assets .............................................. 34,944 36,841 Property, plant and equipment, net (Note 5) ............................ 2,754 19,524 Other .................................................................. 230 453 ------- ------- Total assets ...................................................... $37,928 $56,818 ======= ======= LIABILITIES AND DIVISION EQUITY Current liabilities: Accounts payable .................................................... $ 1,130 $ 1,378 Accrued expenses .................................................... 2,992 2,816 Due to Genzyme General .............................................. 1,233 1,213 ------- ------- Total current liabilities ......................................... 5,355 5,407 Long-term debt ......................................................... 18,000 18,000 Convertible debenture, net ............................................. 13,635 12,681 Other .................................................................. 452 527 ------- ------- Total liabilities ................................................. 37,442 36,615 Division equity ........................................................ 486 20,203 ------- ------- Total liabilities and division equity ............................. $37,928 $56,818 ======= =======
The accompanying notes are an integral part of these unaudited, combined financial statements. -10- 11 GENZYME TISSUE REPAIR COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) JUNE 30, JUNE 30, - ------------------------------------------------------------------------------------------------------------------------------ 1998 1997 1998 1997 -------- -------- -------- -------- Revenues: Net service sales ....................................... $ 4,345 $ 2,654 $ 7,956 $ 4,641 Operating costs and expenses: Cost of services sold ................................... 3,776 3,135 7,010 5,991 Selling, general and administrative ..................... 6,007 6,204 12,320 12,658 Research and development ................................ 2,832 2,228 5,918 4,996 -------- -------- -------- -------- Total operating costs and expenses .................... 12,615 11,567 25,248 23,645 -------- -------- -------- -------- Operating loss ............................................. (8,270) (8,913) (17,292) (19,004) Other income (expenses): Equity in loss of joint venture ......................... (1,697) (1,827) (3,628) (3,416) Interest income ......................................... 227 212 674 398 Interest expense ........................................ (715) (861) (1,529) (1,238) -------- -------- -------- -------- Other income (expenses) ............................... (2,185) (2,476) (4,483) (4,256) -------- -------- -------- -------- Net loss ................................................... $(10,455) $(11,389) $(21,775) $(23,260) ======== ======== ======== ======== Basic and diluted net loss per Genzyme Tissue Repair common share: Net loss ................................................ $ (0.52) $ (0.86) $ (1.08) $ (1.76) ======== ======== ======== ======== Weighted average shares outstanding ........................ 20,159 13,238 20,080 13,208 ======== ======== ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. -11- 12 GENZYME TISSUE REPAIR COMBINED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED (UNAUDITED, AMOUNTS IN THOUSANDS) JUNE 30, - ------------------------------------------------------------------------------------------------------------ 1998 1997 -------- -------- OPERATING ACTIVITIES: Net loss .................................................................... $(21,775) $(23,260) Reconciliation of net loss to net cash used by operating activities: Depreciation and amortization ............................................. 1,147 1,214 Non-cash compensation expense ............................................. 77 77 Provision for bad debts ................................................... 257 135 Accretion of debt discount ................................................ 536 407 Accrued interest/amortization on bonds .................................... 136 - Equity in net loss of joint venture ....................................... 3,628 3,416 Increase (decrease) in cash from working capital: Accounts receivable ..................................................... (965) (739) Inventories ............................................................. (326) 366 Prepaid expenses and other .............................................. (453) 103 Accounts payable and accrued expenses ................................... 253 803 Due to Genzyme General .................................................. 20 (1,375) -------- -------- Net cash used by operating activities ................................. (17,465) (18,853) INVESTING ACTIVITIES: Investment in joint venture ................................................. (3,417) (4,130) Sales and maturities of investments ......................................... 7,539 - Purchase of property, plant and equipment ................................... (108) (183) Sale of property, plant and equipment ....................................... 16,535 202 Other ....................................................................... 12 (487) -------- -------- Net cash provided (used) by investing activities ...................... 20,561 (4,598) FINANCING ACTIVITIES: Proceeds from issuance of common stock ...................................... 1,347 1,144 Proceeds from issuance of convertible debenture ............................. - 13,000 Cash allocated (to) from Genzyme General .................................... (84) 13,977 Other ....................................................................... (75) - -------- -------- Net cash provided by financing activities ............................. 1,188 28,121 -------- -------- Increase in cash and cash equivalents .......................................... 4,284 4,670 Cash and cash equivalents at beginning of period ............................... 21,120 16,230 -------- -------- Cash and cash equivalents at end of period ..................................... $ 25,404 $ 20,900 ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. -12- 13 GENZYME TISSUE REPAIR NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION These unaudited, combined financial statements should be read in conjunction with the 1997 Genzyme 10-K/A and the financial statements and footnotes for both GTR and Genzyme 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 rules and regulations of the Securities and Exchange Commission. The financial statements for the three and six months ended June 30, 1998 and 1997 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. FINANCIAL INFORMATION Financial information specific to GTR is presented in these GTR unaudited, combined financial statements. Accounting policies and financial information relevant to Genzyme, Genzyme General, GTR and GMO, collectively, are presented in the Unaudited, Consolidated Financial Statements of Genzyme. 3. NEW ACCOUNTING PRONOUNCEMENTS For a discussion of new accounting pronouncements, see Note 2., "New Accounting Pronouncements", to the Unaudited, Consolidated Financial Statements, which is incorporated herein by reference. 4. INVENTORIES (In thousands) June 30, 1998 December 31, 1997 ------------- ----------------- Raw materials...................... $ 308 $ 243 Work-in-process.................... 1,991 1,730 ------ ------ Total ........................ $2,299 $1,973 ====== ====== 5. TRANSFER OF FACILITY In June 1998, the Genzyme Board approved the transfer of one of GTR's manufacturing facilities, including land, building and equipment, to Genzyme General for cash of approximately $16.5 million. GTR recognized a gain of approximately $0.7 million from this transfer, which was charged to division equity in June 1998. 6. REVOLVING CREDIT FACILITY The disclosures related to amounts borrowed by GTR under Genzyme's Revolving Credit Facility are included in Note 4., "Revolving Credit Facility", to the Unaudited, Consolidated Financial Statements, which is incorporated herein by reference. 7. EQUITY LINE OF CREDIT In June 1998, the Genzyme Board increased the amount of the equity line of credit available from Genzyme General to GTR from $13.0 million to $50.0 million. Under the terms of the equity line, GTR may draw down funds as needed on a quarterly basis in exchange for GTR Designated Shares. 8. NET INCOME (LOSS) PER SHARE Note 6., "Net Income (Loss) per Share", to the Unaudited, Consolidated Financial Statements is incorporated herein by reference. -13- 14 GENZYME TISSUE REPAIR NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS 9. COMPREHENSIVE INCOME Effective January 1, 1998, GTR adopted SFAS 130, which establishes standards for reporting and displaying comprehensive income and its components in a set of financial statements. SFAS 130 requires that all items recognized under accounting standards as components of comprehensive earnings be reported on one of the following: a statement of income and comprehensive income or a statement of stockholders' equity. Components of comprehensive income are net income and all other non-owner changes in equity such as the change in the cumulative translation adjustment. Presentation of comprehensive income for earlier periods is provided for comparative purposes. Genzyme presents such information related to GTR in its statement of stockholders' equity on an annual basis and in a footnote in its quarterly reports. Comprehensive loss for GTR for the three and six months ended June 30, 1998 and 1997 is as follows (in thousands):
Three Months Ended Six Months Ended June 30, June 30, ------------------------- ------------------------- 1998 1997 1998 1997 -------- -------- -------- -------- Genzyme Tissue Repair: Net loss ................................... $(10,455) $(11,389) $(21,775) $(23,260) Unrealized gain (loss) on investments ...... 7 - 7 - -------- -------- -------- -------- Comprehensive loss.......................... $(10,448) $(11,389) $(21,768) $(23,260) ======== ======== ======== ========
-14- 15 GENZYME MOLECULAR ONCOLOGY COMBINED BALANCE SHEETS
JUNE 30, DECEMBER 31, (UNAUDITED, AMOUNTS IN THOUSANDS) 1998 1997 - --------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents ..................................................... $ 4,132 $15,010 Short-term investments ........................................................ 5,657 5,170 Other ......................................................................... 1,285 823 ------- ------- Total current assets ......................................................... 11,074 21,003 Equipment, net .................................................................. 867 487 Long-term investments ........................................................... - 1,049 Intangibles, net ................................................................ 23,157 30,688 Investment in joint venture ..................................................... - 574 ------- ------- Total assets ................................................................. $35,098 $53,801 ======= ======= LIABILITIES AND DIVISION EQUITY Current liabilities: Accrued expenses .............................................................. $ 1,434 $ 2,015 Due to Genzyme General ........................................................ 5,540 5,434 Deferred revenue .............................................................. 1,103 1,583 Other ......................................................................... - 18 ------- ------- Total current liabilities .................................................... 8,077 9,050 Long-term debt .................................................................. - 5,000 Convertible debentures, net ..................................................... 19,124 17,024 Note payable to Genzyme General ................................................. 2,658 2,582 Deferred tax liability .......................................................... 5,184 6,509 Other ........................................................................... 512 170 ------- ------- Total liabilities ............................................................ 35,555 40,335 Division equity ................................................................. (457) 13,466 ------- ------- Total liabilities and division equity ........................................ $35,098 $53,801 ======= =======
The accompanying notes are an integral part of these unaudited, combined financial statements. -15- 16 GENZYME MOLECULAR ONCOLOGY COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) JUNE 30, JUNE 30, - ------------------------------------------------------------------------------------------------- ----------------------- 1998 1997 1998 1997 ------- ------- -------- ------- Total revenues ..................................................... $ 1,689 $ - $ 4,506 $ - Operating costs and expenses: Cost of revenues .................................................. 1,102 - 2,323 - Selling, general and administrative ............................... 2,003 166 3,155 275 Research and development .......................................... 2,228 1,031 5,523 1,549 Amortization of intangibles ....................................... 3,045 228 6,070 228 Charge for in-process technology .................................. - 7,000 - 7,000 ------- ------- -------- ------- Total operating costs and expenses ............................... 8,378 8,425 17,071 9,052 ------- ------- -------- ------- Operating loss ..................................................... (6,689) (8,425) (12,565) (9,052) Other income (expenses): Equity in loss of joint venture ................................... (534) - (978) - Interest income ................................................... 204 - 484 - Interest expense .................................................. (1,090) (17) (2,252) (17) ------- ------- -------- ------- Total other income (expenses) .................................... (1,420) (17) (2,746) (17) ------- ------- -------- ------- Loss before income taxes ........................................... (8,109) (8,442) (15,311) (9,069) Tax benefit ........................................................ 662 50 1,324 50 ------- ------- -------- ------- Net loss ........................................................... $(7,447) $(8,392) $(13,987) $(9,019) ======= ======= ======== ======= Basic and diluted net loss per Genzyme Molecular Oncology common share: Net loss ......................................................... $ (1.90) $ (3.56) ======= ======== Weighted average shares outstanding ................................ 3,929 3,929 ======= ======== Pro forma basic and diluted net loss per Genzyme Molecular Oncology common share: Pro forma net loss ............................................... $ (2.14) $ (2.30) ======= ======= Pro forma shares outstanding ....................................... 3,929 3,929 ======= =======
The accompanying notes are an integral part of these unaudited, combined financial statements. -16- 17 GENZYME MOLECULAR ONCOLOGY COMBINED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED (UNAUDITED, AMOUNTS IN THOUSANDS) JUNE 30, - ------------------------------------------------------------------------------------------------------------ 1998 1997 -------- ------- Operating Activities: Net loss ....................................................................... $(13,987) $(9,019) Reconciliation of net loss to net cash used by operating activities: Depreciation and amortization ............................................ 6,280 228 Charge for in-process technology ......................................... - 7,000 Deferred tax benefit ..................................................... (1,324) - Accretion of debt conversion feature ..................................... 1,412 - Equity in loss of joint venture .......................................... 978 - Accrued interest/amortization of marketable securities ................... 87 - Non-cash compensation expense ............................................ 57 - Non-cash purchase price adjustments ...................................... 747 - Increase (decrease) in cash from working capital changes: Other current assets .................................................. (61) - Accrued expenses, deferred revenue and other liabilities .............. (309) (33) Due to Genzyme General ................................................ 182 430 -------- ------- Net cash used by operating activities ................................. (5,938) (1,394) INVESTING ACTIVITIES: Acquisition of PharmaGenics, Inc. net of acquired cash ...................... - 9 Purchases of investments .................................................... (2,057) - Maturities of investments ................................................... 2,539 - Acquisitions of equipment ................................................... (502) - -------- ------- Net cash provided (used) by investing activities ...................... (20) 9 FINANCING ACTIVITIES: Allocation of debt from Genzyme General ..................................... - 5,000 Repayments of debt and leases ............................................... (5,018) Parent company investment, Genzyme General .................................. - 1,394 Other ....................................................................... 98 - -------- ------- Net cash provided (used) by financing activities ...................... (4,920) 6,394 -------- ------- Increase (decrease) in cash and cash equivalents ............................... (10,878) 5,009 Cash and cash equivalents at beginning of period ............................... 15,010 - -------- ------- Cash and cash equivalents at end of period ..................................... $ 4,132 $ 5,009 ======== =======
The accompanying notes are an integral part of these unaudited, combined financial statements. -17- 18 GENZYME MOLECULAR ONCOLOGY NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION These unaudited, combined financial statements should be read in conjunction with the 1997 Genzyme 10-K/A and the financial statements and footnotes for both GMO and Genzyme 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 rules and regulations of the Securities and Exchange Commission. Certain items in the 1997 financial statements have been reclassified to conform with the 1998 presentation. The financial statements for the three and six months ended June 30, 1998 and 1997 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. FINANCIAL INFORMATION Financial information specific to GMO is presented in these GMO unaudited, combined financial statements. Accounting policies and financial information relevant to Genzyme, Genzyme General, GTR and GMO, collectively, are presented in the Unaudited, Consolidated Financial Statements of Genzyme. 3. NEW ACCOUNTING PRONOUNCEMENTS For a discussion of new accounting pronouncements, see Note 2., "New Accounting Pronouncements," to the Unaudited, Consolidated Financial Statements, which is incorporated herein by reference. 4. REVOLVING CREDIT FACILITY In March 1998, GMO repaid the full $5.0 million allocated to it under the Revolving Credit Facility. See Note 4., "Revolving Credit Facility," to the Unaudited, Consolidated Financial Statements, which is incorporated herein by reference. 5. DUE TO JOINT VENTURE Pursuant to the funding commitment provided in the Collaboration Agreement relating to StressGen/Genzyme LLC, the joint venture between GMO, StressGen Biotechnologies Corporation ("StressGen") and the Canadian Medical Discoveries Fund, Inc. ("CMDF"), Genzyme and StressGen are obligated to fund the operations of StressGen/Genzyme LLC in equal portions after the initial $10.0 million (Canadian) of funding of StressGen/Genzyme LLC has been expended. As a result of this funding commitment, GMO records 50% of the losses of StressGen/Genzyme LLC for financial statement purposes. As of June 30, 1998, GMO's portion of the cumulative losses of StressGen/Genzyme LLC exceeded its initial capital contribution of $0.7 million and GMO has recorded $0.5 million as a noncurrent liability due to the joint venture. 6. REGISTRATION STATEMENT In April 1998, GMO filed with the Securities and Exchange Commission an amended registration statement on Form S-3 (which has not yet become effective) covering the initial public offering of 3,450,000 shares of GMO Stock (including 450,000 shares issuable upon exercise of the underwriters' over-allotment option). 7. NET LOSS PER SHARE Note 6., "Net Income (Loss) Per Share," to the Unaudited, Consolidated Financial Statements is incorporated herein by reference. -18- 19 GENZYME MOLECULAR ONCOLOGY NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS 8. COMPREHENSIVE INCOME Effective January 1, 1998, GMO adopted SFAS 130, which establishes standards for reporting and displaying comprehensive income and its components in a set of financial statements. SFAS 130 requires that all items recognized under accounting standards as components of comprehensive earnings be reported on one of the following: a statement of income and comprehensive income or a statement of stockholders' equity. Components of comprehensive income are net income and all other non-owner changes in equity such as the change in the cumulative translation adjustment. Presentation of comprehensive income for earlier periods is provided for comparative purposes. Genzyme presents such information related to GMO in its statement of stockholders' equity on an annual basis and in a footnote in its quarterly reports. Comprehensive loss for GMO for the three and six months ended June 30, 1998 and 1997 is as follows (in thousands):
Three Months Ended Six Months Ended June 30, June 30, --------------------- --------------------- 1998 1997 1998 1997 ------- ------- -------- ------- Net loss..................................... $(7,447) $(8,392) $(13,987) $(9,019) Unrealized gain (loss) on investments........ 2 - 7 - ------- ------- -------- ------- Comprehensive loss........................... $(7,445) $(8,392) $(13,980) $(9,019) ======= ======= ======== =======
-19- 20 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(UNAUDITED, AMOUNTS IN THOUSANDS) JUNE 30, DECEMBER 31, - ---------------------------------------------------------------------------------------------------------------- 1998 1997 ---------- ---------- ASSETS Current assets: Cash and cash equivalents ..................................................... $ 306,296 $ 102,406 Short-term investments ........................................................ 43,722 51,259 Accounts receivable, net....................................................... 137,749 118,277 Inventories ................................................................... 135,788 139,681 Prepaid expenses and other current assets ..................................... 20,074 17,361 Deferred tax assets - current ................................................. 27,973 27,601 ---------- ---------- Total current assets ........................................................ 671,602 456,585 Property, plant and equipment, net ............................................... 385,409 385,348 Long-term investments ............................................................ 159,490 92,676 Intangibles, net of accumulated amortization ..................................... 266,849 271,275 Deferred tax assets - noncurrent ................................................. 30,844 29,479 Investment in equity securities .................................................. 26,730 30,047 Other ............................................................................ 34,013 30,043 ---------- ---------- Total assets ................................................................ $1,574,937 $1,295,453 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable .............................................................. $ 18,012 $ 19,787 Accrued expenses .............................................................. 71,065 72,103 Income taxes payable .......................................................... 21,729 11,168 Deferred revenue .............................................................. 1,103 1,800 Current portion of long-term debt and capital lease obligations ............... 20,796 905 ---------- ---------- Total current liabilities ................................................... 132,705 105,763 Long-term debt and capital lease obligations ..................................... 103,167 140,978 Convertible debentures ........................................................... 282,759 29,298 Other ............................................................................ 8,981 7,364 ---------- ---------- Total liabilities ........................................................... 527,612 283,403 Stockholders' equity: Preferred Stock................................................................ - - Genzyme General Division Common Stock, $.01 par value ......................... 787 777 Genzyme Tissue Repair Division Common Stock, $.01 par value ................... 203 199 Genzyme Molecular Oncology Division Common Stock, $.01 par value .............. 39 39 Treasury Stock - at cost ...................................................... (901) (901) Additional paid-in capital - Genzyme General .................................. 911,403 895,340 Additional paid-in capital - Genzyme Tissue Repair ............................ 172,477 170,430 Additional paid-in capital - Genzyme Molecular Oncology ....................... 34,573 34,517 Accumulated deficit ........................................................... (55,466) (76,346) Foreign currency translation adjustments ...................................... (12,605) (12,449) Unrealized net gains (losses) on investments .................................. (3,185) 444 ---------- ---------- Total stockholders' equity .................................................. 1,047,325 1,012,050 ---------- ---------- Total liabilities and stockholders' equity .................................. $1,574,937 $1,295,453 ========== ==========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. -20- 21 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------ (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- Revenues: Net product sales .......................................... $153,807 $131,636 $293,177 $259,792 Net service sales .......................................... 18,627 16,949 36,871 33,692 Revenue from research and development contracts ............ 2,440 1,683 5,377 3,377 -------- -------- -------- -------- Total revenues ......................................... 174,874 150,268 335,425 296,861 Operating costs and expenses: Cost of products sold ...................................... 48,573 45,498 94,923 92,010 Cost of services sold ...................................... 12,425 12,114 24,255 24,286 Selling, general and administrative ........................ 55,907 47,047 108,483 94,373 Research and development ................................... 27,016 21,592 52,567 41,684 Amortization of intangibles ................................ 6,093 3,392 12,065 6,588 Charge for in-process technology ........................... - 7,000 - 7,000 -------- -------- -------- -------- Total operating costs and expenses ....................... 150,014 136,643 292,293 265,941 -------- -------- -------- -------- Operating income ............................................... 24,860 13,625 43,132 30,920 Other income (expenses): Equity in net loss of unconsolidated affiliates ............ (6,318) (2,610) (11,598) (4,269) Gain on affiliate sale of stock ............................ 2,369 - 2,369 - Minority interest .......................................... 860 - 1,724 - Investment income .......................................... 5,287 2,806 8,934 5,310 Interest expense ........................................... (5,156) (2,597) (9,122) (5,255) -------- -------- -------- -------- Total other income (expenses) ........................... (2,958) (2,401) (7,693) (4,214) -------- -------- -------- -------- Income before income taxes ..................................... 21,902 11,224 35,439 26,706 Provision for income taxes ..................................... (8,806) (6,955) (14,559) (13,070) -------- -------- -------- -------- Net income ..................................................... $ 13,096 $ 4,269 $ 20,880 $ 13,636 ======== ======== ======== ========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. -21- 22 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------ (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- Attributable to Genzyme General: Net income ................................................... 24,960 18,755 44,257 35,482 Tax benefit allocated from Genzyme Tissue Repair ............. 3,390 4,327 7,796 8,838 Tax benefit allocated from Genzyme Molecular Oncology ........ 2,850 201 4,085 201 -------- -------- -------- -------- Net income attributable to GGD Stock ......................... $ 31,200 $ 23,283 $ 56,138 $ 44,521 ======== ======== ======== ======== Per Genzyme General common share - basic: Net income ................................................. $ 0.40 $ 0.31 $ 0.72 $ 0.59 ======== ======== ======== ======== Weighted average shares outstanding .......................... 78,524 76,065 78,223 75,856 ======== ======== ======== ======== Per Genzyme General common and common equivalent share - diluted: Net income ................................................. $ 0.39 $ 0.30 $ 0.70 $ 0.57 ======== ======== ======== ======== Adjusted weighted average shares outstanding ................. 80,679 78,130 80,520 78,184 ======== ======== ======== ======== Attributable to Genzyme Tissue Repair: Net loss ..................................................... $(10,455) $(11,389) $(21,775) $(23,260) ======== ======== ======== ======== Per GTR basic and diluted common share: Net loss ................................................... $ (0.52) $ (0.86) $ (1.08) $ (1.76) ======== ======== ======== ======== Weighted average shares outstanding .......................... 20,159 13,238 20,080 13,208 ======== ======== ======== ======== Attributable to Genzyme Molecular Oncology: Net loss ..................................................... $ (7,447) $ (8,392) $(13,987) $ (9,019) ======== ======== ======== ======== Per GMO basic and diluted common share: Net loss ................................................... $(1.90) $ (3.56) ====== ======== Weighted average shares outstanding .......................... 3,929 3,929 ====== ======== Pro forma per GMO basic and diluted common share: Pro forma net loss ......................................... $ (2.14) $ (2.30) ======== ======== Pro forma weighted average shares outstanding ................ 3,929 3,929 ======== ========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. -22- 23 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED (UNAUDITED, AMOUNTS IN THOUSANDS) JUNE 30, - -------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: 1998 1997 --------- --------- Net income ..................................................... $ 20,880 $ 13,636 Reconciliation of net income to net cash provided by operating activities: Depreciation and amortization ............................... 30,274 16,272 Non-cash compensation expense ............................... 165 - Accrued interest/amortization on bonds ...................... (1,818) 578 Non-cash purchase price adjustments ......................... 747 - Provision for bad debts and inventory ....................... 3,393 2,395 Deferred income tax benefit ................................. (1,324) - Equity in net loss of unconsolidated affiliates ............. 11,598 4,269 Gain on affiliate sale of stock ............................. (2,369) - Minority interest in net loss of affiliates ................. (1,724) - Accretion of debt conversion feature ........................ 1,948 407 Purchase of in-process research and development ............. - 7,000 Other ....................................................... 162 579 Increase (decrease) in cash from working capital changes: Accounts receivable ...................................... (23,245) (9,841) Inventories .............................................. 4,290 (12,828) Prepaid expenses and other current assets ................ (2,401) (2,444) Accounts payable, accrued expenses and deferred revenue .. 10,055 (8,903) --------- --------- Net cash provided by operating activities ................ 50,631 11,120 INVESTING ACTIVITIES: Purchases of investments ....................................... (108,104) (25,424) Sales and maturities of investments ............................ 50,676 45,444 Acquisitions of property, plant and equipment .................. (18,148) (16,074) Sale of property, plant and equipment .......................... 623 202 Acquisitions, net of acquired cash and assumed liabilities ..... (8,324) 9 Investment in joint ventures ................................... (7,124) (4,130) Repayment of loans by affiliates ............................... 2,019 - Other .......................................................... (490) (9,982) --------- --------- Net cash used by investing activities .................... (88,872) (9,955) FINANCING ACTIVITIES: Proceeds from issuance of common stock ......................... 18,003 101,936 Proceeds from issuance of debt, net ............................ 243,676 13,000 Payments of debt and capital lease obligations ................. (19,086) (102,798) Other .......................................................... 1,393 - --------- --------- Net cash provided by financing activities ................ 243,986 12,138 Effect of exchange rate changes on cash ............................ (1,855) (1,657) --------- --------- Increase in cash and cash equivalents .............................. 203,890 11,646 Cash and cash equivalents at beginning of period ................... 102,406 93,450 --------- --------- Cash and cash equivalents at end of period ......................... $ 306,296 $ 105,096 ========= =========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. -23- 24 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION These unaudited, combined financial statements should be read in conjunction with the 1997 Genzyme 10-K/A and the financial statements and footnotes for Genzyme 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 rules and regulations of the Securities and Exchange Commission. Certain items in the 1997 financial statements have been reclassified to conform to the 1998 presentation. The financial statements for the three and six months ended June 30, 1998 and 1997 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. NEW ACCOUNTING PRONOUNCEMENTS In April 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-5, "Accounting for the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires all costs of start-up activities (as defined by SOP 98-5) to be expensed as incurred. Genzyme has determined that adoption of SOP 98-5 will not have a material impact on its consolidated financial statements. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as "derivatives"), and for hedging activities. SFAS 133 requires companies to recognize all derivatives as either assets or liabilities, with the instruments measured at fair value. The accounting for changes in fair value, gains or losses, depends on the intended use of the derivative and its resulting designation. The statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Genzyme will adopt SFAS 133 by January 1, 2000. Genzyme is evaluating SFAS 133 to determine its impact on its consolidated financial statements. 3. INVENTORIES (IN THOUSANDS) June 30, 1998 December 31, 1997 ------------- ----------------- Raw materials.................. $ 49,566 $ 48,392 Work-in-process................ 30,557 31,994 Finished products.............. 55,665 59,295 -------- -------- Total............... $135,788 $139,681 ======== ======== 4. 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. In March 1998, GMO repaid the full $5.0 million of borrowings allocated to it under the Revolving Credit Facility and in June 1998, Genzyme General repaid $13.0 million of borrowings allocated to it under this facility. As of June 30, 1998, the Company had $100.0 million of debt outstanding under the Revolving Credit Facility, $82.0 million of which was allocated to Genzyme General and $18.0 million of which was allocated to GTR. -24- 25 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS 5. 5.25% CONVERTIBLE SUBORDINATED NOTES In May 1998, Genzyme completed the private placement of the GGD Notes. The GGD Notes bear interest at 5.25% per annum and interest is payable semi-annually on June 1 and December 1 of each year, commencing on December 1, 1998. The GGD Notes are convertible, at any time at or before maturity (unless previously redeemed), into shares of GGD Stock at a conversion price of $39.60 per share, subject to adjustment in certain events. The GGD Notes may not be redeemed prior to June 10, 2001 and are redeemable, subject to certain subordination provisions, on such date and thereafter at the option of Genzyme, as a whole or from time to time in part, at the following prices (expressed as percentages of the principal amount) plus accrued interest to, but not including, the redemption date: 102.63% if redeemed on or before May 31, 2002, 101.75% if redeemed between June 1, 2002 and May 31, 2003; 100.88% if redeemed between June 1, 2003 and May 31, 2004; and 100% if redeemed on or after June 1, 2004. 6. NET INCOME (LOSS) PER SHARE The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
Three Months Ended Six Months Ended June 30, June 30, --------------------- --------------------- 1998 1997 1998 1997 ------- ------- ------- ------- GENZYME GENERAL: Net income attributable to GGD Stock-basic and diluted ...... $31,200 $23,283 $56,138 $44,521 ======= ======= ======= ======= Shares used in net income per common share-basic ............ 78,524 76,065 78,223 75,856 Effect of dilutive securities: Employee and director stock options ...................... 2,152 2,060 2,291 2,320 Warrants ................................................. 3 5 6 8 ------- ------- ------- ------- Dilutive potential common shares ............................ 2,155 2,065 2,297 2,328 ------- ------- ------- ------- Shares used in net income per common share-diluted .......... 80,679 78,130 80,520 78,184 ======= ======= ======= ======= Net income per common share - basic ......................... $ 0.40 $ 0.31 $ 0.72 $ 0.59 ======= ======= ======= ======= Net income per common share - diluted ....................... $ 0.39 $ 0.30 $ 0.70 $ 0.57 ======= ======= ======= =======
Certain securities were not included in the computation of Genzyme General's diluted earnings per share for the three and six months ended June 30, 1998 and 1997. For the three months ended June 30, 1998 and 1997, such securities include options to purchase 3,829,926 and 5,173,854 shares of GGD Stock, respectively, outstanding during the periods then ended but with exercise prices greater than the average market price of GGD Stock during each respective period. For the three months ended June 30, 1998 such securities also include (i) warrants to purchase 80,000 shares of GGD Stock exercisable as of June 30, 1998 with an exercise price greater than the average market price of GGD Stock during the three months ended June 30, 1998, and (ii) 6,313,131 shares of GGD -25- 26 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS 6. NET INCOME (LOSS) PER SHARE (CONTINUED) Stock reserved in May 1998 for issuance upon conversion of the GGD Notes which were not included in the computation because inclusion of such shares would have an anti-dilutive effect on Genzyme General's net income per share. For the six months ended June 30, 1998 and 1997, such securities include options to purchase 3,844,830 and 4,633,768 shares of GGD Stock, respectively, outstanding during the periods then ended but with exercise prices greater than the average market price of GGD Stock during each respective period. For the six months ended June 30, 1998, such securities also include (i) warrants to purchase 80,000 shares of GGD Stock exercisable as of June 30, 1998 with an exercise price greater than the average market price of GGD Stock during the six months ended June 30, 1998; and (ii) 6,313,131 shares of GGD Stock reserved in May 1998 for issuance upon conversion of the GGD Notes which were not included in the calculation because inclusion of such shares would have an anti-dilutive effect on Genzyme General's net income per share. GTR: Basic net loss per GTR common share is the same as diluted net loss per GTR common share for each of the three and six months ended June 30, 1998 and 1997. Certain securities were not included in the computation of GTR's diluted earnings per share for each of these periods because they would have an anti-dilutive effect due to GTR's net loss for the relevant period. For the three months ended June 30, 1998 and 1997, these securities include: (i) options to purchase 3,244,098 and 2,382,203 shares, respectively, of GTR Stock; (ii) 822,508 and 3,142,921 GTR Designated Shares, respectively; and (iii) 2,577,245 shares of GTR Stock reserved for issuance upon conversion of a 5% convertible note due February 27, 2000 (the "GTR Note"). For the six months ended June 30, 1998 and 1997, these securities include: (i) options to purchase 2,977,643 and 2,438,621 shares, respectively, of GTR Stock; (ii) 828,141 and 2,550,611 GTR Designated Shares, respectively; and (iii) 2,577,245 shares of GTR Stock reserved for issuance upon conversion of the GTR Note. GMO: Historical loss per share information is presented for GMO for the three and six months ended June 30, 1998 but is omitted for the three and six months ended June 30, 1997 as there were no shares of GMO Stock outstanding prior to June 18, 1997. Pro forma net loss per share is disclosed for GMO for the three and six months ended June 30, 1997. The pro forma shares outstanding represent the shares issued to effect the merger of PharmaGenics, Inc. ("PharmaGenics") with and into Genzyme in June 1997. Basic net loss per GMO common share is the same as diluted net loss per GMO common share for the three and six months ended June 30, 1998. Pro forma basic net loss per Genzyme Molecular Oncology common share is the same as pro forma diluted net loss per share for the three and six months ended June 30, 1997. Certain securities were not included in the computation of GMO's diluted or pro forma diluted earnings per share for each of these periods because they would have an anti-dilutive effect due to GMO's net loss for the relevant period. These securities include for the three months ended June 30, 1998: (i) options to purchase 1,176,749 shares of GMO Stock; (ii) warrants to purchase 9,563 shares of GMO Stock at $8.04 per share; (iii) 3,475,915 shares of GMO Stock reserved for issuance upon conversion of a 6% convertible note due August 28, 2002 (the "GMO Debentures"); and (iv) 6,000,000 shares of GMO Stock which are not outstanding but are issuable for the benefit of Genzyme General or its stockholders ("GMO Designated Shares"). For the six months ended June 30, 1998 and 1997, these securities include: (i) options to purchase 1,023,527 shares of GMO Stock; (ii) warrants to purchase 9,563 shares of GMO Stock at $8.04 per share; (iii) 3,475,915 shares of GMO Stock reserved for issuance upon conversion of the GMO Debentures; and (iv) 6,000,000 GMO Designated Shares. -26- 27 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS 7. COMPREHENSIVE INCOME Effective January 1, 1998, Genzyme adopted SFAS 130, which establishes standards for reporting and displaying comprehensive income and its components in a set of financial statements. SFAS 130 requires that all items recognized under accounting standards as components of comprehensive earnings be reported on one of the following: a statement of income and comprehensive income, a statement of comprehensive income or a statement of stockholders' equity. Components of comprehensive income are net income and all other non-owner changes in equity such as the change in the cumulative translation adjustment. Presentation of comprehensive income for earlier periods is provided for comparative purposes. Genzyme presents such information in its statement of stockholders' equity on an annual basis and in a footnote in its quarterly reports. Comprehensive income for the three and six months ended June 30, 1998 and 1997, is as follows (in thousands):
Three Months Ended Six Months Ended June 30, June 30, ------------------------ ------------------------ 1998 1997 1998 1997 -------- -------- -------- -------- Consolidated: Net income ........................................ $ 13,096 $ 4,269 $ 20,880 $ 13,636 Cumulative translation adjustment ................. 542 117 (156) (8,753) Unrealized gain (loss) on investments ............. (4,962) (1,275) (3,630) (1,940) -------- -------- -------- -------- Comprehensive income (loss) ....................... $ 8,676 $ 3,111 $ 17,094 $ 2,943 ======== ======== ======== ======== Genzyme General: Net income ........................................ $ 31,200 $ 23,283 $ 56,138 $ 44,521 Cumulative translation adjustment ................. 542 117 (156) (8,753) Unrealized gain (loss) on investments ............. (4,971) (1,275) (3,644) (1,940) -------- -------- -------- -------- Comprehensive income .............................. $ 26,771 $ 22,125 $ 52,338 $ 33,828 ======== ======== ======== ======== Genzyme Tissue Repair: Net loss .......................................... $(10,455) $(11,389) $(21,775) $(23,260) Unrealized gain (loss) on investments ............. 7 - 7 - -------- -------- -------- -------- Comprehensive loss ................................ $(10,448) $(11,389) $(21,768) $(23,260) ======== ======== ======== ======== Genzyme Molecular Oncology: Net loss .......................................... $ (7,447) $ (8,392) $(13,987) $ (9,019) Unrealized gain (loss) on investments ............. 2 - 7 - -------- -------- -------- -------- Comprehensive loss ................................ $ (7,445) $ (8,392) $(13,980) $ (9,019) ======== ======== ======== ========
8. REGISTRATION STATEMENT In April 1998, GMO filed with the Securities and Exchange Commission an amended registration statement on Form S-3 (which has not yet become effective) covering the initial public offering of 3,450,000 shares of GMO Stock (including 450,000 shares issuable upon the exercise of the underwriters' over-allotment option). 9. SUBSEQUENT EVENTS On July 1, 1998, Genzyme completed the sale of the primary assets of its research products business to TECHNE. The purchase price consisted of $24.8 million in cash, approximately 987,000 shares of TECHNE common stock, and royalties on TECHNE's biotechnology group sales for the next five years. Royalty income will be recorded as earned. On July 17, 1998, Genzyme made an equity investment in Pharming of approximately $14.0 million at NLG 33.33 per share for a total of 852,307 shares of Pharming common stock. The investment will be accounted for under the cost method of accounting. -27- 28 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 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. RESULTS OF OPERATIONS GENZYME CORPORATION REVENUES Total revenues for the three and six months ended June 30, 1998 increased 16% and 13% to $174.9 million and $335.4 million, respectively, from $150.3 million and $296.9 million, respectively, in the corresponding periods of 1997. Product revenues consist solely of sales by Genzyme General. Product revenues for the three months ended June 30, 1998 increased 17% to $153.8 million from $131.6 million in the comparable period of 1997. For the six months ended June 30, 1998, product revenues increased 13% to $293.2 million from $259.8 million in the same period of 1997. The increase during both periods was primarily due to the increased sales of Cerezyme[R] enzyme. Service revenues consist primarily of genetic testing services performed by Genzyme General, sales of GTR's Carticel[TM] autologous cultured chondrocyte ("Carticel[TM] AuCC") and Epicel[SM] services as well as sales of GMO's SAGE[TM] differential gene expression technology ("SAGE[TM]") services. For the three months ended June 30, 1998, service revenues increased 10% to $18.6 million from $16.9 million for the corresponding period of 1997. Service revenues were $36.9 million for the six months ended June 30, 1998, an increase of 9% over service revenues of $33.7 million for the six months ended June 30, 1997. Service sales increased for the three and six months ended June 30, 1998 due primarily to increased sales of both GTR's Carticel[TM] AuCC and Epicel[TM] services and the addition of sales of GMO's SAGE[TM] services in each period, offset in part by slight reductions in genetic testing service revenue in each period. GMO added $0.3 million and $1.2 million of service revenue in the three and six months ended June 30, 1998, respectively, for which there were no comparable amounts in the same periods of 1997. International sales as a percentage of total product and service sales for the three and six months ended June 30, 1998 increased to 41% in each such period from 37% for each of the corresponding periods of 1997. The increases in international sales in these periods are due primarily to increases in the combined international sales of Cerezyme[R] enzyme and Ceredase[R] enzyme of 27% in the three months ended June 30, 1998 and 29% in the six months ended June 30, 1998, as well as increased European sales of Carticel[TM] AuCC. MARGINS AND OPERATING EXPENSES Gross margins for the quarters ended June 30, 1998 and 1997 were 65% and 61%, respectively, and 64% and 60% for the six months ended June 30, 1998 and 1997, respectively, primarily due to increased sales of Cerezyme[R] enzyme. Genzyme provides a broad range of health care products and services, -28- 29 resulting in a range of gross margins depending on the particular market conditions of each product or service. Product margins for both the three and six months ended June 30, 1998 were 68% compared to 65% for each of the same periods of 1997. The increase in product margins in both periods is primarily due to increased sales volume of Cerezyme[R] enzyme. Service margins for the three months ended June 30, 1998 were 33%, as compared to 29% for the three months ended June 30, 1997, and 34% for the six months ended June 30, 1998 as compared to 28% for the corresponding period of 1997. The increase in service margins for the three and six month periods ended June 30, 1998 resulted primarily from increased service margins for GTR attributable to higher sales volume and related efficiencies in the manufacturing process of Carticel[TM] AuCC, the continued consolidation of facilities and services relating to Genzyme General's genetic testing services and the addition of GMO's SAGE[TM] service sales for which there were no comparable amounts in the corresponding periods of 1997. Selling, general and administrative ("SG&A") expenses and amortization of intangibles for the three months ended June 30, 1998 were $62.0 million as compared to $50.4 million for the same period in 1997, an increase of 23%. SG&A expenses and amortization of intangibles for the six months ended June 30, 1998 increased 19% to $120.5 million from $101.0 million in the corresponding period of 1997. The increase for both periods was due primarily to increased staffing in support of the growth in several product lines, and GMO's amortization of intangibles in the three and six months ended June 30, 1998 of $3.0 million and $6.1 million, respectively, for which there were no comparable amounts in the same periods of last year. Research and development expenses for the three months ended June 30, 1998 were $27.0 million compared to $21.6 million for the three months ended June 30, 1997, an increase of 25%, due primarily to additional research and development expenses resulting from (i) the consolidation of the results of ATIII LLC, the joint venture between Genzyme and GTC for the development and commercialization of transgenic recombinant human antithrombin III ("ATIII"), for which there were no comparable amounts in the corresponding period of 1997, and (ii) increased spending on GMO's SAGE[TM] services, gene therapy and drug discovery programs. For the six months ended June 30, 1998, research and development expenses were $52.6 million compared to $41.7 million for the same period of 1997, an increase of 26%, due primarily to additional research and development expenses from the consolidation of the results of ATIII LLC for which there were no comparable amounts in the same period of 1997, increased spending on GMO's SAGE[TM] services, gene therapy and drug discovery programs and increases in GTR's research and development spending. OTHER INCOME AND EXPENSES Other income and expenses for the three months ended June 30, 1998 was a net expense of $3.0 million compared to a net expense of $2.4 million in the three months ended June 30, 1997. The increase is primarily due to increased losses from unconsolidated affiliates. Equity in net loss of Genzyme's unconsolidated affiliates increased from $2.6 million for the three months ended June 30, 1997 to $6.3 million for the three months ended June 30, 1998. The change is primarily due to (i) increased losses from GTC and (ii) Genzyme's portion of the losses resulting from Genzyme's joint venture with GelTex Pharmaceuticals, Inc. ("GelTex") for the development and commercialization of RenaGel[R] non-absorbed phosphate binder ("RenaGel LLC") which was established on June 17, 1997. These losses were offset by a gain of $2.4 million on Genzyme's investment in GTC, due to issuance of GTC's Common Stock, which was recorded in the three months ended June 30, 1998. For the three months ended June 30, 1998, Genzyme recorded minority interest of $0.9 million, representing GTC's portion of the results of ATIII LLC for the period then ended. Other income and expenses for the six months ended June 30, 1998 was a net expense of $7.7 million compared to a net expense of $4.2 million in the six months ended June 30, 1997. The increase is primarily due to increased losses from unconsolidated affiliates. Equity in net loss of Genzyme's unconsolidated affiliates increased from $4.3 million for the six months ended June 30, 1997 to $11.6 million for the six months ended June 30, 1998. The change is primarily due to increased losses from GTC and Genzyme's portion of the losses of RenaGel LLC. These losses were offset in part by a gain of $2.4 million on Genzyme's investment in GTC, due to issuance of GTC's Common Stock, which was recorded in June 1998. For the six months ended June 30, 1998, Genzyme recorded minority interest in the results of ATIII LLC of $1.7 million, representing GTC's portion of the losses of the joint venture for the first six months of 1998. The tax provisions for the three and six months ended June 30, 1998 and 1997 vary from the U.S. statutory tax rate because of the provision for state income taxes, nondeductible interest, the use of a foreign sales corporation to effect overseas sales, nondeductible amortization of intangibles, tax credits and Genzyme's share of the losses of unconsolidated subsidiaries. The effective tax rate increased slightly to 40.2% and 41.1% for the three and six months ended June 30, 1998, respectively, from 38.4% and 38.9%, respectively, for the corresponding period in 1997 due to higher nondeductible intangible amortization and losses from unconsolidated subsidiaries. -29- 30 GENZYME GENERAL REVENUES Total revenues for the three and six months ended June 30, 1998 increased 14% and 11% to $169.0 million and $323.1 million, respectively, from $147.6 million and $292.2 million, respectively, in the corresponding periods of 1997. Product revenues for the three and six months ended June 30, 1998 increased 17% and 13% to $153.8 million and $293.2 million, respectively, from $131.6 million and $259.8 million, respectively, in the comparable periods of 1997. Revenues for the Therapeutics business unit consisted primarily of sales of Cerezyme[R] enzyme and Ceredase[R] enzyme and increased 25% and 24% to $102.5 million and $198.1 million for the three and six months ended June 30, 1998, respectively, from $81.8 million and $160.4 million, respectively, in the corresponding periods in 1997 due to strong international sales and the market launch of Cerezyme[R] enzyme in Japan. Cerezyme[R] enzyme sales accounted for 83% of the combined revenues for the two products during the second quarter of 1998. Combined revenues for Cerezyme[R] enzyme and Ceredase[R] enzyme for the three and six months ended June 30, 1998 were $98.6 million and $192.1 million, respectively, as compared to $80.3 million and $156.7 million, respectively, for the same periods of 1997. Genzyme General's results of operations are highly dependent on these products, which together represented 64% and 66% of product sales for the three and six months ended June 30, 1998, respectively, compared to 61% and 60%, respectively, in the corresponding periods of last year. Revenues for the Surgical Products business unit increased 2% to $29.0 million in the three months ended June 30, 1998 from $28.4 million in the corresponding period of last year due primarily to increased sales of Seprafilm[R] bioresorbable membrane, offset in part by an 18% decrease in sales of fluid management products. During the quarter, Genzyme obtained reimbursement approval from the Japanese Ministry of Health and Welfare for the use of Seprafilm[R] bioresorbable membrane in gynecological surgery. Based on this approval, Genzyme General's marketing partner in Japan, Kaken Pharmaceutical Co., Ltd., can begin selling Seprafilm[R]. In addition, clinical trials in Japan of Seprafilm[R] for use in abdominal surgery are progressing, and Genzyme expects to file for reimbursement approval in Japan for this indication in late 1998 or early 1999. For the six months ended June 30, 1998, Surgical Products' revenues declined 4% to $54.5 million from $57.0 million despite stronger sales of Seprafilm[R] bioresorbable membrane due primarily to a 16% reduction in sales of fluid management products in comparison to the same period of 1997. Revenues for the Diagnostics business unit increased 2% to $31.3 million for the three months ended June 30, 1998 from $30.7 million in the same period of last year. For the six months ending June 30, 1998, Diagnostics' revenues declined to $61.8 million from $62.3 million in the corresponding period of 1997 due primarily to a reduction in genetic testing revenues, offset in part by increased sales of diagnostic products. -30- 31 International sales as a percentage of total product and service sales for the three and six months ended June 30, 1998 increased to 42% in each such period from 37% for each of the corresponding periods of 1997. The increase in international sales for the three and six months ended June 30, 1998 is due primarily to increases in the international sales of Cerezyme[R] enzyme. MARGINS AND OPERATING EXPENSES Gross margins for the quarters ended June 30, 1998 and 1997 were 66% and 63%, respectively, and 65% and 62% for the six months ended June 30, 1998 and 1997, respectively, due primarily to increased Cerezyme[R] enzyme sales. Genzyme General provides a broad range of health care products and services, resulting in a range of gross margins depending on the particular market conditions of each product or service. Product margins for both the three and six months ended June 30, 1998 were 68% compared to 65% for each of the same periods of 1997. The increase in product margins in both periods is primarily due to increased sales volume of Cerezyme[R] enzyme. Genetic testing service margins for the three and six months ended June 30, 1998 increased to 39% and 40%, respectively, in comparison to 37% for both of the corresponding periods of 1997, due primarily to the continued consolidation of facilities and services. SG&A expenses and amortization of intangibles for the three months ended June 30, 1998 were $51.2 million as compared to $44.0 million for the same period in 1997, an increase of 16%. SG&A expenses and amortization of intangibles for the six months ended June 30, 1998 increased 13% to $99.5 million from $88.0 million in the corresponding period of 1997. The increase for both periods was due primarily to increased staffing in support of the growth in several product lines. Research and development expenses for the three months ended June 30, 1998 were $21.1 million compared to $19.0 million for the three months ended June 30, 1997, an increase of 11%, due primarily to $2.5 million of additional research and development expenses resulting from the consolidation of the results of ATIII LLC and for which there were no comparable amounts in the same period of 1997. This increase was partially offset by a decrease in Genzyme General's research and development spending of $0.4 million. For the six months ended June 30, 1998, research and development expenses were $39.5 million compared to $36.3 million for the same period of 1997, an increase of 9%, due primarily to $5.0 million of research and development expenses resulting from the consolidation of the results of ATIII LLC for which there were no comparable amounts in the corresponding period of 1997, offset partially by a decrease in Genzyme General's research and development spending of $1.8 million. OTHER INCOME AND EXPENSES Other income and expenses for the three months ended June 30, 1998 was a net other income of approximately $647,000 compared to net other income of approximately $92,000 in the three months ended June 30, 1997. The increase is primarily due to increased interest income due to higher average cash balances, offset in part by increased losses from unconsolidated affiliates and increased interest expense. Equity in net loss of Genzyme's unconsolidated affiliates increased from $0.8 million in the three months ended June 30, 1997 to $4.1 million for the three months ended June 30, 1998. The change is primarily due to increased losses from GTC and Genzyme's portion of the losses of RenaGel LLC, which was established on June 17, 1997. These losses were offset by a gain on Genzyme General's investment in GTC, due to issuance of GTC's Common Stock, of approximately $2.4 million which was recorded in the three months ended June 30, 1998. Interest expense for the three months ended June 30, 1998 increased to $3.4 million from $1.7 million in the same period of 1997 due to additional interest expense recorded resulting from the issuance of the GGD Notes in May 1998. For the three months ended June 30, 1998, Genzyme recorded minority interest of $0.9 million, representing GTC's portion of the results of ATIII LLC for the period then ended. Other income and expenses for the six months ended June 30, 1998 was a net expense of approximately $464,000 compared to a net other income of approximately $59,000 in the six months ended June 30, 1997. The change is primarily due to increased losses from unconsolidated affiliates and increased interest expense, offset in part by increased interest income due to higher average cash balances. Equity in net loss of Genzyme's unconsolidated affiliates increased from $0.9 million for the six months ended June 30, 1997 to $7.0 million for the six months ended June 30, 1998. The change is primarily due to increased losses from GTC and Genzyme's portion of the losses of RenaGel LLC. These losses were offset by a $2.4 million gain on Genzyme General's investment in GTC, due to issuance of GTC's common stock, -31- 32 which was recorded in the three months ended June 30, 1998. Interest expense for the six months ended June 30, 1998 increased to $5.3 million from $4.0 million in the same period of 1997 due to additional interest expense recorded as a result of the issuance of the GGD Notes in May 1998. For the six months ended June 30, 1998 Genzyme recorded minority interest in the results of ATIII LLC of $1.7 million, representing GTC's portion of the losses of the joint venture for the first six months of 1998. The tax provisions for the three and six months ended June 30, 1998 vary from the U.S. statutory tax rate because of the provision for state income taxes, the use of a foreign sales corporation to effect overseas sales, nondeductible amortization of intangibles, tax credits and Genzyme General's share of the losses of unconsolidated subsidiaries. The effective tax rate for the three months ended June 30, 1998 was 37.9%, a slight decrease from 38.1% for the same period of 1997. For the three months ended June 30, 1998, tax benefits allocated from GTR and GMO of $3.4 million and $2.9 million, respectively, reduced Genzyme General's tax rate to 22.4% and in the corresponding period of 1997, tax benefits allocated from GTR and GMO of $4.3 million and $0.2 million, respectively, reduced Genzyme General's tax rate to 23.1%. The effective tax rate for the six months ended June 30, 1998 increased slightly to 38.6% from 38.4% in the same period of 1997. For the six months ended June 30, 1998, tax benefits allocated from GTR and GMO of $7.8 million and $4.1 million, respectively, reduced Genzyme General's tax rate to 22.1% and in the corresponding period of 1997, tax benefits allocated from GTR and GMO of $8.8 million and $0.2 million, respectively, reduced Genzyme General's tax rate to 22.8%. GENZYME TISSUE REPAIR REVENUES Service revenues for the three and six months ended June 30, 1998 were $4.3 million and $8.0 million, respectively, representing increases of 64% and 71% over the same periods in 1997. Sales of Carticel[TM] AuCC were $2.5 million and $5.0 million for the three and six months ended June 30, 1998 as compared to $1.6 million and $2.7 million for the three and six months ended June 30, 1997, representing increases of 60% and 85%, respectively. The growth in Carticel[TM] AuCC sales is primarily attributable to increased market penetration and the number of orthopedic surgeons trained in the technique as well as an increase in reimbursement and policy coverage by insurance companies following approval by the FDA of GTR's biologics license application in August 1997 for Carticel[TM] AuCC (the "BLA"). Sales of the Epicel[TM] service increased 69% and 53% to $1.8 million and $3.0 million in the three and six months ended June 30, 1998, respectively, from $1.1 million and $1.9 million in the same periods of 1997, in each case due to improvements in marketing and reimbursement efforts. MARGINS AND OPERATING EXPENSES GTR's gross margins for the three and six months ended June 30, 1998 were 13% and 12%, respectively, as compared to the three and six months ended June 30, 1997, when the cost of services sold exceeded revenues by 18% and 29%, respectively. These improvements in service margins are primarily attributable to the higher sales volumes and efficiencies gained in the manufacturing process. SG&A expenses were $6.0 million and $12.3 million for the three and six months ended June 30, 1998, respectively, as compared to $6.2 million and $12.7 million in the comparable periods of last year, representing decreases of 3% in both periods. The decreases are attributable to decreased marketing costs for Carticel[TM] AuCC. GTR incurs direct SG&A charges as well as an SG&A charge, based on actual amounts incurred, from Genzyme General for SG&A work performed by Genzyme General on behalf of GTR. In the three and six months ended June 30, 1998, $1.7 million and $3.4 million, respectively, of SG&A services were provided by Genzyme General as -32- 33 compared to $2.0 million and $4.1 million for the same periods of 1997. These changes were due to decreases in expenses incurred in connection with the marketing of Carticel[TM] AuCC and the costs incurred in the first quarter of 1997 related to filing of the BLA for Carticel[TM] AuCC with the FDA. Research and development expenses for the three and six months ended June 30, 1998 were $2.8 million and $5.9 million, respectively, compared to $2.2 million and $5.0 million in the comparable periods of 1997. The increases were primarily due to spending on Carticel[TM] AuCC. In the three and six months ended June 30, 1998, $2.3 million and $4.5 million, respectively, of research and development services were provided to GTR by Genzyme General, compared to $1.8 million and $3.7 million in the same periods of 1997 due to increased support for the various Carticel[TM] programs. OTHER INCOME AND EXPENSES Interest income was $0.2 million for both the three months ended June 30, 1998 and June 30, 1997 and increased to $0.7 million for the six months ended June 30, 1998 from $0.4 million for the same period of 1997. These increases were due primarily to higher average cash balances during the first quarter of 1998. Interest expense was $0.7 million and $1.5 million for the three and six months ended June 30, 1998, respectively, as compared to $0.9 million and $1.2 million for the same periods of 1997. The changes in interest expense were the result of interest and accretion of the conversion feature related to the March 1997 addition of $13.0 million of debt from the GTR Note. On October 1, 1996, Diacrin/Genzyme LLC was established as a joint venture between GTR and Diacrin, Inc. to develop and commercialize products and processes using porcine fetal cells for the treatment of Parkinson's disease and Huntington's disease in humans. Under the terms of the joint venture agreement, GTR provided 100% of the initial $10.0 million of the funding requirements and will provide 75% of the next $40.0 million of funding requirements for products to be developed by the joint venture. Thereafter, all costs will be shared equally by the two parties. In the three and six months ending June 30, 1998, GTR provided $1.4 million and $3.4 million, respectively, of funding to, and realized net losses of $1.7 million and $3.6 million, respectively, from the joint venture as compared to funding of $2.3 million and $4.1 million, respectively, and net losses of $1.8 million and $3.4 million, respectively, for the corresponding periods in 1997. The decreased funding is due primarily to the reduction of GTR's funding obligation of the expenses incurred by Diacrin/Genzyme LLC from 100% to 75%. GENZYME MOLECULAR ONCOLOGY REVENUES GMO recorded service revenues of $0.3 million and $1.2 million for the three and six months ended June 30, 1998, respectively. Service revenues consisted of SAGE[TM] service contracts primarily with third parties. GMO also recorded research and development revenues of $1.4 million and $3.3 million in the three and six months ended June 30, 1998, respectively, as compared to no revenues in the corresponding periods in 1997. These revenues consisted of gene therapy research and development contracts with strategic partners and work performed on behalf of StressGen/Genzyme LLC. MARGINS AND OPERATING EXPENSES For the three and six months ended June 30, 1998, GMO recorded cost of revenues of $1.1 million and $2.3 million, respectively. There were no similar amounts in the corresponding periods in 1997. Cost of revenues consisted of work performed related to the development of gene therapies on behalf of StressGen/Genzyme LLC, as well as development efforts attributable to gene therapy and SAGE[TM] contracts with third parties. GMO recorded $2.0 million and $3.2 million of SG&A expenses in the three and six months ended June 30, 1998, respectively, as compared to $0.2 and $0.3 million in the comparable periods in 1997. The increases from 1997 are due primarily to increased administrative support corresponding with the growth of GMO's business in the areas of gene therapy and drug discovery. The increases are also attributable to legal fees related to patents. Research and development expenses incurred by GMO in the three and six months ended June 30, 1998 were $2.2 million and $5.5 million, respectively, compared to $1.0 million and $1.5 million in the same periods of 1997. The increases in research and development costs relate to increases in research personnel and other costs associated with the continued development of GMO's drug discovery, gene therapy, and SAGE[TM] programs. -33- 34 GMO's amortization of intangibles for the three and six months ended June 30, 1998 were $3.0 million and $6.1 million, respectively, as compared to $0.2 million during the same periods in 1997. Amortization of intangibles is attributable to certain intangible assets acquired in connection with the acquisition of PharmaGenics on June 18, 1997. In the second quarter of 1997, GMO recorded a $7.0 million charge resulting from the value assigned to PharmaGenics programs which were still in the developmental stage and for which there was no alternative use. There were no similar amounts in 1998. OTHER INCOME AND EXPENSES Interest income and interest expense were $0.2 million and $1.1 million, respectively, for the three months ended June 30, 1998, and were $0.5 million and $2.3 million, respectively, for the six months ended June 30, 1998. In the comparable periods in 1997, GMO's interest expense was $17,000. The interest income results from higher average cash balances due to the issuance of the GMO Debentures. The interest expense consists of interest and the related accretion of the conversion feature of the GMO Debentures. On July 31, 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. GMO recorded an equity in the loss of StressGen/Genzyme LLC of $0.5 million and $1.0 million in the three and six months ended June 30, 1998, respectively. GMO recorded a tax benefit of $0.7 million and $1.3 million for the three and six months ended June 30, 1998, respectively, from the amortization of the deferred tax liability established upon the acquisition of PharmaGenics. LIQUIDITY AND CAPITAL RESOURCES GENZYME CORPORATION AND SUBSIDIARIES As of June 30, 1998, Genzyme had cash, cash equivalents, and short- and long-term investments of $509.5 million, an increase of $263.2 million from December 31, 1997. Operating and financing activities provided $50.6 million and $244.0 million of cash, respectively, investing activities used $88.9 million and fluctuations in exchange rates caused a reduction in cash of $1.9 million. In the six months ended June 30, 1998, financing activities provided $18.0 million of cash proceeds from the exercise of stock options and $243.7 million from the issuance of debt, net of underwriters' fees and debt offering costs of approximately $6.3 million, and used $19.1 million for the repayment of debt and capital lease obligations. At June 30, 1998, $100.0 million was outstanding under the Revolving Credit Facility, of which $82.0 million was allocated to Genzyme General and $18.0 million was allocated to GTR. In the six months ended June 30, 1998, investing activities provided $2.0 million of cash from the repayment of loans by affiliates and $0.6 million from the sale of property, plant and equipment. Investing activities used $57.4 million of cash for the investment portfolio; $18.1 million of cash to fund capital expenditures; $7.1 million of cash to fund Genzyme's investments in joint ventures; $8.3 million of cash to fund acquisitions for the Diagnostics business unit's genetic testing services group; and $0.5 million to fund other noncurrent assets. In May 1998, Genzyme completed the private placement of the GGD Notes resulting in net proceeds (after giving effect to the initial purchasers' discount and offering costs) to Genzyme of $243.7 million. The GGD Notes bear interest at 5.25% per annum and interest is payable semi-annually on June 1 and December 1 of each year, commencing on December 1, 1998. The GGD Notes are convertible, at any time at or before maturity (unless previously redeemed) into shares of GGD Stock at a conversion price of $39.60 per share, subject to adjustment in certain events. The GGD Notes may not be redeemed prior to June 10, 2001 and are redeemable, subject to certain subordination provisions, on such date and thereafter at the option of Genzyme, as a whole or from time to time in part, at the following prices (expressed as percentages of the principal amount) plus accrued interest to, but not including, the redemption date: 102.63% if redeemed on or before May 31, 2002; 101.75% if redeemed between June 1, 2002 and May 31, 2003; 100.88% if redeemed between June 1, 2003 and May 31, 2004; and 100% if redeemed on or after June 1, 2004. GENZYME GENERAL As of June 30, 1998, Genzyme had cash, cash equivalents, and short- and long-term investments of $471.2 million, an increase of $278.0 million from December 31, 1997. Operating and financing activities provided $74.0 million and $247.7 million of cash, respectively, investing activities used $109.4 million and fluctuations in exchange rates caused a reduction in cash of $1.9 million. In the six months ended June 30, 1998, financing activities provided -34- 35 $16.7 million of cash proceeds from the exercise of stock options and $243.7 million from the issuance of the GGD Notes, net of underwriters' fees and debt offering costs of approximately $6.3 million, and used $14.1 million for the repayment of debt and capital lease obligations. At June 30, 1998, $82.0 million of funds allocated to Genzyme General under the Revolving Credit Facility remained outstanding. In the six months ended June 30, 1998, investing activities provided $2.0 million of cash from the repayment of loans by affiliates and $0.6 million from the sale of property, plant and equipment. Investing activities used a net of $65.4 million of cash for the investment portfolio; $34.0 million of cash to fund capital expenditures; $3.7 million of cash to fund Genzyme's investments in joint ventures; $8.3 million of cash to fund acquisitions for the Diagnostics business unit's genetic testing services group; and $0.5 million to fund other noncurrent assets. In May 1998, the GGD Notes and related cash proceeds, net of approximately $6.3 million of underwriters' fees and debt offering costs were allocated to Genzyme General. In June 1998, the Genzyme Board increased the amount of the equity line of credit available from Genzyme General to GTR from $13.0 million to $50.0 million. Under the terms of the equity line, GTR may draw down funds as needed on a quarterly basis in exchange for GTR Designated Shares. Management of Genzyme General believes that its available cash, investments and cash flow from 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 Seprafilm[R] bioresorbable membrane in the United States and Europe and developing other products on behalf of a joint venture between Genzyme and Genzyme Development Partners, L.P. ("GDP"), and for 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 Genzyme exercises its option to acquire the partnership interests in GDP using cash to pay some or all of the exercise price. In addition to these commitments, Genzyme historically has pursued strategic acquisitions and collaborations with complementary businesses as opportunities become available and expects to seek additional acquisitions and collaborations in the future. Further, to the extent the liabilities or contingencies of GTR and GMO affect Genzyme's resources or financial condition, such liabilities or contingencies could affect the financial condition or results of operations of Genzyme General. As a result of the foregoing, Genzyme may have to obtain additional financing. There can be no assurance that such financing will be available on terms reasonably acceptable to Genzyme, if at all. GENZYME TISSUE REPAIR As of June 30, 1998, GTR had cash, cash equivalents and short-term investments of $28.5 million, a decline of $3.4 million from December 31, 1997. In the six months ended June 30, 1998, GTR used $17.5 million of cash for operations. Investing activities provided $20.6 million of cash which consisted of $16.5 million from the transfer of property to Genzyme General and $7.5 million from the sale and maturity of investments, offset by $3.4 million used to fund GTR's investment in Diacrin/Genzyme LLC. Financing activities provided $1.2 million of cash which included $1.3 million of cash proceeds from employee stock plans. As of June 30, 1998, $18.0 million of funds allocated to GTR in December 1996 under the Revolving Credit Facility remained outstanding. Management of GTR believes its available cash and investments will be sufficient to finance planned operations and capital requirements through 1998. In June 1998, the Genzyme Board increased the amount of the equity line of credit available from Genzyme General to GTR from $13.0 million to $50.0 million. Under the terms of the equity line, GTR may draw down funds as needed on a quarterly basis in exchange for GTR Designated Shares. The rate of exchange will be determined by dividing the draw down amount by the average market value of a share of GTR Stock during the 20 trading days prior to the date the funding is drawn down. Management of GTR does not anticipate that it will need to draw down funds from the equity line until 1999. GTR may need to raise significant additional capital in order to continue operations at current levels beyond 1999. GTR's plans to raise additional capital include the consideration of the sale of additional equity securities, additional borrowings, strategic alliances with third parties to fund further development and marketing of Carticel(TM) AuCC and TGF[beta-2] for the treatment of chronic skin ulcers and other business transactions that would generate capital resources to assure continuation of GTR's operations and research programs. If these initiatives are not successful, GTR may be required to delay, scale back or eliminate certain of its programs, or to license third parties to commercialize technologies or products that GTR would otherwise undertake itself. -35- 36 GENZYME MOLECULAR ONCOLOGY As of June 30, 1998, GMO had cash, cash equivalents, and short- and long-term investments of $9.8 million, a decrease of $11.4 million from December 31, 1997. GMO used $5.9 million for operations. Financing activities used $4.9 million of cash, which was primarily the repayment of $5.0 million which had been allocated to GMO under the Revolving Credit Facility. GMO also has $5.0 million available under an equity line of credit (the "GMO Equity Line") from Genzyme General. Management of GMO currently believes that existing cash balances, revenues generated from SAGE[TM] agreements, committed research funding from collaborators and cash available for allocation to GMO from Genzyme General pursuant to the GMO Equity Line will enable GMO to maintain its current and planned operations through 1999. In April 1998, GMO filed with the Securities and Exchange Commission an amended registration statement (which has not yet become effective) on Form S-3 covering the initial public offering of 3,450,000 shares of GMO Stock (including 450,000 shares issuable upon exercise of the underwriters' over-allotment option). There can be no assurance, however, that the initial public offering of GMO Stock will be completed. Upon successful completion of the offering, the GMO Equity Line will terminate. Management of GMO anticipates that if the initial public offering is completed, the proceeds from the offering, together with GMO's existing cash balances, revenues from SAGE[TM] agreements and committed research funding from collaborators would be sufficient to fund GMO's operations through the end of 1999. Substantial additional funds will be required to complete development and commercialization of GMO's products and services (other than SAGE[TM] services). In addition, GMO's cash requirements may vary materially from those now planned as a result of numerous factors, including progress of GMO's research and development programs, achievement of milestones under strategic alliance arrangements, the ability of GMO to establish and maintain additional strategic alliances and licensing arrangements, the progress of development efforts of GMO's strategic partners, competing technological and market 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 third parties to commercialize technologies or products that GMO would otherwise undertake itself. YEAR 2000 Many computer systems experience problems handling dates beyond the year 1999. Therefore, some computer hardware and software will need to be modified prior to the year 2000 in order to remain functional. The Company is assessing the internal readiness of its computer systems for handling the year 2000. The Company expects to implement successfully the systems and programming changes necessary to address year 2000 issues, and does not believe that the cost of such actions will have a material effect on the Company's results of operations or financial condition. There can be no assurance, however, that there will not be a delay in, or increased costs associated with, the implementation of such changes, and the Company's inability to implement such changes could have an adverse effect on future results of operations. NEW ACCOUNTING PRONOUNCEMENTS In April 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued SOP 98-5. SOP 98-5 requires all costs of start-up activities (as defined by the SOP) to be expensed as incurred. Genzyme has not assessed the impact of SOP 98-5 on its consolidated financial statements. In June 1998, the Financial Accounting Standards Board issued SFAS 133. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. SFAS 133 requires companies to recognize all derivatives as either assets or liabilities, with the instruments measured at fair value. The accounting for changes in fair value, gains or losses, depends on the intended use of the derivative and its resulting designation. The statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Genzyme will adopt SFAS 133 by January 1, 2000. Genzyme is evaluating SFAS 133 to determine its impact on its consolidated financial statements. SUBSEQUENT EVENTS -- GENZYME GENERAL On July 1, 1998, Genzyme completed the sale of the primary assets of its research products business to TECHNE. The purchase price consisted of $24.8 million in cash, approximately 987,000 shares of TECHNE common stock, and royalties on TECHNE's biotechnology group sales for the next five years. Royalty income will be recorded as earned. On July 17, 1998, Genzyme made an equity investment in Pharming Group N.V., a Dutch publicly traded company, of approximately $14.0 million at NLG 33.33 per share for a total of 852,307 shares of Pharming Group N.V. common stock. The investment will be accounted for under the cost method of accounting. ITEM 3. QUANTITATIVE AND QUALITATIVE ANALYSIS OF MARKET RISK Not applicable. -36- 37 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, JUNE 30, 1998 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS The information concerning the GGD Notes set forth in Part I, Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the second paragraph under the heading "Liquidity and Financial Resources -- Genzyme Corporation and Subsidiaries" is incorporated herein by reference. The GGD Notes were sold to Credit Suisse First Boston, Cowen & Company and Goldman, Sachs & Co. (the "Initial Purchasers"). Genzyme believes that the sale of the GGD Notes to the Initial Purchasers 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 limited number of "qualified institutional buyers" (as defined in Rule 501 of the Act) without general solicitation) and the purchasers' financial status, investment experience and investment intent, as represented to Genzyme. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS I. The Company held an annual meeting of stockholders on May 28, 1998. 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 2001: Nominee ------- Henry E. Blair Number of Votes --------------------------- For Withheld ---------- ---------- GGD 66,238,364 1,235,712 GTR* 5,906,226 67,270 GMO** 207,634 410 ---------- ---------- Total 72,352,224 1,303,392 Nominee ------- Douglas A. Berthiaume Number of Votes --------------------------- For Withheld ---------- ---------- GGD 66,246,393 1,227,683 GTR* 5,907,360 66,135 GMO** 208,044 0 ---------- ---------- Total 72,361,797 1,293,818 b. Proposal to amend the Company's 1990 Employee Stock Purchase Plan (the "1990 ESPP") to increase the number of shares of GGD Stock available for issuance under the 1990 ESPP by 250,000 shares.
Number of Number of Number of Votes Number of Votes for Votes Against Abstaining Broker Non-Votes ---------- ------------- --------------- ---------------- GGD 59,830,581 7,449,759 193,735 - GTR* 5,034,170 907,261 32,065 - GMO** 206,658 876 509 - ---------- --------- ------- Total 65,071,409 8,357,896 226,309 -
---------------- * Represents the actual number of GTR shares voted multiplied by .33 ** Represents the actual number of GMO shares voted multiplied by .25 -37- 38 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, JUNE 30, 1997 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (CONTINUED) c. Proposal to amend the 1990 ESPP to increase the number of shares of GTR Stock available for issuance under the 1990 ESPP by 350,000 shares.
Number of Number of Number of Votes Number of Votes for Votes Against Abstaining Broker Non-Votes ---------- ------------- --------------- ---------------- GGD 60,052,906 7,222,497 198,672 - GTR* 5,136,999 802,094 34,402 - GMO** 206,658 876 509 - ---------- --------- ------- Total 65,396,563 8,025,467 233,583 -
d. Proposal to approve the Company's 1998 Director Stock Option Plan.
Number of Number of Number of Votes Number of Votes for Votes Against Abstaining Broker Non-Votes ---------- ------------- --------------- ---------------- GGD 47,532,455 17,759,999 2,181,621 - GTR* 4,478,395 1,441,784 53,316 - GMO** 205,715 2,195 132 - ---------- ---------- -------- Total 52,216,565 19,203,978 2,235,069 -
---------------- * Represents the actual number of GTR shares voted multiplied by .33 ** Represents the actual number of GMO shares voted multiplied by .25 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 4.1 Indenture, dated as of May 22, 1998, between Genzyme and State Street Bank and Trust Company, as Trustee, including the form of Note. Filed as Exhibit 4.3 to Genzyme's Registration Statement on Form S-3 (File No. 333-59513) and incorporated herein by reference. 4.2 Registration Rights Agreement, dated as of May 19, 1998, among Genzyme, Credit Suisse First Boston Corporation, Goldman, Sachs & Co. and Cowen & Company. Filed as Exhibit 4.4 to Genzyme's Registration Statement on Form S-3 (File No. 333-59513) and incorporated herein by reference. 4.3 Purchase Agreement, dated as of May 19, 1998, among Genzyme, Credit Suisse First Boston Corporation, Goldman, Sachs & Co. and Cowen & Company. Filed as Exhibit 4.5 to Genzyme's Registration Statement on Form S-3 (Filed No. 333-59513) and incorporated herein by reference. 10.1 Second Amendment to Credit Agreement dated as of April 15, 1998 by and among Genzyme and those of its subsidiaries party thereto, Fleet National Bank, as Administrative Agent, BankBoston, as Documentation Agent, and the lenders identified on the signature pages thereto. Filed herewith. 27.1 Financial Data Schedules for Genzyme for the six months ended June 30, 1998 (for EDGAR filing purposes only). Filed herewith. 27.2 Financial Data Schedules for Genzyme for the six months ended June 30, 1997 (for EDGAR filing purposes only). Filed herewith. (b) Report on Form 8-K On May 20, 1998, Genzyme Corporation filed a Current Report on Form 8-K to announce that it had entered into a purchase agreement for a private placement of $250.0 million aggregate principal amount of the GGD Notes. -38- 39 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, JUNE 30, 1998 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, 1998 By: /s/ David J. McLachlan --------------------------------------- David J. McLachlan Duly Authorized Officer and Executive Vice President, Finance; Chief Financial Officer -39- 40 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, JUNE 30, 1998 EXHIBIT INDEX Exhibit No. Description Page No. - ------- ----------- -------- 4.1 Indenture, dated as of May 22, 1998, between Genzyme and State Street Bank and Trust Company, as Trustee, including the form of Note. Filed as Exhibit 4.3 to Genzyme's Registration Statement on Form S-3 (File No. 333-59513) and incorporated herein by reference. 4.2 Registration Rights Agreement, dated as of May 19, 1998, among Genzyme, Credit Suisse First Boston Corporation, Goldman, Sachs & Co. and Cowen & Company. Filed as Exhibit 4.4 to Genzyme's Registration Statement on Form S-3 (File No. 333-59513) and incorporated herein by reference. 4.3 Purchase Agreement, dated as of May 19, 1998, among Genzyme, Credit Suisse First Boston Corporation, Goldman, Sachs & Co. and Cowen & Company. Filed as Exhibit 4.5 to Genzyme's Registration Statement on Form S-3 (Filed No. 333-59513) and incorporated herein by reference. 10.1 Second Amendment to Credit Agreement dated as of April 15, 1998 by and among Genzyme and those of its subsidiaries party thereto, Fleet National Bank as Administrative Agent, BankBoston, as Documentation Agent, and the lenders identified on the signature pages thereto. Filed herewith. 27.1 Financial Data Schedules for Genzyme for the six months ended June 30, 1998 (for EDGAR filing purposes only). Filed herewith. 27.2 Financial Data Schedules for Genzyme for the six months ended June 30, 1997 (for EDGAR filing purposes only). Filed herewith. -40- EX-10.1 2 SECOND AMENDMENT TO CREDIT AGREEMENT 1 EXHIBIT 10.1 SECOND AMENDMENT TO CREDIT AGREEMENT SECOND AMENDMENT to Credit Agreement ("Second Amendment") dated as of April 15, 1998 among and between Genzyme Corporation (the "Company"); each of the Subsidiaries of the Company identified under the caption "Subsidiary Guarantors" on the signature pages hereto; each of the Lenders identified under the caption "Lenders" on the signature pages hereto (each a "Lender" and collectively, the "Lenders"); Fleet National Bank ("Fleet") as administrative agent for the Lenders (the "Administrative Agent"); and BankBoston ("BankBoston") as documentation agent for the Lenders (the "Documentation Agent"). Reference is made to the Credit Agreement dated as of November 14, 1996, as amended, among and between the Company, the Subsidiary Guarantors, the Lenders, the Administrative Agent and the Documentation Agent, pursuant to which the Lenders furnished to the Company a $225,000,000 revolving line of credit. Capitalized terms used in this Second Amendment have the meanings given such terms in the Credit Agreement, as amended hereby, except as provided otherwise herein. The Company has requested that the Credit Agreement be amended to establish the basis for the issuance of subordinated debt by the Company and to amend certain financial covenants. Under Section 12.5 of the Agreement, to be effective, this Second Amendment must be signed by the Company, the Administrative Agent and the Lenders constituting the Required Lenders. 1. Amendment to Section 1.1 - (Certain Defined Terms). Section 1.1 of the Credit Agreement is amended as follows: (a) The following definition of "Capital Stock" is added between the definitions "Capital Lease Obligations" and "Cash Equivalents": "Capital Stock" shall mean capital stock of the Company that does not rank prior, as to the payment of dividends or as to the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of the Company, to shares of capital stock of any other class of the Company. (b) Intentionally omitted. (c) The definition of Consolidated Operating Income is deleted and the following is substituted in place thereof: "Consolidated Operating Income" shall mean, for any period, the Consolidated Net Income of the Company for such period, provided, however, that, to the extent the following items have been included in determining Consolidated Net Income, they shall NOT be considered in computing Consolidated Operating Income: provision for income taxes, interest expense, equity in the operating results of unconsolidated subsidiaries (including partnerships, joint ventures and Affiliates but only to the extent that such results represent noncash, nonoperating 1 2 items) and other non-operating, non-cash items including, but not limited to, write-off of acquired technology or acquired, in-process research and development which, in accordance with GAAP, must be charged to income. Furthermore, all charges arising from the acquisition of Neozyme II Corporation and/or Deknatel Snowden Pencer, Inc. which are included in the determination of Consolidated Net Income for any period shall be excluded from the computation of Consolidated Operating Income whether such charges be of a cash or non-cash nature. (d) The following definition of "Fundamental Change" is added between the definitions "Federal Funds Rate" and "GAAP": "Fundamental Change" shall mean any of the following: (i) a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), becoming the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of Voting Shares of the Company entitled to exercise more than 50% of the total voting power of all outstanding Voting Shares of the Company (including any right to acquire Voting Shares that are not then outstanding of which such person or group is deemed the beneficial owner); or (ii) a change in the Board of Directors in which the individuals who constituted the Board of Directors at the beginning of the two-year period immediately preceding such change (together with any other director whose election by the Board of Directors or whose nomination for election by the shareholders of the Company was approved by a vote of at least two-thirds of the directors then in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the directors then in office; or (iii) any consolidation of the Company with, or merger of the Company into, any other Person, any merger of another Person into the Company, or any sale or transfer of all or substantially all of the assets of the Company to another Person (other than (w) a merger which does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Capital Stock, (x) a merger which is effected solely to change the jurisdiction of incorporation of the Company, (y) any consolidation with or merger of the Company into a Wholly Owned Subsidiary of the Company, or any sale or transfer by the Company of all or substantially all of its assets to one or more of its Wholly Owned Subsidiaries, in any one transaction or a series of transactions, provided, in any such case, that the resulting corporation or each such Wholly Owned Subsidiary assumes the Obligations under the Loan Documents; or (z) a merger or consolidation in which the holders of the Company's Voting Shares immediately prior to such event 2 3 continue to hold more than 50% of the Voting Shares outstanding immediately after such event). (e) The definition of "Net Equity Proceeds" is deleted and the following is substituted in place thereof: "Net Equity Proceeds" shall mean the aggregate amount of all cash payments and the fair market value of any non-cash consideration received by the Company and its Subsidiaries directly or indirectly in connection with any Investment made as a capital contribution to equity to the Company and its Subsidiaries including upon conversion of Subordinated Debt into equity of the Company or any Subsidiary; provided that Net Equity Proceeds shall be net of the amount of any legal expenses, commissions other fees and expenses paid by the Company and its Subsidiaries to any non-Affiliated person in connection with such Investment. (f) The definition of "Person" is deleted and the following is substituted in place thereof: "Person" shall mean any individual, corporation, company, voluntary association, partnership, joint venture, trust, unincorporated organization or government (or any agency, instrumentality or political subdivision thereof) and shall include any syndicate or group which would be deemed to be a "person" under Section 13(d)(3) of the Exchange Act. (g) The definition of "Subordinated Debt" is deleted and the following is substituted in place thereof: "Subordinated Debt" means (1) the Company's $13 million Convertible Note, issued February 28, 1997, (2) the Company's $20 million of Convertible Debentures, issued August 29, 1997, (3) unsecured Indebtedness of the Company or a Subsidiary of the Company in an aggregate principal amount outstanding at any time not in excess of $250,000,000 which, by its terms, is explicitly subordinated to the prior payment in full of the Obligations to at least the following extent: (a) no payments of principal of (or premium, if any) or interest on (or otherwise due in respect of) such Indebtedness may be permitted for so long as any Default or Event of Default in the payment of principal (or premium, if any) or interest on the Loans exists; (b) in the event that any other Default or Event of Default exists, upon notice by the Required Lenders, the Administrative Agent shall have the right to give notice to the Company and the holders of such Indebtedness (or agents therefor) of a payment blockage, and thereafter no payments of principal of (or premium, if any) or interest on (or otherwise due in respect of) such Indebtedness may be made for a period of 179 days from the date of such notice unless, prior to such time, such Default or Event of Default is cured or waived; provided, however, that only one such notice of a payment blockage shall be effective during any 365 consecutive day period and provided, further, that no such other Default or Event of Default that existed upon first delivery of such a notice shall be the basis for a subsequent notice of payment blockage unless such Default or Event of Default shall have been cured or waived for a 3 4 period of 180 consecutive days; (c) such Indebtedness may not (i) provide for payments of principal of such Indebtedness at the stated maturity thereof or by way of a sinking fund applicable thereto or by way of any mandatory redemption, defeasance, retirement or repurchase thereof by the Company or any Subsidiary (including any redemption, retirement or repurchase which is contingent upon events or circumstances but not including any exchange, conversion or payment with equity or other Subordinated Debt), in each case prior to the Revolving Credit Commitment Termination Date (without giving effect to any potential extension pursuant to Section 2.9) or (ii) permit redemption or other retirement (including pursuant to an offer to purchase made by the Company or any Subsidiary) of such other Indebtedness at the option of the holder thereof prior to the Revolving Credit Commitment Termination Date (without giving effect to any potential extension pursuant to Section 2.9) other than by conversion to Capital Stock or other equity of the Company or other Subordinated Debt; provided, however, in the case of either (i) or (ii), such Indebtedness may provide for payment prior to the stated maturity of such Indebtedness if any event which causes, or (with the giving of any notice or the lapse of time or both) permits the holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders) to cause such Indebtedness to become due, or to be prepaid (whether by redemption, purchase, offer to purchase or otherwise), prior to its stated maturity would also cause a Default or an Event of Default (subject, however, to the limitations of clauses (a), (b), (d) and (e) hereof); (d) the terms of such Indebtedness shall provide, to the extent not prohibited in the Trust Indenture Act of 1939, as amended, that no action to enforce the payment thereof or to exercise any remedy with respect thereto shall occur unless the holders of such Indebtedness (or agents therefor) give the Administrative Agent notice of such default and thereafter no such enforcement action or exercise of remedies shall occur until 180 days shall have elapsed from the date of such notice without the cure or waiver of such default, provided that such standstill period shall continue for as long as a Default or an Event of Default under clause (a) above exists; provided, further, however, that the restrictions described in this clause (d) shall not apply if the event which gives rise to the right to enforce such payment or exercise such remedy triggers a Default or an Event of Default (subject, however, to the limitations of clauses (a), (b), (c), and (e); and (e) such Indebtedness shall further provide that, upon any bankruptcy, insolvency, liquidation or similar case or proceeding relative to the Company or any of its Subsidiaries, or upon the realization of any amounts by the holders of the Indebtedness (or the agents therefor) resulting from an action under clause (d) above, the Obligations shall first be paid in full to the Administrative Agent or such payment shall have been provided for to the satisfaction of the Required Lenders before any payment or distribution is made to or retained by the holders of the Indebtedness (or the agents therefor), (4) any other Indebtedness of the Company or its Subsidiaries, incurred after the date hereof, containing subordination terms, which are specifically consented to in writing by the Required Lenders and (5) any refinancing of Subordinated Debt incurred pursuant to subsections (1), (2), (3) or (4), in which (x) the principal amount of Subordinated Debt resulting from such refinancing does not exceed the sum of (i) the principal amount of the Subordinated Debt so refinanced plus (ii) customary fees and expenses incurred in connection with such refinancing and (y) the Indebtedness resulting from such refinancing satisfies the criteria for Subordinated Debt hereunder." 4 5 (h) The following definition of "Voting Shares" is added between the definition of "U.S. Person" and "Wholly Owned Subsidiary": "Voting Shares" shall mean all outstanding shares of any class or series (however designated) of Capital Stock entitled to vote generally in the election of members of the Board of Directors of the Company. 2. Amendment to Section 9.9(c). Section 9.9(c) is amended to delete the phrase "ratio of Consolidated Funded Debt to Consolidated EBITDA" as it appears on the second and third lines therein and to insert the phrase "ratio of (a) Consolidated Funded Debt less all cash and Cash Equivalents and Marketable Investments of the Company and its Consolidated Subsidiaries in excess of $125,000,000; to (b) Consolidated EBITDA" in lieu thereof. 3. Amendment to Section 10. Section 10 is amended to add the following subparagraph (l) after subparagraph (k) (which subparagraph (k) also is amended to add the word "or" at the end thereof): "(l) Any Fundamental Change shall occur;" 4. Representations and Warranties. In order to induce the Agents and Lenders to enter into this Second Amendment, the Company makes the following representations and warranties, all of which shall survive the execution and delivery of this Second Amendment: (a) Each of the Company and the Subsidiary Guarantors has all requisite corporate, partnership or other power and authority to execute, deliver and perform its obligations under this Second Amendment and under the Credit Agreement, as amended hereby. This Second Amendment has been duly authorized, executed and delivered by the Company and each Subsidiary Guarantor, and does not conflict with, violate or result in a breach of or require any consent under any applicable law, rule or regulation or any of the terms of the charter or by-laws (or equivalent constitutional documents) of any Obligor, any agreement or instrument to which the Company or any Subsidiary is a party or to which any of them or their Property is bound or to which any of them is subject. This Second Amendment and the Credit Agreement, as amended hereby, constitute the legal, valid and binding obligation of each Obligor enforceable against each Obligor in accordance with its terms. (b) On the date hereof each of the representations and warranties in the Credit Agreement are true, accurate and complete in all material respects. (c) Upon the execution and delivery of this Second Amendment, and the satisfaction of each of the conditions precedent set forth in Section 4 of this Second Amendment, no Default or Event of Default shall exist and be continuing. 5. Conditions Precedent. The agreements contained herein and the amendments contemplated hereby shall become effective on the date (the "Effective Date") when Company, 5 6 the Required Lenders, and the Administrative Agent shall have executed this Second Amendment and when each of the following conditions shall have been fulfilled: (a) Execution of Documents, Etc. This Second Amendment and any other agreements, documents and instruments to be executed and/or delivered in connection herewith (collectively the "Second Amendment Documents") shall have been duly and properly authorized and executed by: the Company, the Administrative Agent, and the Required Lenders and shall be in full force and effect on and as of the Effective Date of this Second Amendment and all representations and warranties of the Company hereunder shall continue to be true, accurate and complete. (b) Proceedings; Receipt of Documents. All requisite corporate action and proceedings of the Company and the Subsidiary Guarantors in connection with the execution and delivery of this Second Amendment and the other Second Amendment Documents shall be satisfactory in form and substance to the Administrative Agent and its counsel, and the Administrative Agent and its counsel shall have received all information and copies of all documents, including without limitation, records of requisite corporate action and proceedings which the Administrative Agent or its counsel may have requested in connection therewith, such documents where requested by the Administrative Agent or its counsel to be certified by appropriate persons or governmental authorities. (c) Material Litigation. There shall be no pending or, to the best knowledge of the Company, threatened litigation with respect to the Company or any Subsidiary Guarantor before any court, arbitrator or governmental or administrative body or agency which challenges or relates to (i) the transactions contemplated hereby or (ii) the Loan Documents. (d) Payment of Amendment Fee. Upon approval by the Required Lenders, the Company shall pay to the Administrative Agent an amendment fee of five basis points on the Revolving Credit Commitment of each of the Lenders that responds either affirmatively or negatively in writing as required by the Administrative Agent's request for approval of this Second Amendment dated April 8, 1998 on or before 9:00 A.M. (E.S.T.) April 15, 1998 (the "Responding Lenders"). This amendment fee shall be paid over by the Administrative Agent only to the Responding Lenders in accordance with their respective Revolving Credit Commitments. 6. Reaffirmation and Ratification of Existing Agreements, Etc. The Company and the Subsidiary Guarantors each: (i) reaffirms and ratifies all the Obligations to the Agents and the Lenders, in respect of the Credit Agreement, as hereby amended, and the other Loan Documents, (ii) certifies that there are no defenses, offsets or counterclaims to such Obligations as of the date hereof, (iii) expressly acknowledges its continuing liability pursuant thereto, and (iv) agrees that each of the Credit Agreement, as amended hereby, and the other Loan Documents shall remain in full force and effect, enforceable against the Company and Subsidiary Guarantors in accordance with its terms. 7. Miscellaneous. 6 7 (a) This Second Amendment may be executed on separate counterparts by the parties hereto, each of which when so executed and delivered shall be an original, but all of which shall constitute one and the same agreement. (b) This Second Amendment and the rights and obligations of the parties hereunder shall be construed in accordance with and be governed by the laws of the Commonwealth of Massachusetts (without giving effect to the conflict of law principles thereof). (c) The headings of the several sections of this Second Amendment are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Second Amendment. (d) This Second Amendment, together with the other Second Amendment Documents, embodies the entire agreement and understanding among the parties relating to the subject matter hereof and supersedes all prior proposals, negotiation, agreements and understandings relating to such subject matter. (e) This Second Amendment, together with the other Second Amendment Documents, shall be deemed to be Loan Documents under the Credit Agreement. (f) EACH OF THE OBLIGORS, THE AGENTS AND THE LENDERS HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS SECOND AMENDMENT, OR THE TRANSACTIONS CONTEMPLATED HEREBY. (g) The Company shall pay on demand the reasonable costs and expenses, including, without limitation, reasonable attorneys' fees and expenses incurred, or which may be incurred by the Agents or the Lenders in connection with the negotiation, documentation, administration and enforcement of this Second Amendment. 7 8 IN WITNESS WHEREOF, this Second Amendment has been duly executed and delivered as a sealed instrument at Boston, Massachusetts as of the date first above written. THE COMPANY: GENZYME CORPORATION By: /s/ David J. McLachlan ----------------------------------- Title: Executive Vice President - Finance SUBSIDIARY GUARANTORS: DEKNATEL SNOWDEN PENCER, INC. By: /s/ David J. McLachlan ----------------------------------- Title: Vice President and Treasurer GENZYME SURGICAL PRODUCTS CORPORATION f/k/a DSP WORLDWIDE, INC. By: /s/ John G. Schulte ----------------------------------- Title: President ALLSTON LANDING LIMITED PARTNERSHIP By: Allston Landing Corporation, its General Partner By: /s/ David J. McLachlan ----------------------------------- Title: Treasurer ADMINISTRATIVE AGENT: FLEET NATIONAL BANK By: /s/ Kimberly Martone ----------------------------------- Title: Vice President DOCUMENTATION AGENT: BANKBOSTON By: /s/ [signature illegible] ------------------------------------ Title: Vice President 8 9 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing Second Amendment to Credit Agreement dated April , 1998. Revolving Credit Commitment: FLEET NATIONAL BANK $35,000,000.00 By: /s/ Kimberly Martone ----------------------------- Title: Vice President [Signature Page to Second Amendment to Credit Agreement dated April , 1998] 10 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing Second Amendment to Credit Agreement dated April , 1998. Revolving Credit Commitment: BANKBOSTON $22,000,000.00 By: /s/ [signature illegible] ----------------------------- Title: Vice President [Signature Page to Second Amendment to Credit Agreement dated April , 1998] 11 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing Second Amendment to Credit Agreement dated April , 1998. Revolving Credit Commitment: BANK OF TOKYO-MITSUBISHI TRUST COMPANY $13,000,000.00 By: /s/ Michael J. Cronin ----------------------------- Title: Vice President [Signature Page to Second Amendment to Credit Agreement dated April , 1998] 12 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing Second Amendment to Credit Agreement dated April , 1998. Revolving Credit Commitment: CREDIT LYONNAIS NEW YORK BRANCH $13,000,000.00 By: ----------------------------- Title: [Signature Page to Second Amendment to Credit Agreement dated April , 1998] 13 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing Second Amendment to Credit Agreement dated April , 1998. Revolving Credit Commitment: THE FUJI BANK, LIMITED, NEW YORK BRANCH $13,000,000.00 By: ----------------------------- Title: [Signature Page to Second Amendment to Credit Agreement dated April , 1998] 14 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing Second Amendment to Credit Agreement dated April , 1998. Revolving Credit Commitment: MELLON BANK, N.A. $13,000,000.00 By: /s/ [signature illegible] ----------------------------- Title: Vice President [Signature Page to Second Amendment to Credit Agreement dated April , 1998] 15 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing Second Amendment to Credit Agreement dated April , 1998. Revolving Credit Commitment: NATIONSBANK, N.A. $13,000,000.00 By: /s/ Michael Sylvester ----------------------------- Title: Vice President [Signature Page to Second Amendment to Credit Agreement dated April , 1998] 16 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing Second Amendment to Credit Agreement dated April , 1998. Revolving Credit Commitment: REPUBLIC NATIONAL BANK OF NEW YORK $13,000,000.00 By: /s/ Theodore R. Koemer ----------------------------- Title: First Vice President By: /s/ Jean-Pierre F. Diels ----------------------------- Title: Executive Vice President [Signature Page to Second Amendment to Credit Agreement dated April , 1998] 17 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing Second Amendment to Credit Agreement dated April , 1998. Revolving Credit Commitment: ABN AMRO BANK N.V. $7,500,000.00 By: /s/ [signature illegible] ----------------------------- Title: Vice President By: /s/ [signature illegible] ----------------------------- Title: Senior Vice President [Signature Page to Second Amendment to Credit Agreement dated April , 1998] 18 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing Second Amendment to Credit Agreement dated April , 1998. Revolving Credit Commitment: BANK LEUMI USA $7,500,000.00 By: /s/ [signature illegible] ----------------------------- Title: Vice President By: /s/ [signature illegible] ----------------------------- Title: Vice President [Signature Page to Second Amendment to Credit Agreement dated April , 1998] 19 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing Second Amendment to Credit Agreement dated April , 1998. Revolving Credit Commitment: THE BANK OF NOVA SCOTIA $7,500,000.00 By: /s/ T.M. Pitcher ----------------------------- Title: Authorized Signatory [Signature Page to Second Amendment to Credit Agreement dated April , 1998] 20 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing Second Amendment to Credit Agreement dated April , 1998. Revolving Credit Commitment: CITIZENS BANK OF MASSACHUSETTS $7,500,000.00 By: /s/ [signature illegible] ----------------------------- Title: Vice President [Signature Page to Second Amendment to Credit Agreement dated April , 1998] 21 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing Second Amendment to Credit Agreement dated April , 1998. Revolving Credit Commitment: CORESTATES BANK, N.A. $7,500,000.00 By: /s/ [signature illegible] ----------------------------- Title: Vice President [Signature Page to Second Amendment to Credit Agreement dated April , 1998] 22 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing Second Amendment to Credit Agreement dated April , 1998. Revolving Credit Commitment: CREDIT SUISSE FIRST BOSTON $7,500,000.00 By: /s/ Robert N. Finnery ----------------------------- Title: Managing Director By: /s/ James P. Moran ----------------------------- Title: Director [Signature Page to Second Amendment to Credit Agreement dated April , 1998] 23 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing Second Amendment to Credit Agreement dated April , 1998. Revolving Credit Commitment: KREDIETBANK, N.V. $7,500,000.00 By: ----------------------------- Title: By: ----------------------------- Title: [Signature Page to Second Amendment to Credit Agreement dated April , 1998] 24 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing Second Amendment to Credit Agreement dated April , 1998. Revolving Credit Commitment: LTCB TRUST CO. $7,500,000.00 By: /s/ [signature illegible] ----------------------------- Title: Senior Vice President [Signature Page to Second Amendment to Credit Agreement dated April , 1998] 25 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing Second Amendment to Credit Agreement dated April , 1998. Revolving Credit Commitment: THE NORTHERN TRUST COMPANY $7,500,000.00 By: /s/ [signature illegible] ----------------------------- Title: Vice President [Signature Page to Second Amendment to Credit Agreement dated April , 1998] 26 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing Second Amendment to Credit Agreement dated April , 1998. Revolving Credit Commitment: THE SAKURA BANK, LIMITED $7,500,000.00 By: /s/ Yasumasa Kikuchi ----------------------------- Title: Senior Vice President [Signature Page to Second Amendment to Credit Agreement dated April , 1998] 27 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing Second Amendment to Credit Agreement dated April , 1998. Revolving Credit Commitment: THE SANWA BANK, LIMITED $7,500,000.00 By: /s/ Takayoshi Futae ----------------------------- Title: Deputy General Manager [Signature Page to Second Amendment to Credit Agreement dated April , 1998] 28 LENDERS: The undersigned Lender, with the Revolving Credit Commitment set forth herein, hereby enters into the foregoing Second Amendment to Credit Agreement dated April , 1998. Revolving Credit Commitment: THE SUMITOMO BANK, LIMITED, NEW YORK BRANCH $7,500,000.00 By: /s/ John C. Kissinger ----------------------------- Title: Joint General Manager [Signature Page to Second Amendment to Credit Agreement dated April , 1998] EX-27.1 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR GENZYME CORPORATION FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND AS OF JUNE 30, 1998 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, 1998. 1,000 U.S. DOLLARS 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 1 306,296 43,722 137,749 21,152 135,788 671,602 515,205 129,796 1,574,937 132,705 0 0 0 1,029 1,046,296 1,574,937 330,048 335,425 94,923 119,178 179,755 3,234 9,122 35,439 14,559 20,880 0 0 0 20,880 0.40 0.39 THE EARNING PER SHARE FIGURES PRESENTED ON THIS SCHEDULE REPRESENT EPS DATA FOR NET INCOME ATTRIBUTABLE TO GENZYME GENERAL DIVISION COMMON STOCK ("GGD STOCK"). GENZYME CORPORATION REPORTS EARNINGS BASED ON ITS THREE TRACKING STOCKS, GGD STOCK, GENZYME TISSUE REPAIR COMMON STOCK ("GTR STOCK") AND GENZYME MOLECULAR ONCOLOGY COMMON STOCK ("GMO STOCK"). THEREFORE, CONSOLIDATED EARNINGS PER SHARE DATA IS NOT APPLICABLE. FOR THE SIX MONTHS ENDED JUNE 30, 1998, GENZYME GENERAL HAD NET INCOME OF $56,138 AND NET INCOME PER SHARE OF GGD STOCK - -- BASIC AND DILUTED OF $0.72 AND $0.70, RESPECTIVELY. NET LOSS FOR GTR FOR THE SIX MONTHS ENDED JUNE 30, 1998, WAS $(21,775) OR $(1.08) PER SHARE OF GTR STOCK - -- BASIC AND DILUTED. NET LOSS FOR GMO FOR THE SIX MONTHS ENDED JUNE 30, 1998, WAS $(13,987) OR $(3.56) PER SHARE OF GMO STOCK -- BASIC AND DILUTED.
EX-27.2 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS RESTATED 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 0.59 0.57 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. Net income per share for GGD Stock has been restated to conform to SFAS 128. Primary and fully diluted net income per share of GGD Stock for the three and six months ended June 30, 1997 was historically reported as $0.30 per share and $0.57 per share. 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. Net loss attributable to GTR Stock for the three and six months ended June 30, 1997, computed to conform to SFAS 128 is the same as net loss per share of GTR Stock for the relevant periods as computed under APB 15 as the inclusion of certain potentially dilutive shares in the dilutive loss per share calculation for each such period would have been anti-dilutive. Net loss attributable to GTR Stock for the three and six months ended June 30, 1997 was $(0.86) per share and $(1.76) per share, respectively. Pro forma net loss attributable to GMO Stock for the three and six months ended June 30, 1997 computed to conform to SFAS 128 is the same as pro forma net loss per share of GMO Stock computed under APB 15 as the inclusion of certain potentially dilutive securities in the pro forma dilutive loss per share calculation for each such period would have bee anti-dilutive. Pro forma net loss attributable to GMO Stock was $(2.14) per share and $(2.30) per share, respectively.
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