<PAGE> 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 March 31, 1996
--------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-14680
--------------------------
GENZYME CORPORATION
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(Exact name of registrant as specified in its charter)
Massachusetts 06-1047163
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Kendall Square, Cambridge, Massachusetts 02139
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(Address of principal executive offices) (Zip Code)
(617) 252-7500
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of each of the issuer's classes of common stock
as of April 30, 1996:
Class Outstanding at April 30,1996:
----- -----------------------------
General Division Common Stock,
$0.01 par value ("General Division Stock") 33,642,444
Tissue Repair Division Common Stock,
$0.01 par value ("TR Stock") 12,572,489
Total number of pages in document - 62
Exhibit index located on page - 33
1
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GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, MARCH 31, 1996
NOTE REGARDING FORWARD-LOOKING STATEMENTS:
This Report on Form 10-Q for Genzyme Corporation (the "Company") contains
forward-looking statements concerning, among other things, the Company's
expected future revenues, operations and expenditures, estimates of the
potential markets for the Company's products and services, assessments of
competitors and potential competitors, projected timetables for the preclinical
and clinical development, regulatory approval and market introduction of the
Company's products and services and estimates of the capacity of manufacturing
and other facilities to support such products and services. All such
forward-looking statements are necessarily only estimates of future results and
the actual results achieved by the Company 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) decisions, and the timing of decisions, made by the
U.S. Food and Drug Administration and other agencies 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, and (vi) the accuracy of
the Company's information concerning the products and resources of competitors
and potential competitors. See also "Factors Affecting Future Operating Results"
under Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company's Annual Report on Form 10-K for the year
ended December 31, 1995.
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GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, MARCH 31, 1996
<TABLE>
TABLE OF CONTENTS
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
- ----------------------------- --------
<S> <C>
ITEM 1. Unaudited Condensed Financial Statements
GENZYME CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations for
the Three Months Ended March 31, 1996 and 1995 .............. 4-5
Condensed Consolidated Balance Sheets as of March 31, 1996
and December 31, 1995 ....................................... 6
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1996 and 1995 .................. 7
Notes to Unaudited Condensed Consolidated Financial
Statements................................................... 8-10
Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................... 11-14
GENZYME GENERAL DIVISION
Condensed Combined Statements of Operations for
the Three Months Ended March 31, 1996 and 1995 .............. 15-16
Condensed Combined Balance Sheets as of March 31,
1996 and December 31, 1995 .................................. 17
Condensed Combined Statements of Cash Flows for the
Three Months Ended March 31, 1996 and 1995 .................. 18
Notes to Unaudited Condensed Combined Financial Statements ... 19-21
Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................... 21-25
GENZYME TISSUE REPAIR DIVISION
Condensed Combined Statements of Operations for
the Three Months Ended March 31, 1996 and 1995 .............. 26
Condensed Combined Balance Sheets as of March 31,
1996 and December 31, 1995 .................................. 27
Condensed Combined Statements of Cash Flows for the
Three Months Ended March 31, 1996 and 1995 .................. 28
Notes to Unaudited Condensed Combined Financial Statements ... 29-30
Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................... 31-32
PART II OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K ............................. 33
Signatures ............................................................ 34
</TABLE>
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GENZYME CORPORATION AND SUBSIDIARIES
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS) THREE MONTHS ENDED MARCH 31,
- -------------------------------------------------------------------------------------------------------
1996 1995
---- ----
<S> <C> <C>
Revenues:
Net product sales ............................... $ 92,815 $ 68,271
Net service sales ............................... 14,621 13,494
Revenues from research and development contracts:
Related parties ............................... 6,043 6,326
Other ......................................... 18 98
--------- ---------
113,497 88,189
Operating costs and expenses:
Cost of products sold ........................... 33,324 25,406
Cost of services sold ........................... 10,653 8,676
Selling, general and administrative ............. 38,572 25,991
Research and development (including research
and development related to contracts) .......... 17,690 16,463
--------- ---------
100,239 76,536
--------- ---------
Operating income ................................... 13,258 11,653
Other income and (expenses):
Minority interest in net loss of subsidiaries ... -- 365
Equity in net loss of unconsolidated affiliate .. (937) (949)
Investment income ............................... 4,492 1,765
Interest expense ................................ (213) (47)
--------- ---------
3,342 1,134
--------- ---------
Income before income taxes ......................... 16,600 12,787
Provision for income taxes ......................... (6,308) (4,731)
--------- ---------
Net income ......................................... $ 10,292 $ 8,056
========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited, condensed,
consolidated financial statements.
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<PAGE> 5
GENZYME CORPORATION AND SUBSIDIARIES
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) THREE MONTHS ENDED MARCH 31
- -------------------------------------------------------------------------
1996 1995
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<S> <C> <C>
ATTRIBUTABLE TO GENZYME GENERAL
DIVISION STOCK:
Net income .............................. $ 15,537 $ 10,371
Tax benefit allocated from Genzyme Tissue
Repair Division ...................... 3,497 1,627
-------- --------
Net income attributable to General
Division Stock ....................... $ 19,034 $ 11,998
======== ========
Per common and common equivalent share:
Net income .............................. $ 0.53 $ 0.43
======== ========
Average shares outstanding .............. 35,691 27,945
======== ========
Per common share assuming full dilution:
Net income .............................. $ 0.51 $ 0.40
======== ========
Average fully diluted shares outstanding 37,096 29,970
======== ========
ATTRIBUTABLE TO GENZYME TISSUE REPAIR
DIVISION STOCK:
Net loss attributable to TR Stock ....... $ (8,742) $ (3,942)
======== ========
Per common share:
Net loss ................................ $ (0.71) $ (0.45)
======== ========
Average shares outstanding .............. 12,246 8,751
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, condensed,
consolidated financial statements.
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<PAGE> 6
GENZYME CORPORATION AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS) MARCH 31, DECEMBER 31,
- -------------------------------------------------------------------------------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ......................... $ 102,446 $ 144,372
Short-term investments ............................ 182,228 112,303
Accounts receivable, less allowance
for doubtful accounts ............................ 86,599 88,959
Inventories ....................................... 59,289 53,042
Prepaid expenses and other current assets ......... 13,066 12,531
Deferred tax assets - current ..................... 7,729 7,729
--------- ---------
Total current assets ............................ 451,357 418,936
Property, plant and equipment, net ................... 345,164 329,423
Other Assets:
Long-term investments ............................. 52,629 69,561
Note receivable - affiliate ....................... 2,651 262
Intangibles, net of accumulated amortization ...... 28,708 29,934
Deferred tax assets - noncurrent .................. 23,645 23,645
Other noncurrent assets ........................... 33,946 33,440
--------- ---------
141,579 156,842
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$ 938,100 $ 905,201
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable .................................. $ 12,969 $ 21,980
Accrued expenses .................................. 40,578 39,418
Income taxes payable .............................. 7,080 1,316
Deferred revenue .................................. 2,244 1,367
Short-term borrowings ............................. 8,000 --
Current portion of long-term debt and capital
lease obligations ................................ 2,362 2,445
--------- ---------
Total current liabilities ....................... 73,233 66,526
Noncurrent Liabilities:
Long-term debt and capital lease obligations ...... 24,286 124,473
Other noncurrent liabilities ...................... 8,784 8,995
--------- ---------
33,070 133,468
Stockholders' Equity:
General Division Stock, $.01 par value ............ 336 312
TR Stock, $.01 par value .......................... 126 121
Treasury Stock - at cost .......................... (882) (882)
Additional paid-in capital ........................ 841,204 725,342
Accumulated deficit ............................... (6,866) (17,158)
Other equity adjustments .......................... (2,121) (1,528)
--------- ---------
831,797 705,207
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$ 938,100 $ 905,201
========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited, condensed,
consolidated financial statements.
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GENZYME CORPORATION AND SUBSIDIARIES
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS) THREE MONTHS ENDED MARCH 31,
- -------------------------------------------------------------------------------------------------------
1996 1995
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income ...................................................... $ 10,292 $ 8,056
Reconciliation of net income to net cash provided
by operating activities:
Depreciation and amortization ................................. 5,669 5,470
Provision for bad debts ....................................... 2,887 1,044
Loss on sale of investments ................................... -- 85
Loss on disposal of fixed assets .............................. 12 8
Accrued interest/amortization on bonds ........................ (1,235) 270
Minority interest in net loss of subsidiaries ................. -- (365)
Equity in net loss of unconsolidated subsidiary ............... 937 949
Other ......................................................... (13) 575
Increase in cash from working capital:
Accounts receivable ......................................... (1,102) 4,429
Inventories ................................................. (6,814) (3,384)
Prepaid expenses and other current assets ................... (631) (463)
Accounts payable, accrued expenses
and deferred revenue ....................................... 944 (4,240)
--------- ---------
Net cash provided by operating activities ................... 10,946 12,434
INVESTING ACTIVITIES:
Investment in unconsolidated affiliate ........................ (339) (4,000)
Loans to affiliate ............................................ (2,804) (1,640)
Purchases of investments ...................................... (73,361) (11,014)
Sales and maturities of investments ........................... 20,566 14,547
Property, plant and equipment ................................. (20,482) (13,224)
Other noncurrent assets ....................................... (36) (372)
--------- ---------
Net cash from investing activities .......................... (76,456) (15,703)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock ........................ 15,508 3,102
Proceeds from issuance of common stock by subsidiary .......... -- 73
Short-term borrowings under bank credit agreement ............. 8,000 --
Issuance of debt .............................................. -- 177
Payments of debt and capital lease obligations ................ (253) (39,204)
--------- ---------
Net cash from financing activities .......................... 23,255 (35,852)
Effect of exchange rate changes on cash ............................ 329 (1,115)
--------- ---------
Increase (decrease) in cash and cash
equivalents ....................................................... (41,926) (40,236)
Cash and cash equivalents, beginning of period ..................... 144,372 63,542
--------- ---------
Cash and cash equivalents, end of period ........................... $ 102,446 $ 23,306
========= =========
Supplemental cash flow information: Cash paid during the period for:
Interest ...................................................... $ 603 $ 1,248
Income taxes .................................................. 345 6,258
</TABLE>
Supplemental Disclosure of Non-Cash Transactions:
Additional investment in unconsolidated affiliate -- Note 6
Conversion of Subordinated Notes -- Note 8
The accompanying notes are an integral part of these unaudited, condensed,
consolidated financial statements.
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<PAGE> 8
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation:
----------------------
These unaudited condensed consolidated financial statements
should be read in conjunction with the Annual Report on Form 10-K of
Genzyme Corporation ("Genzyme" or the "Company") for the fiscal year
ended December 31, 1995 and the financial statements and footnotes
included therein. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant
to the Securities and Exchange Commission rules and regulations.
Certain items in the 1995 financial statements have been reclassified
to conform with the 1996 presentation.
The financial statements for the three months ended March 31, 1996
and 1995 are unaudited but include, in the Company's opinion, all
adjustments (consisting only of normal recurring adjustments) necessary
for a fair presentation of the results for the periods presented.
2. Accounting Policies:
--------------------
The accounting policies underlying the quarterly financial
statements are those set forth in Note A of the financial statements
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
3. Investments:
------------
As of March 31, 1996, the Company's investment portfolio,
consisting primarily of debt securities classified as available for sale,
was adjusted to its market value. As a result, gross unrealized holding
gains of approximately $326,000 and gross unrealized holding losses
totaling approximately $554,000 were recorded as a net decrease to
Stockholders' Equity.
As of March 31, 1996, the carrying values of the Company's
investments in Aronex Pharmaceuticals, Inc. (formerly Argus
Pharmaceuticals, Inc.), Celtrix Pharmaceuticals, Inc., IVF America, Inc.
and North American Biologicals, Inc. (formerly Univax Biologics, Inc.),
included in Other noncurrent assets in the unaudited, combined balance
sheet, were adjusted to their respective market values. Gross unrealized
holding gains of approximately $3,983,000 and gross unrealized holding
losses of approximately $737,000 were recorded as a net increase to
Stockholders' Equity.
<TABLE>
4. Inventories:
------------
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
<S> <C> <C>
Raw materials .......................... $13,269,000 $12,634,000
Work-in-process ........................ 22,655,000 14,821,000
Finished products ...................... 23,365,000 25,587,000
----------- -----------
$59,289,000 $53,042,000
=========== ===========
</TABLE>
5. Provision for Income Taxes:
---------------------------
The tax provision for the quarter ended March 31, 1996 varies from
the U.S. statutory tax rate because of the provision for state income
taxes, Genzyme's share of losses of subsidiaries which generate no
current tax benefit, tax credits and taxes on foreign earnings. The
effective tax rate was 38% for the three months ended March 31, 1996 as
compared to 37% for the corresponding period in 1995.
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<PAGE> 9
6. Additional Investment in Unconsolidated Affiliate:
--------------------------------------------------
In February 1996, Genzyme Transgenics Corporation ("GTC") obtained
a short-term loan in the amount of $950,000 from Genzyme. The loan was
repaid on March 31, 1996 with interest which had been accrued at a rate
of 6 1/2% per annum.
In March 1996, GTC entered into a Convertible Debt and Development
Funding Agreement with Genzyme under which Genzyme agreed to provide a
revolving line of credit in the amount of $10 million and has agreed to
fund development costs of the Antithrombin III ("AT-III") program through
March 31, 1997. Under the agreement, GTC granted to Genzyme co-marketing
rights to AT-III in all territories other than Asia subject to
negotiation and execution of a development and supply agreement between
the parties prior to March 31, 1997. The line of credit provides for
interest at 7% per year and is convertible into GTC's common stock at
GTC's options up to an amount sufficient to maintain GTC's tangible net
worth at the end of each quarter at a level between $4.0 million and $4.2
million or at Genzyme's option at any time for up to the full amount
outstanding. Pursuant to the terms of this agreement, GTC borrowed $2.8
million from Genzyme's General Division in March 1996 and converted
$150,000 of this debt into 26,244 shares of GTC Common Stock on March 31,
1996, which increased Genzyme's ownership in GTC to 47.8%.
7. Short-Term Borrowing Arrangements:
----------------------------------
Genzyme has an available line of credit with a commercial bank of
$15.0 million which may be used by either the General or Tissue Repair
Division. On March 29, 1996, Genzyme Tissue Repair Division ("GTR")
borrowed $8.0 million under this line for a term of 48 days at an
interest rate of approximately 6.05% primarily as short-term financing
for land and buildings, acquired in January 1996, in Framingham,
Massachusetts for $6.8 million, in cash, as part of the planned expansion
of manufacturing capacity for the CARTICEL[SM] Service programs. Such
interim financing will fund the purchase of and required renovations to
these facilities until a suitable long-term financing arrangement can be
secured.
8. Long-Term Debt:
---------------
In March 1996, holders of the Company's 6 3/4% convertible
subordinated notes in the principal amount of $100 million converted such
notes into General Division and TR Stock. Holders of the notes received
18.913 shares of General Division Stock and 2.553 shares of TR Stock in
conversion of each $1,000 note. As a result of the conversion, the
holders forfeited interest which would have been payable by the Company
on April 1, 1996. The carrying amount of the debt, net of unamortized
discount, plus accrued interest of approximately $2,914,000 was credited
to Stockholders' Equity.
9. Equity Incentive Plan:
----------------------
In March 1996, the Board of Directors voted, subject in each case
to the approval of the stockholders, to adopt two amendments to the
Company's 1990 Equity Incentive Plan (the "Equity Plan"). These
amendments would increase the aggregate number of shares of General
Division Stock that may be subject to grants under the Equity Plan from
7,600,000 to 9,900,000 and the aggregate number of shares of TR Stock
that may be subject to grants under the Equity Plan from 2,000,000 to
3,300,000 subject to adjustment for stock splits, stock dividends and
certain transactions affecting the Company's capital stock.
-9-
<PAGE> 10
10. Subsequent Events:
On April 30, 1996, the Company acquired Genetrix Inc., a privately
held genetic testing laboratory based in Phoenix, Arizona, in a tax-free
exchange of General Division Stock. In the aggregate, approximately
690,000 shares of General Division Stock valued at approximately $36.5
million were issued. The acquisition will be accounted for as a purchase.
The excess of the purchase price over the fair market value of the net
assets acquired, approximately $29.1 million will be allocated to
Goodwill to be amortized over 11 years.
On May 3, 1996, Genzyme announced that it was withdrawing its
offer to acquire substantially all of the assets of Genzyme Development
Partners, L.P. (the "Partnership") for shares of Genzyme General Division
Common Stock valued at $93 million at the time the offer was made. The
withdrawal of the offer by Genzyme does not affect the respective rights
and obligations of the Partnership and Genzyme under any of the existing
agreements between the parties. Under the terms of these agreements, the
Joint Venture formed between Genzyme and the Partnership will manufacture
and market the Surgical Products in North America following FDA approval.
The parties have begun negotiations to establish definitive terms for the
operation of the Joint Venture, including the allocation between Genzyme
and the Partnership of profits and losses from the Joint Venture.
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<PAGE> 11
GENZYME CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
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. Forward-looking statements contained in the following
discussion are expectations only and there can be no assurance that actual
results will not materially differ from these expectations. This discussion
should be read in conjunction with the financial statements and related notes of
Genzyme. See also "Factors Affecting Future Operating Results" under Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
RESULTS OF OPERATIONS
Revenue
Total revenues for the three months ended March 31, 1996 were $113.5
million, an increase of 29% over the corresponding period in 1995. Product and
service revenues were $107.4 million, an increase of 31% over the same period
in 1995. Product revenues for the three months ending March 31, 1996 increased
36% to $92.8 million from $68.3 million for the corresponding period in 1995,
reflecting sales increases of 18%, 25% and 226%, respectively, in the
Therapeutic, Diagnostic Product and Pharmaceutical businesses. The increase in
sales of Therapeutic products resulted primarily from increased shipments of
Ceredase[R] and Cerezyme[R] enzyme for which the rate of new patient accruals
more than offset dosage reductions. The General Division's results of
operations are highly dependent on these products which, with combined sales
for the three months ended March 31, 1996 and 1995 of $58.8 million and $49.4
million, respectively, represented 63% and 72%, respectively of product sales.
The increase in Diagnostic Product sales resulted from growth in each of its
businesses, most notably a 95% increase in Direct LDL[TM] test sales. The
substantial increase in Pharmaceutical sales resulted primarily from sales of
Melatonin which commenced in the third quarter of 1995. Service revenues for
the three months ended March 31, 1996 increased 8% to $14.6 million from $13.5
million for the corresponding period in 1995 due to higher unit volume and
pricing changes in the Diagnostic Services business of the General Division, a
22% increase in sales of GTR's Epicel[SM] skin grafts and $469,000 from the
sale of the CARTICEL[SM] Service, GTR's cartilage repair service, which
commenced in the first quarter of 1995.
International sales represented approximately 37% of product sales for
the first quarter of 1996 compared with approximately 42% for the first quarter
of 1995. The decrease occurred despite a 32% increase in the combined
international sales of Ceredase[R]/Cerezyme[R] enzyme due to the effect of
exchange rates.
Revenues from research and development contracts for the three months
ended March 31, 1996 were $6.1 million, as compared to $6.4 million for the
corresponding period in 1995, due primarily to a 6% decrease in Neozyme II
revenue which resulted from a reduction in the external contract expenses
incurred by the General Division on behalf of the Neozyme II development
programs.
-11-
<PAGE> 12
Margins and Operating Expenses
- ------------------------------
Total gross margin for the quarters ended March 31, 1996 and 1995 were
59% and 58%, respectively. The General Division 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
the quarter ended March 31, 1996 increased to 64% from 63% for the same period
in 1995 due primarily to the high volume of Melatonin sales in the first quarter
of 1996 and consistent margins in all other business lines. Service margins for
the three months ended March 31, 1996 decreased to 27% from 36% due to costs
associated with the creation of manufacturing capacity in GTR.
Selling, general and administrative expenses for the three months ended
March 31, 1996 were $38.6 million, an increase of 48% over the same period in
1995. As a percentage of total revenues, selling, general and administrative
expenses were 34% compared to 29% for the corresponding period in 1995. The
General Division's share of these expenses increased to $32.2 million from
$24.2 million for the three months ending March 31, 1996 and 1995,
respectively, or 33%, attributable to increased staffing in support of the
growth in several product lines, most notably in support of the European
introduction of the Surgical Products. GTR's selling, general and
administrative expenses for the three months ended March 31, 1996 and 1995 were
$6.2 million and $1.8 million, respectively, an increase of $4.4 million. This
increase consisted of $2.6 million in increased direct charges for surgeon
training costs and additional staffing related to GTR's CARTICEL[SM] Service,
and a $1.8 million in services provided by the General Division on behalf of
GTR's worldwide marketing efforts.
Research and development expenses for the three months ended March 31,
1996 were $17.7 million, an increase of 7% over the same period in 1995.
General Division research and development costs for the three months ended
March 31, 1996 were $15.3 million, an increase of 12% over the same period in
1995 due to increased spending by the General Division on internal programs,
including the HA Products. GTR's research and development expenses for the
three months ended March 31, 1996 and 1995 were $2.4 million and $2.8 million,
respectively, a decrease of 14%. The decrease in GTR's research and development
expenses resulted from reduced spending on certain programs offset by product
improvement and regulatory expenses in support of GTR's CARTICEL[SM] Service
programs.
Other Income and Expenses
Investment income for the quarter ended March 31, 1996 increased to $4.5
million from $1.8 million for the same period in 1995, due primarily to higher
average cash and investment balances which resulted from GTR's public offering
in September 1995, the General Division's public offering in October 1995 and
the exercise of stock options and warrants.
Interest expense for the quarter ended March 31, 1996 was $0.2 million,
net of capitalized interest on construction in progress of $1.7 million. In
March 1996, holders of the Company's 6 3/4% convertible subordinated
notes in the principal amount of $100 million converted such notes into General
Division and TR Stock. Holders of the notes received 18.913 shares of General
Division Stock and 2.553
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<PAGE> 13
shares of TR Stock in conversion of each $1,000 note. As a result of the
conversion, the holders forfeited interest which would have been payable by the
Company on April 1, 1996. The carrying amount of the debt, net of unamortized
discount, plus accrued interest of approximately $2,914,000 was credited to
Division Equity. Accordingly, interest relating to the Notes declined 24% to
$1.3 million from $1.7 million in the first quarter of 1995, due to the
redemption which was completed in mid-March. The General Division also incurred
interest expense of $0.4 million related to a $21.5 million mortgage note issued
in the second quarter of 1995, $0.1 million related to a deferred liability
established to acquire the remaining shares of a Swiss company acquired, in
part, in July 1994 and the remainder related to interest on capitalized leases.
The tax provision for the quarter ended March 31, 1996 varies from the
U.S. statutory tax rate because of the provision for state income taxes,
Genzyme's share of losses of subsidiaries which generate no current tax benefit,
tax credits and taxes on foreign earnings. The effective tax rate was 38% for
the three months ended March 31, 1996 as compared to 37% for the corresponding
period in 1995.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996, the Company had cash, and cash equivalents and
investments in marketable securities totaling $284.7 million, an increase of
$28.0 million from December 31, 1995. In the first quarter of 1996, the Company
spent $20.5 million on increased manufacturing capacity and loaned an additional
$2.8 million to an unconsolidated affiliate. These expenditures were financed by
operations, $10.9 million, and by the issuance of common stock through exercises
of stock options and warrants, $15.5 million.
As of March 31, 1996, the Company had accounts receivable of $86.6
million, a decrease of $2.4 million from December 31, 1995, due primarily to
accelerated collections. Inventories increased $6.2 million, or 12%, to $59.3
million as of March 31, 1996 as compared to December 31, 1995. The increase was
due primarily to support of increased business operations and, in part, to
exchange rate fluctuations. In March 1996, GTR borrowed $8.0 million against
Genzyme's $15.0 million line of credit with a commercial bank.
Also in February 1996, the General Division renewed its commitment to
continue funding, until February 28, 1997, the development of the HAL[TM]
products on behalf of the Surgical Aids Partnership whose available funds were
fullly expended in the first quarter of 1994.
In March 1996, GTC entered into a Convertible Debt and Development
Funding Agreement with Genzyme under which Genzyme agreed to provide a revolving
line of credit in the amount of $10 million and has agreed to fund development
costs of the Antithrombin III ("AT-III") program through March 31, 1997. Under
the agreement, GTC granted to Genzyme co-marketing rights to AT-III in all
territories other than Asia subject to negotiation and execution of a
development and supply agreement between the parties prior to March 31, 1997.
The line of credit provides for interest at 7% per year and is convertible into
GTC's common stock at GTC's option up to an amount sufficient to maintain GTC's
tangible net worth at the end of each quarter at a level between $4.0 million
and $4.2 million or at Genzyme's option at any time for up to the full amount
outstanding. Pursuant to the terms of this agreement, GTC borrowed $2.8 million
from Genzyme's General Division in March 1996 and converted $150,000 of this
debt into 26,244 shares of GTC Common Stock on March 31, 1996, which increased
Genzyme's ownership in GTC to 47.8%.
-13-
<PAGE> 14
Genzyme expects that its available cash, investments and cash flow from
research contracts and product and service sales will be sufficient to finance
its planned operations and capital requirements for at least the next two years.
Although Genzyme currently has substantial cash resources, it has committed to
utilize a portion of its resources for certain purposes, such as completing
validation of the manufacturing facility in Boston, Massachusetts, completing
its commitment to develop manufacturing capacity sufficient to meet the
requirements for commercialization of the HA Products, the market introduction
of the HA Products, making certain payments to third parties in connection with
strategic collaborations and making the final payment for a company acquired in
1994. In addition, working capital and other capital requirements may change
because of unanticipated changes in business conditions, and such other
considerations as expansion of operations, results of research and development
activities, competitive and technological developments, the timing and costs of
obtaining required regulatory approvals for new products and future acquisitions
of technology and/or product rights. As a result, Genzyme may have to obtain
additional financing. There can be no assurance that such financing will be
available on acceptable terms.
SUBSEQUENT EVENTS
On April 30, 1996, the Company acquired Genetrix Inc., a privately held
genetic testing laboratory based in Phoenix, Arizona, in a tax-free exchange of
General Division Stock. In the aggregate, approximately 690,000 shares of
General Division Stock valued at approximately $36.5 million were issued. The
acquisition was accounted for as a purchase. The excess of the purchase price
over the fair market value of the net assets acquired, approximately $29.1
million will be allocated to Goodwill to be amortized over 11 years.
On May 3, 1996, Genzyme announced that it was withdrawing its offer to
acquire substantially all of the assets of Genzyme Development Partners, L.P.
(the "Partnership") for shares of Genzyme General Division Common Stock valued
at $93 million at the time the offer was made. The withdrawal of the offer by
Genzyme does not affect the respective rights and obligations of the Partnership
and Genzyme under any of the existing agreements between the parties. Under the
terms of these agreements, the Joint Venture formed between Genzyme and the
Partnership will manufacture and market the Surgical Products in North America
following FDA approval. The parties have begun negotiations to establish
definitive terms for the operation of the Joint Venture, including the
allocation between Genzyme and the Partnership of profits and losses from the
Joint Venture.
-14-
<PAGE> 15
GENZYME GENERAL DIVISION
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) THREE MONTHS ENDED MARCH 31,
- -----------------------------------------------------------------------------------------
1996 1995
---- ----
<S> <C> <C>
Revenues:
Net product sales ............................... $ 92,815 $ 68,271
Net service sales ............................... 12,907 12,464
Revenues from research and development contracts:
Related parties ............................... 6,043 6,326
Other ......................................... 18 98
--------- ---------
111,783 87,159
Operating costs and expenses:
Cost of products sold ........................... 33,324 25,406
Cost of services sold ........................... 8,227 7,951
Selling, general and administrative ............. 32,326 24,239
Research and development (including research
and development related to contracts) .......... 15,336 13,649
--------- ---------
89,213 71,245
--------- ---------
Operating income ................................... 22,570 15,914
Other income and (expenses):
Minority interest in net loss of subsidiaries ... -- 365
Equity in net loss of unconsolidated affiliate .. (937) (949)
Investment income ............................... 3,918 1,446
Interest expense ................................ (209) (47)
--------- ---------
2,772 815
--------- ---------
Income before income taxes ......................... 25,342 16,729
Provision for income taxes ......................... (9,805) (6,358)
--------- ---------
Net income ......................................... 15,537 10,371
Tax benefit allocated from Tissue Repair Division .. 3,497 1,627
--------- ---------
Net income attributable to Genzyme General
Division Stock .................................... $ 19,034 $ 11,998
========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited, condensed,
combined financial statements.
-15-
<PAGE> 16
GENZYME GENERAL DIVISION
CONDENSED COMBINED STATEMENTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) THREE MONTHS ENDED MARCH 31,
- ------------------------------------------------------------------------------------------------
1996 1995
---- ----
<S> <C> <C>
Net income attributable to Genzyme
General Division Stock ....................................... $19,034 $11,998
======= =======
Income per General Division common and common equivalent share:
Net income .................................................... $ 0.53 $ 0.43
======= =======
Average shares outstanding .................................... 35,691 27,945
======= =======
Income per General Division Common Share
assuming full dilution:
Net income .................................................... $ 0.51 $ 0.40
======= =======
Average fully diluted shares outstanding ...................... 37,096 29,970
======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited, condensed,
combined financial statements.
-16-
<PAGE> 17
GENZYME GENERAL DIVISION
<TABLE>
COMBINED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS) MARCH 31, DECEMBER 31,
- --------------------------------------------------------------------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .................. $ 74,254 $103,631
Short-term investments ..................... 175,313 105,471
Accounts receivable, less allowance
for doubtful accounts ..................... 84,749 87,121
Inventories ................................ 57,858 52,281
Prepaid expenses and other current assets .. 12,631 12,345
Due from Genzyme Tissue Repair Division .... 991 2,034
Deferred tax assets - current .............. 7,729 7,729
-------- --------
Total current assets ..................... 413,525 370,612
Property, plant and equipment, net ............ 333,310 327,461
Other Assets:
Long-term investments ...................... 52,629 69,561
Note receivable - affiliate ................ 2,651 262
Intangibles, net of accumulated
amortization.............................. 28,708 29,934
Deferred tax assets - noncurrent ........... 23,645 23,645
Other noncurrent assets .................... 33,895 33,111
-------- --------
141,528 156,513
-------- --------
$888,363 $854,586
======== ========
LIABILITIES AND DIVISION EQUITY
Current Liabilities:
Accounts payable ........................... $ 11,600 $ 19,548
Accrued expenses ........................... 39,077 38,069
Income taxes payable ....................... 7,080 1,316
Deferred revenue ........................... 2,244 1,367
Current portion of long-term debt and
capital lease obligations ................. 2,271 2,276
-------- --------
Total current liabilities ................ 62,272 62,576
Noncurrent Liabilities:
Long-term debt and capital lease
obligations............................... 24,286 124,473
Other noncurrent liabilities ............... 8,039 8,256
-------- --------
32,325 132,729
Division equity ............................... 793,766 659,281
-------- --------
$888,363 $854,586
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, condensed,
combined financial statements.
-17-
<PAGE> 18
GENZYME GENERAL DIVISION
<TABLE>
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS) THREE MONTHS ENDED MARCH 31,
- -------------------------------------------------------------------------------------------------------
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ...................................................... $ 19,034 $ 11,998
Reconciliation of net income to net
cash provided by operating activities:
Depreciation and amortization ................................. 5,645 5,320
Provision for bad debts ....................................... 2,501 1,044
Loss on sale of investments ................................... -- 85
Loss on disposal of fixed assets .............................. 12 8
Accrued interest/amortization on bonds ........................ (1,145) 428
Minority interest in net loss of subsidiaries ................. -- (365)
Equity in net loss of unconsolidated subsidiary ............... 937 949
Other ......................................................... (13) 575
Increase (decrease) in cash from working capital:
Accounts receivable ......................................... (704) 3,670
Inventories ................................................. (6,144) (3,375)
Prepaid expenses and other current assets ................... (382) (523)
Accounts payable, accrued expenses
and deferred revenue ....................................... 1,855 (2,178)
Due from Genzyme Tissue Repair Division ..................... 1,044 (2,051)
--------- ---------
Net cash provided by operating activities ................... 22,640 15,585
INVESTING ACTIVITIES:
Investment in unconsolidated affiliate .......................... (339) (4,000)
Loans to affiliate .............................................. (2,804) (1,640)
Purchases of investments ........................................ (70,354) (57)
Sales and maturities of investments ............................. 17,556 6,460
Property, plant and equipment ................................... (10,566) (13,170)
Other noncurrent assets ......................................... (322) (382)
--------- ---------
Net cash provided by investing activities ................... (66,829) (12,789)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock .......................... 14,659 2,920
Proceeds from issuance of common stock by subsidiary ............ -- 73
Issuance of debt ................................................ -- 177
Payments of debt and capital lease obligations .................. (176) (39,110)
--------- ---------
Net cash provided by financing activities ................... 14,483 (35,940)
Effect of exchange rate changes on cash ............................ 329 (1,115)
--------- ---------
Increase (decrease) in cash and cash
equivalents ....................................................... (29,377) (34,259)
Cash and cash equivalents, beginning of period ..................... 103,631 46,549
--------- ---------
Cash and cash equivalents, end of period ........................... $ 74,254 $ 12,290
========= =========
Supplemental cash flow information: Cash paid during the period for:
Interest ........................................................... $ 599 $ 1,248
Income taxes ....................................................... 345 6,258
</TABLE>
Supplemental Disclosure of Non-Cash Transactions:
Additional investment in unconsolidated affiliate -- Note 6
Conversion of Subordinated Notes -- Note 8
The accompanying notes are an integral part of these unaudited, condensed,
combined financial statements.
-18-
<PAGE> 19
GENZYME GENERAL DIVISION
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
1. Basis of Presentation:
----------------------
These unaudited, condensed, combined financial statements should be
read in conjunction with the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995 and the financial statements and
footnotes for Genzyme General Division included therein. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the Securities and
Exchange Commission rules and regulations. Certain items in the 1995
financial statements have been reclassified to conform with the 1996
presentation.
The financial statements for the three months ended March 31, 1996
and 1995 are unaudited but include, in the Company's opinion, all
adjustments (consisting only of normally recurring accruals) necessary
for a fair presentation of the results for the periods presented.
2. Accounting Policies:
--------------------
The accounting policies underlying the quarterly financial statements
are those set forth in Note A of the General Division's financial
statements included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1995.
3. Investments:
------------
As of March 31, 1996, the General Division's investment portfolio,
consisting primarily of debt securities classified as available for sale,
was adjusted to its market value. As a result, gross unrealized holding
gains totaling approximately $326,000 and gross unrealized holding losses
of approximately $542,000 were recorded as a net decrease to Division
equity.
As of March 31, 1996, the carrying values of the General Division's
investments in Aronex Pharmaceuticals, Inc. (formerly Argus
Pharmaceuticals, Inc.), Celtrix Pharmaceuticals, Inc., IVF America, Inc.
and North American Biologicals, Inc. (formerly Univax Biologics, Inc.),
included in Other noncurrent assets in the unaudited, combined balance
sheet, were adjusted to their respective market values. Gross unrealized
holding gains of approximately $3,983,000 and gross unrealized holding
losses of approximately $737,000 were recorded as a net increase to
Division equity.
<TABLE>
4. Inventories:
------------
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
<S> <C> <C>
Raw Materials............ $13,145,000 $12,527,000
Work-in-process.......... 21,348,000 14,167,000
Finished products........ 23,365,000 25,587,000
----------- -----------
$57,858,000 $52,281,000
=========== ===========
</TABLE>
5. Provision for Income Taxes:
---------------------------
The tax provision for the quarter ended March 31, 1996 varies from
the U.S. statutory tax rate because of the provision for state income
taxes, the General Division's share of losses of subsidiaries which
generate no current tax
-19-
<PAGE> 20
benefit, tax credits and taxes on foreign earnings. The effective tax
rate was 38.7% for the three months ended March 31, 1996, a slight
increase over the corresponding period in 1995. The allocated tax benefit
generated by GTR of $3.5 million and $1.6 million, respectively, reduced
the General Division's tax rate for the three months ended March 31, 1996
and 1995 to 24.9% and 28.3%, respectively.
6. Additional Investments in Unconsolidated Affiliate:
---------------------------------------------------
In February 1996, GTC obtained a short-term loan in the amount of
$950,000 from Genzyme's General Division. The loan was repaid on March
31, 1996 with interest which had been accrued at a rate of 6 1/2% per
annum.
In March 1996, GTC entered into a Convertible Debt and Development
Funding Agreement with Genzyme under which Genzyme agreed to provide a
revolving line of credit in the amount of $10 million and has agreed to
fund development costs of the Antithrombin III ("AT-III") program
through March 31, 1997. Under the agreement, GTC granted to the General
Division co-marketing rights to AT-III in all territories other than
Asia subject to negotiation and execution of a development and supply
agreement between the parties prior to March 31, 1997. The line of
credit provides for interest at 7% per year and is convertible into
GTC's common stock at GTC's option up to an amount sufficient to
maintain GTC's tangible net worth at the end of each quarter at a level
between $4.0 million and $4.2 million or by the General Division at any
time for up to the full amount outstanding. Pursuant to the terms of
this agreement, GTC borrowed $2.8 million from the General Division in
March 1996 and converted $150,000 of this debt into 26,244 shares of
GTC Common Stock on March 31, 1996, which increased the General
Division's ownership in GTC to 47.8%.
7. Long-Term Debt:
---------------
In March 1996, holders of the Company's 6 3/4% convertible
subordinated notes in the principal amount of $100 million converted such
notes into General Division and TR Stock. Holders of the notes received
18.913 shares of General Division Stock and 2.553 shares of TR Stock in
conversion of each $1,000 note. As a result of the conversion, the
holders forfeited interest which would have been payable by the Company
on April 1, 1996. The carrying amount of the debt, net of unamortized
discount, plus accrued interest of approximately $2,914,000 was credited
to Division Equity.
8. Equity Incentive Plan:
----------------------
In March 1996, the Board of Directors voted, subject in each case to
the approval of the stockholders, to adopt an amendment to the Company's
1990 Equity Incentive Plan (the "Equity Plan"). This amendment would
increase the aggregate number of shares of General Division Stock that
may be subject to grants under the Equity Plan from 7,600,000 to
9,900,000 subject to adjustment for stock splits, stock dividends and
certain transactions affecting the Company's capital stock.
9. Subsequent Events:
------------------
On April 30, 1996 the General Division acquired Genetrix Inc., a
privately held genetic testing laboratory based in Phoenix, Arizona, in a
tax-free exchange of General Division Stock. In the aggregate,
approximately 690,000 shares of General Division Stock valued at
approximately $36.5 million were issued. The acquisition was accounted
for as a purchase. The excess of the purchase price over the fair market
value of the net assets acquired, approximately $29.1 million will be
allocated to Goodwill to be amortized over 11 years.
-20-
<PAGE> 21
On May 3, 1996, Genzyme announced that it was withdrawing its offer
to acquire substantially all of the assets of Genzyme Development
Partners, L.P. (the "Partnership") for shares of Genzyme General Division
Common Stock valued at $93 million at the time the offer was made.
Genzyme advised the special Committee that its decision to withdraw the
offer was based in part on the prompt action taken by the FDA advisory
panel reviewing the pre-market approval application for Seprafilm[TM].
The speed of the FDA review made it unlikely that Genzyme could account
for the acquisition as a purchase of in-process research and development,
which was a condition to Genzyme's offer. In addition, Genzyme stated
that its decision was also influenced by the decline in the price of
General Division Stock during the negotiations, which increased the
dilutive potential of the offer and reduced the value of the offer to the
Partnership. The withdrawal of the offer by Genzyme does not affect the
respective rights and obligations of the Partnership and Genzyme under
any of the existing agreements between the parties. Under the terms of
these agreements, the Joint Venture formed between Genzyme and the
Partnership will manufacture and market the Surgical Products in North
America following FDA approval. The parties have begun negotiations to
establish definitive terms for the operation of the Joint Venture,
including the allocation between Genzyme and the Partnership of profits
and losses from the Joint Venture.
-21-
<PAGE> 22
GENZYME GENERAL DIVISION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
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. Forward-looking statements contained in the following
discussion are expectations only and there can be no assurance that actual
results will not materially differ from these expectations. This discussion
should be read in conjunction with the financial statements and related notes of
the General Division. See also "Factors Affecting Future Operating Results"
under Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Genzyme's Annual Report on Form 10-K for the year
ended December 31, 1995.
RESULTS OF OPERATIONS
Revenue
Total revenues for the three months ended March 31, 1996 were $111.8
million, an increase of 28% over the corresponding period in 1995. Product and
service revenues were $105.7 million, an increase of 31% over the same period
in 1995. Product revenues for the three months ending March 31, 1996 increased
36% to $92.8 million from $68.3 million for the corresponding period in 1995,
reflecting sales increases of 18%, 25% and 226%, respectively, in the
Therapeutic, Diagnostic Product and Pharmaceutical businesses. The increase in
sales of Therapeutic products resulted primarily from increased shipments of
Ceredase(R) and Cerezyme(R) enzyme for which the rate of new patient accruals
more than offset dosage reductions. The General Division's results of
operations are highly dependent on these products which, with combined sales
for the three months ended March 31, 1996 and 1995 of $58.8 million and $49.4
million, respectively, represented 63% and 72%, respectively of product sales.
The increase in Diagnostic Product sales resulted from growth in each of its
businesses, most notably a 95% increase in Direct LDL [TM] test sales. The
substantial increase in Pharmaceutical sales resulted primarily from sales of
Melatonin which commenced in the third quarter of 1995. Service revenues for
the three months ended March 31, 1996 increased 3% to $12.9 million from $12.5
million for the corresponding period in 1995 due to higher unit volume and
pricing changes in the Diagnostic Services business.
International sales represented approximately 37% of product sales for the
first quarter of 1996 compared with approximately 42% for the first quarter of
1995. The decrease occurred despite a 32% increase in the combined international
sales of Ceredase(R)/Cerezyme[R] enzyme due to the effect of exchange rates.
Revenues from research and development contracts for the three months ended
March 31, 1996 were $6.1 million, as compared to $6.4 million for the
corresponding period in 1995, due primarily to a 6% decrease in Neozyme II
revenue which resulted from a reduction in the external contract expenses
incurred by the General Division on behalf of the Neozyme II development
programs.
Margins and Operating Expenses
Total gross margin for the quarters ended March 31, 1996 and 1995 were 61%
and 59%, respectively. The General Division 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
the
-22-
<PAGE> 23
quarter ended March 31, 1996 increased to 64% from 63% for the same period in
1995 due primarily to the high volume of Melatonin sales in the first quarter of
1996 and consistent margins in all other business lines. Service margins were
36% for the three months ended March 31, 1996 and 1995, respectively.
Selling, general and administrative expenses for the three months ended
March 31, 1996 were $32.3 million, an increase of 33% over the same period in
1995. The increase was due primarily to increased staffing in support of the
growth in several product lines, most notably in support of the European
introduction of the Surgical Products. As a percentage of total revenues,
selling, general and administrative expenses were 29% compared to 28% for the
corresponding period in 1995.
Research and development expenses for the three months ended March 31, 1996
were $15.3 million, an increase of 12% over the same period in 1995 due to
increased spending on internal programs, including the HA Products.
Other Income and Expenses
Investment income for the quarter ended March 31, 1996 increased to $3.9
million from $1.4 million for the same period in 1995, due primarily to higher
average cash and investment balances which resulted from the General Division's
public offering in October 1995 and the exercise of stock options and warrants.
Interest expense for the quarter ended March 31, 1996 was $0.2 million, net
of capitalized interest on construction in progress of $1.7 million. In March
1996, holders of the Company's 6 3/4% convertible subordinated notes in
the principal amount of $100 million converted such notes into General Division
and TR Stock. Holders of the notes received 18.913 shares of General Division
Stock and 2.553 shares of TR Stock in conversion of each $1,000 note. As a
result of the conversion, the holders forfeited interest which would have been
payable by the Company on April 1, 1996. The carrying amount of the debt, net of
unamortized discount, plus accrued interest of approximately $2,914,0000 was
credited to Stockholders' Equity. Accordingly, interest relating to the Notes
declined 24% to $1.3 million from $1.7 million in the first quarter of 1995, due
to the conversion which was completed in mid-March. The General Division also
incurred interest costs of $0.4 million related to a $21.5 million mortgage
note issued in the second quarter of 1995, $0.1 million related to a deferred
liability established to acquire the remaining shares of a Swiss company
acquired, in part, in July 1994 and the remainder related to interest on
capitalized leases.
The tax provision for the quarter ended March 31, 1996 varies from the U.S.
statutory tax rate because of the provision for state income taxes, the General
Division's share of losses of subsidiaries which generate no current tax
benefit, tax credits and taxes on foreign earnings. The effective tax rate was
38.7% for the three months ended March 31, 1996, a slight increase over the
corresponding period in 1995. The allocated tax benefit generated by GTR of $3.5
million and 1.6 million, respectively, reduced the General Division's tax rate
for the three months ended March 31, 1996 and 1995 to 24.9% and 28.3%,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996, the General Division had cash, cash equivalents and
investments in marketable securities totaling $249.6 million, an increase of
$40.5 million from December 31, 1995. In the first quarter of 1996, the General
Division spent $10.6 million on increased manufacturing capacity and loaned
an additional $2.8 million in an unconsolidated affiliate. These expenditures
were financed by operations, $22.6 million, and by the issuance of common stock
through exercises of stock options and warrants, $14.7 million.
As of March 31, 1996, the General Division had accounts receivable of $84.7
million, a decrease of $2.4 million from December 31, 1995, due primarily to
-23-
<PAGE> 24
accelerated collections. Inventories increased $5.6 million, or 11%, to $57.9
million as of March 31, 1996 as compared to December 31, 1995. The increase was
due primarily to support of increased business operations and, in part, to
exchange rate fluctuations.
In February 1996, the General Division renewed its commitment to continue
funding, until February 28, 1997, the development of the HAL(TM) products on
behalf of the Surgical Aids Partnership whose available funds were fully
expended in the first quarter of 1995.
In March 1996, GTC entered into a Convertible Debt and Development
Funding Agreement with Genzyme under which Genzyme agreed to provide a
revolving line of credit in the amount of $10 million and has agreed to fund
development costs of the Antithrombin III ("AT-III") program through March 31,
1997. Under the agreement, GTC granted to the General Division co-marketing
rights to AT-III in all territories other than Asia subject to negotiation and
execution of a development and supply agreement between the parties prior to
March 31, 1997. The line of credit provides for interest at 7% per year and is
convertible into GTC's common stock at GTC's option up to an amount sufficient
to maintain GTC's tangible net worth at the end of each quarter at a level
between $4.0 million and $4.2 million or by the General Division at any time
for up to the full amount outstanding. Pursuant to the terms of this agreement,
GTC borrowed $2.8 million from the General Division in March 1996 and converted
$150,000 of this debt into 26,244 shares of GTC Common Stock on March 31, 1996,
which increased the General Division's interest in GTC to 47.8%.
In March 1996, the Board of Directors voted, subject in each case to the
approval of the stockholders, to adopt two amendments to the Company's 1990
Equity Incentive Plan (the "Equity Plan"). These amendments would increase the
aggregate number of shares of General Division Stock that may be subject to
grants under the Equity Plan from 7,600,000 to 9,900,000 subject to adjustment
for stock splits, stock dividends and certain transactions affecting the
Company's capital stock.
The General Division expects that its available cash, investments and cash
flow from research contracts and product and service sales will be sufficient to
finance its planned operations and capital requirements for at least the next
two years. Although the General Division currently has substantial cash
resources, it has committed to utilize a portion of its resources for certain
purposes, such as completing validation of the manufacturing facility in Boston,
Massachusetts, completing its commitment to develop manufacturing capacity
sufficient to meet the requirements for commercialization of the Surgical Aids
Partnership's products, the market introduction of the HA Products, making
certain payments to third parties in connection with strategic collaborations
and making a final payment for a company acquired in 1994. Genzyme's commitment
to allocate up to $30 million from the General Division to fund the operations
of GTR was substantially eliminated when GTR sold new TR Stock to the public in
September 1995; however, Genzyme retains the right to make voluntary allocations
of up to $30 million from the General Division to the GTR. Such allocation would
result in dilution to holders of TR Stock. In addition, working capital and
other capital requirements may change because of unanticipated changes in
business conditions, and such other considerations as expansion of operations,
results of research and development activities, competitive and technological
developments, the timing and costs of obtaining required regulatory approvals
for new products and future acquisitions of technology and/or product rights. As
a result, the General Division may have to obtain additional financing. There
can be no assurance that such financing will be available on acceptable terms.
-24-
<PAGE> 25
SUBSEQUENT EVENTS
On April 30, 1996, the General Division acquired Genetrix Inc., a privately
held genetic testing laboratory based in Phoenix, Arizona, in a tax-free
exchange of General Division Stock. In the aggregate, approximately 690,000
shares of General Division Stock valued at approximately $36.5 million were
issued. The acquisition was accounted for as a purchase. The excess of the
purchase price over the fair market value of the net assets acquired,
approximately $29.1 million, will be allocated to Goodwill to be amortized over
11 years.
On May 3, 1996, Genzyme announced that it was withdrawing its offer to
acquire substantially all of the assets of Genzyme Development Partners, L.P.
(the "Partnership") for shares of Genzyme General Division Common Stock valued
at $93 million at the time the offer was made. The withdrawal of the offer by
Genzyme does not affect the respective rights and obligations of the Partnership
and Genzyme under any of the existing agreements between the parties. Under the
terms of these agreements, the Joint Venture formed between Genzyme and the
Partnership will manufacture and market the Surgical Products in North America
following FDA approval. The parties have begun negotiations to establish
definitive terms for the operation of the Joint Venture, including the
allocation between Genzyme and the Partnership of profits and losses from the
Joint Venture.
-25-
<PAGE> 26
GENZYME TISSUE REPAIR DIVISION
<TABLE>
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) THREE MONTHS ENDED MARCH 31,
- --------------------------------------------------------------------------------
1996 1995
---- ----
<S> <C> <C>
Revenues:
Net service sales ................... $ 1,714 $ 1,030
Operating costs and expenses:
Cost of services sold ............... 2,426 725
Selling, general and administrative . 6,246 1,752
Research and development ............ 2,354 2,814
-------- --------
11,026 5,291
-------- --------
Operating loss ......................... (9,312) (4,261)
Other income and (expenses):
Investment income ...................... 574 319
Interest expense ....................... (4) --
-------- --------
570 319
-------- --------
Net loss ............................... $ (8,742) $ (3,942)
======== ========
Per Tissue Repair Division Common share:
Net loss ............................ $ (0.71) $ (0.45)
======== ========
Average shares outstanding .......... 12,246 8,751
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, condensed,
combined financial statements.
-26-
<PAGE> 27
GENZYME TISSUE REPAIR DIVISION
<TABLE>
COMBINED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS) MARCH 31, DECEMBER 31,
- ---------------------------------------------------------------------------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ......................... $28,192 $40,741
Short-term investments ............................ 6,915 6,832
Accounts receivable, less allowance
for doubtful accounts ........................... 1,850 1,838
Inventories ....................................... 1,431 761
Prepaid expenses and other current assets ......... 435 186
------- -------
Total current assets ............................ 38,823 50,358
Property, plant and equipment, net ................... 11,854 1,962
Other Assets:
Other noncurrent assets ........................... 51 329
------- -------
51 329
------- -------
$50,728 $52,649
======= =======
LIABILITIES AND DIVISION EQUITY
Current Liabilities:
Accounts payable .................................. $ 1,369 $ 2,432
Accrued expenses .................................. 1,501 1,349
Payable to Genzyme General Division ............... 991 2,034
Short-term borrowings ............................. 8,000 --
Current portion of capital lease obligations ...... 91 169
------- -------
Total current liabilities ....................... 11,952 5,984
Noncurrent Liabilities:
Other noncurrent liabilities ...................... 745 739
------- -------
745 739
Division equity ...................................... 38,031 45,926
------- -------
$50,728 $52,649
======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited, condensed,
combined financial statements.
-27-
<PAGE> 28
GENZYME TISSUE REPAIR DIVISION
<TABLE>
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS) THREE MONTHS ENDED MARCH 31,
- ------------------------------------------------------------------------------------------
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss .......................................... $ (8,742) $ (3,942)
Reconciliation of net loss to net cash used by
operating activities:
Depreciation and amortization ................... 24 150
Provision for bad debts ......................... 386 --
Accrued interest/amortization on bonds .......... (90) (158)
Increase (decrease) in cash from working capital:
Accounts receivable ........................... (398) 759
Inventories ................................... (670) (9)
Prepaid expenses and other current assets ..... (248) 60
Accounts payable, accrued expenses
and deferred revenue ......................... (911) (2,062)
Due to Genzyme General Division ............... (1,044) 2,051
-------- --------
Net cash used by operating activities ......... (11,693) (3,151)
INVESTING ACTIVITIES:
Purchases of investments .......................... (3,006) (10,957)
Sales and maturities of investments ............... 3,010 8,087
Property, plant and equipment ..................... (9,916) (54)
Other noncurrent assets ........................... 278 10
-------- --------
Net cash used by investing activities ......... (9,634) (2,914)
FINANCING ACTIVITIES:
Proceeds from issuance of TR Stock ................ 849 182
Short-term borrowings under bank credit agreement . 8,000 --
Payments of capital lease obligations ............. (77) (68)
Other ............................................. 6 (26)
-------- --------
Net cash provided by financing activities ..... 8,778 88
-------- --------
Decrease in cash and cash equivalents ................ (12,549) (5,977)
Cash and cash equivalents, beginning of period ....... 40,741 16,993
-------- --------
Cash and cash equivalents, end of period ............. $ 28,192 $ 11,016
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, condensed,
combined financial statements.
-28-
<PAGE> 29
GENZYME TISSUE REPAIR DIVISION
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
1. Basis of Presentation:
----------------------
These unaudited, condensed, combined financial statements should be
read in conjunction with the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995 and the financial statements and
footnotes for Genzyme Tissue Repair Division ("GTR") included therein.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the
Securities and Exchange Commission rules and regulations.
The financial statements for the three months ended March 31, 1996
and 1995 are unaudited but include, in GTR's opinion, all adjustments
(consisting only of normally recurring accruals) necessary for a fair
presentation of the results for the periods presented.
2. Accounting Policies:
--------------------
The accounting policies underlying the quarterly financial statements
are those set forth in Note A of GTR's financial statements included in
the Company's Annual Report on Form 10-K for the year ended December 31,
1995.
3. Investments:
------------
As of March 31, 1996, GTR classified all investments, consisting
primarily of debt securities, as available for sale. As a result, gross
unrealized holding losses of $12,000 were recorded as a net decrease to
Division equity.
<TABLE>
4. Inventories:
------------
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
<S> <C> <C>
Raw materials.............. $ 124,000 $107,000
Work-in-process............ 1,307,000 654,000
---------- --------
$1,431,000 $761,000
========== ========
</TABLE>
5. Short-Term Borrowing Arrangements:
----------------------------------
Genzyme has an available line of credit with a commercial bank of
$15.0 million which may be used by either the General or Tissue Repair
Division. On March 29, 1996, GTR borrowed $8.0 million under the this
line at an interest rate of approximately 6.05% primarily as short-term
financing for land and buildings acquired in January 1996, in Framingham,
Massachusetts for $6.8 million, in cash, as part of the planned expansion
of manufacturing capacity for the CARTICEL[SM] Service programs. Such
interim financing will fund the purchase of and required renovations to
these facilities until a suitable long-term financing arrangement can be
secured.
6. Equity Incentive Plan:
----------------------
In March 1996, the Board of Directors voted, subject in each case to
the approval of the stockholders, to adopt an amendment to the Company's
1990 Equity Incentive Plan (the "Equity Plan"). This amendment would
increase the
-29-
<PAGE> 30
GENZYME TISSUE REPAIR DIVISION
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
aggregate number of shares of TR Stock that may be subject to grants
under the Equity Plan from 2,000,000 to 3,300,000 subject to adjustment
for stock splits, stock dividends and certain transactions affecting the
Company's capital stock.
-30-
<PAGE> 31
GENZYME TISSUE REPAIR DIVISION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
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. Forward-looking statements contained in the following
discussion are expectations only and there can be no assurance that actual
results will not materially differ from these expectations. This discussion
should be read in conjunction with the financial statements and related notes of
GTR. See also "Factors Affecting Future Operating Results" under Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Genzyme's Annual Report on Form 10-K for the year ended
December 31, 1995.
RESULTS OF OPERATIONS
Revenue
Service revenues for the three months ended March 31, 1996 and 1995 were
$1.7 million and $1.0 million, respectively, an increase of 66%. Service revenue
for the quarter ending March 31, 1996 included a 22% increase in sales of
EpicelTM skin grafts as compared to the corresponding period in 1995 and
$469,000 from the sale of the CARTICEL[SM] Service, GTR's cartilage repair
service, which commenced in the first quarter of 1995.
Margins and Operating Expenses
Gross margins for the three months ended March 31, 1996 declined 71% as
compared to the corresponding period in 1995 due to increased spending for the
expansion of manufacturing capacity. GTR's selling, general and administrative
expenses include direct charges as well as a charge, based on actual amounts
incurred, from the General Division for work performed by the General Division
on behalf of GTR. Selling, general and administrative expenses for the three
months ended March 31, 1996 and 1995 were $6.2 million and $1.8 million,
respectively. The $4.5 million increase in selling, general and administrative
costs is attributed to a $2.6 million increase due to surgeon training costs
and additional staffing related to the CARTICEL[SM] Service, and a $1.8 million
increase in services provided by the General Division on behalf of GTR's
worldwide marketing efforts.
GTR incurs research and development expenses as well as a charge for
research and development and related overhead from the General Division, based
on actual amounts incurred for work performed by the General Division on behalf
of GTR. Research and development expenses for the three months ended March 31,
1996 and 1995 were $2.4 million and $2.8 million, respectively. The decrease in
GTR's research and development expenses resulted from reduced spending on
certain programs offset by product improvement and regulatory expenses incurred
by the General Division in support of GTR's CARTICEL[SM] Service programs.
-31-
<PAGE> 32
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996, GTR had cash, cash equivalents and investments in
marketable securities totaling $35.1 million, a decrease of $12.5 from December
31, 1995. The decrease was primarily due to GTR's net loss from operations,
working capital requirements and capital spending, net of cash from the issuance
of common stock through exercises of stock options and warrants of $0.8 million.
As of March 31, 1996, GTR had accounts receivable of $1.9 million, relatively
unchanged from December 31, 1995, despite a 14% increase in quarterly service
revenue from Q4 1995 to Q1 1996. Inventories increased $0.7 million, to $1.4
million as of March 31, 1996 as compared to December 31, 1995 due primarily to
an increase in the number of incoming biopsies within the first quarter. In the
first quarter of 1996, GTR spent $9.9 million on additional manufacturing
capacity which included the acquisition of certain real estate in Framingham,
Massachusetts, for $6.8 million in cash, of which $5.7 million was allocated to
buildings and $1.1 million was allocated to land based on appraised values. In
March 1996, GTR utilized $8.0 million of Genzyme's $15.0 million line of credit
with a commercial bank as temporary financing for GTR's acquisition of real
property in Framingham, Massachusetts until permanent financing can be obtained.
GTR expects that its available cash and investments will be sufficient to
finance its planned operations and capital requirements for at least one year.
Significant additional funds will be required to complete the commercialization
ad clinical testing of GTR's products and services and to complete the expansion
of manufacturing capacity for its CARTICEL[SM] Service. There can be no
assurance that such funds will be available on attractive terms, if at all.
-32-
<PAGE> 33
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, SEPTEMBER 30, 1995
<TABLE>
EXHIBIT INDEX
<CAPTION>
Exhibit
No. Description Page No.
--- ----------- --------
<S> <C> <C>
10.1 Executive Employment Agreement effective as of January 1,
1996 between the Company and Peter Wirth. Filed herewith. 35
11 Computation of weighted average shares used in
computing earnings per share amounts. Filed herewith. 36
27 Financial Data Schedules for Genzyme General Division
Genzyme Tissue Repair Division (for EDGAR filing
purposes only). 38-43
</TABLE>
-33-
<PAGE> 34
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, MARCH 31, 1996
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: May 15, 1996 By: /s/David J. McLachlan
----------------------
David J. McLachlan
Duly Authorized Officer and
Chief Financial Officer
-34-
<PAGE> 1
EXECUTIVE EMPLOYMENT AGREEMENT
This Executive Employment Agreement (the "Agreement") is entered into
effective as of January 1, 1996 (the "Effective Date") between Genzyme
Corporation (the "Company"), a Massachusetts corporation with its principal
executive offices at One Kendall Square, Cambridge, Massachusetts 02139, and
Peter Wirth (the "Executive").
ARTICLE 1. EMPLOYMENT OF EXECUTIVE
1.1. INITIAL HALF-TIME EMPLOYMENT. Subject to the terms and conditions of
this Agreement, the Company agrees to employ the Executive in a half-time
capacity to serve as Senior Vice President and General Counsel of the Company
and to perform such specific duties as may reasonably be assigned to the
Executive from time to time by the Company's Chief Executive Officer for the
period commencing on the Effective Date and terminating three (3) years from
such date, unless earlier terminated as provided herein, provided, however, that
on each anniversary date of the Effective Date during the period of the
Executive's employment (an "Anniversary Date") the term hereof shall
automatically be extended for one additional year unless written notice of
termination of such extension shall have been given 90 days prior to such
Anniversary Date by either party to the other. The Executive hereby accepts such
employment for the term hereof.
1.2. TRANSITION TO FULL TIME EMPLOYMENT. Upon written notice by the Company
given 90 days prior to either of the first two Anniversary Dates, the Company
may elect to convert the Executive's employment to full time status ("FTE
Status") effective as of such Anniversary Date; provided, however, that the
Company shall on the effective date of Executive's FTE Status increase
Executive's base salary to an amount equal to not less than a 75% range
penetration for General Counsel positions as reported in the then current Towers
Perrin Executive Compensation Survey for Pharmaceutical/Health Care Industry
Grouping (the "TP Survey") and increase Executive's cash bonus potential to an
amount equal to not less than the average cash bonus reported for General
Counsel positions in the then current TP Survey, in each case appropriately
adjusted to reflect reasonably anticipated increases in TP Survey base salary
and bonus figures for the year in which Executive's FTE Status will commence.
1.3. NO CONFLICTING COMMITMENTS. During the period of the Executive's
employment with the Company, Executive will not undertake any commitments which
might impair Executive's performance of his duties as a half time or full time
employee of the Company, as the case may be.
<PAGE> 2
ARTICLE 2. COMPENSATION
For all services to be rendered by Executive to the Company pursuant to
this Agreement, the Company shall pay to the Executive the compensation and
provide for Executive the benefits set forth below:
2.1. BASE SALARY. The Company shall pay to Executive a base salary of
$225,000 per annum during calendar year 1996, prorated and payable in
substantially equal biweekly installments. Thereafter, Executive's base salary
will be set annually by the Board or a duly appointed committee thereof,
beginning in January 1997; provided, however, that such base salary shall not be
lower than the base salary for the preceding calendar year and provided,
further, that upon conversion to FTE Status Executive's base salary shall not be
lower than the amount specified in Section 1.2.
2.2. BONUSES. Upon conversion to FTE Status, Executive shall be entitled to
participate in a cash bonus plan to be established by the Company which will
provide that Executive will be eligible to earn a cash bonus based on
Executive's performance in meeting goals established jointly by the Chief
Executive Officer and Executive, provided, however, that upon conversion to FTE
Status Executive's cash bonus potential shall not be lower than the amount
specified in Section 1.2. Such cash bonus, if earned, will be payable to
Executive annually within one hundred twenty (120) days after the end of each
calendar year.
2.3. FRINGE BENEFITS. In addition to Executive's base salary and bonuses,
the Company shall provide Executive the following benefits: (i) term life
insurance in a policy amount of not less than two times Executive's annual base
salary, payable to Executive or his designees, with all premiums paid by the
Company; (ii) additional life insurance payable to Executive or his designees on
the same basis as is provided to other Senior Vice Presidents of the Company;
(iii) long term disability insurance with benefits in an amount equal to 60% of
Executive's annual base salary until age 65, subject to a maximum benefit limit
of $240,000 per annum; (iv) medical insurance coverage for Executive and his
dependents; (v) payment of Executive's malpractice insurance premiums with
respect to legal services provided to the Company and its affiliates and
appropriate bar association dues; and (vi) such other benefits as are generally
made available by the Company to its other full time executive employees, which
currently include optional contributory life insurance, travel insurance, and
accidental death and dismemberment insurance when engaged in the Company's
business.
2.4. EQUITY INCENTIVES. Executive shall be entitled to receive stock option
grants under the Company's 1990 Equity Incentive Plan as follows:
2.4.1. NEW HIRE GRANT. As of the Effective Date, Executive shall be
entitled to receive a grant of an option to purchase Twenty-two Thousand
Five Hundred (22,500) shares of General Division common stock of the
Company (the "General Stock") and Twelve Thousand Five Hundred (12,500)
shares of Tissue Repair Division common stock of the Company (the "Tissue
Repair Stock"), such options to have an exercise price per share of
-2-
<PAGE> 3
$56.00 for the General Stock and $17.50 for the Tissue Repair Stock, to
become exercisable with respect to twenty percent (20%) of such shares
immediately and with respect to an additional twenty percent (20%) of such
shares on each of the first four Anniversary Dates, subject to acceleration
of exercisability as provided in this Agreement, to have a term of ten
years from the Effective Date, to remain exercisable and outstanding for
the full ten-year option term without regard to Executive's employment
status with the Company to the extent such options had become exercisable
prior to Executive's termination of employment, to be Incentive Stock
Options to the maximum extent permitted by law and to contain such other
terms and conditions consistent with the form of incentive or nonstatutory
stock option certificate, as appropriate, most recently approved for
issuance under the 1990 Equity Incentive Plan.
2.4.2. FTE STATUS GRANT As of the effective date of Executive's
transition to FTE Status (the "FTE Date"), Executive shall be entitled to
receive a grant of an option to purchase Twenty-two Thousand Five Hundred
(22,500) shares of General Stock and Twelve Thousand Five Hundred (12,500)
shares of Tissue Repair Stock, such options to have an exercise price per
share equal to the closing price of such shares on the Nasdaq National
Market System on the FTE Date, to become exercisable with respect to twenty
percent (20%) of such shares on the FTE Date and with respect to an
additional twenty percent (20%) of such shares on each of the first four
anniversaries of the FTE Date, subject to acceleration of exercisability as
provided in this Agreement, to have a term of ten years from the FTE Date,
to remain exercisable and outstanding for the full ten-year option term
without regard to Executive's employment status with the Company to the
extent such options had become exercisable prior to Executive's termination
of employment, to be Incentive Stock Options to the maximum extent
permitted by law and to contain such other terms and conditions consistent
with the form of incentive or nonstatutory stock option certificate, as
appropriate, most recently approved for issuance under the 1990 Equity
Incentive Plan.
2.4.3. 1994 OFFICER PLAN. As of the Effective Date, Executive shall be
entitled to receive a grant of an option to purchase Twelve Thousand Five
Hundred (12,500) shares of General Stock under the Company's 1994 Officers'
Stock Option Plan approved December 8, 1993 (the "1994 Officer Plan"), such
options to have an exercise price per share equal to $56.00, to become
exercisable as provided in the 1994 Officer Plan, subject to acceleration
of exercisability as provided in this Agreement, to have a term of ten
years from the Effective Date, and to contain such other terms and
conditions consistent with the form of nonstatutory stock option
certificate most recently approved for issuance under the 1990 Equity
Incentive Plan.
2.4.4. DECEMBER 1994 KEY EXECUTIVE PROGRAM. As of the Effective Date,
Executive shall be entitled to receive a grant of an option to purchase
Three Thousand Three Hundred Thirty-three (3,333) shares of General Stock
under the Company's December 1994 Key Executive Stock Option Program
approved December 8, 1994 (the "December 1994 Key Executive Program"), such
options to have an exercise price per share equal to $56.00, to become
exercisable as provided in the December 1994 Key Executive Program, subject
to acceleration of exercisability as provided in this Agreement, to have a
term of ten years from the Effective Date, and to contain such other terms
and conditions consistent with the form of nonstatutory stock option
certificate most recently approved for issuance under the 1990 Equity
Incentive Plan.
-3-
<PAGE> 4
2.4.5. 1996 OFFICER PLAN. As of the Effective Date, Executive shall be
entitled to receive a grant of an option to purchase a number of shares of
General Stock and a number of shares of Tissue Repair Stock under the
Company's 1996 Officers' Stock Option Incentive Program approved December
15, 1995 (the "1996 Incentive Program") which is consistent with the grants
made under the 1996 Incentive Program to other Senior Vice Presidents,
assuming a 50/50 allocation between such classes of common stock, such
options to have an exercise price per share equal to the exercise price per
share of other options granted under the 1996 Incentive Program, to become
exercisable as provided in the 1996 Incentive Program, subject to
acceleration of exercisability as provided in this Agreement, to have a
term of ten years from the Effective Date, and to contain such other terms
and conditions consistent with the form of nonstatutory stock option
certificate most recently approved for issuance under the 1990 Equity
Incentive Plan.
2.5. PARTICIPATION IN FUTURE EQUITY INCENTIVE PLANS. Executive shall be
entitled to participate, to the extent and in the manner determined by the Board
in its absolute discretion, in any stock option, stock purchase or other equity
incentive plans established by the Company, if any, it being the understanding
of the Company and Executive that such participation would be for the purpose of
providing Executive additional opportunities for equity participation in the
Company.
ARTICLE 3. EARLY TERMINATION
3.1. EARLY TERMINATION. Prior to a Change in Control (as defined Section
4.3 (i) hereof) and except during the pendency of a Potential Change of Control
(as defined in Section 4.3 (ii) hereof), Executive's employment hereunder shall
terminate before the expiration of the term of this Agreement upon the
occurrence of any of the following events:
3.1.1. Executive's death;
3.1.2. The termination of Executive's employment hereunder by the
Board, at its option, to be exercised by written notice to Executive, upon
Executive's total disability (as defined in the long term disability plan
maintained by the Company covering Executive) and under circumstances
entitling Executive to benefits under such plan;
3.1.3. The termination of Executive's employment hereunder by the
Board, at its option, for "Cause" as defined in Section 4.4. (ii);
3.1.4. The termination of Executive's employment hereunder by the
Board, at its option which may be exercised with or without cause, to be
exercised by delivery of 60 days prior written notice from the Company to
the Executive; or
-4-
<PAGE> 5
3.1.5. The termination of Executive's employment hereunder by
Executive to be exercised by delivery of 60 days prior written notice from
Executive to the Company.
3.2. ADJUSTMENT UPON EARLY TERMINATION. If Executive's employment is
terminated by the Company at its option pursuant to Section 3.1.4., (i) the
Company shall pay as severance pay to Executive a lump sum severance payment
equal to two (2) times the sum of (1) his annual rate of base salary in effect
on the date his termination becomes effective and (2) the greatest of (a) the
average of the last two annual bonuses (annualized in the case of any bonus paid
with respect to a partial year) paid to him preceding the date his termination
becomes effective, or (b) the most recent annual bonus (annualized in the case
of any bonus paid with respect to a partial year) paid to him preceding the date
his termination becomes effective, (ii) the Company shall provide Executive and
his dependents medical insurance and other benefits in accordance with Section
2.3 for the period of two years after the termination of his employment and
shall continue to pay the premiums for such two year period on all life
insurance policies in effect on the date of termination of his employment which
Executive owned or under which he had the right to designate beneficiaries, and
(iii) all rights, options and awards held by Executive under any stock option,
stock purchase or other equity incentive plan or agreement of the Company, other
than any rights, options or awards the value of which is substantially dependent
upon achieving performance goals (including options granted under the Company's
1994 Officer Plan, December 1994 Key Executive Program and 1995 Officer Plan),
shall be fully vested and not subject to forfeiture or repurchase on account of
the termination of employment. Executive shall not be required to mitigate the
amount of any payment provided for in this Section 3.2., by seeking other
employment or otherwise, nor shall the amount of any payment or benefit provided
for in this Section 3.2. be reduced by any compensation earned by Executive as
the result of employment by another employer after the date his employment
terminated, or otherwise, except that any benefits otherwise receivable by
Executive pursuant to clause (ii) of this Section 3.2 shall be reduced to the
extent comparable benefits are actually received by him from a subsequent
employer during the two years after the termination of his employment, and any
such benefits actually received by him shall be reported to the Company. If
Executive's employment is terminated pursuant to Section 3.1 otherwise than
pursuant to Section 3.1.4., the Company shall pay him his full base salary
through the date of termination, plus all other amounts to which he is entitled
under any compensation or benefit plan of the Company at the time such payments
are due, and the Company shall have no further obligations to Executive under
this Agreement except as provided by laws such as the so-called COBRA statute;
provided, however, that if Executive's employment is terminated pursuant to
Section 3.1.1. or Section 3.1.2, all rights, options and awards held by
Executive under any stock option, stock purchase or other equity incentive plan
or agreement of the Company, other than any rights, options or awards the value
of which is substantially dependent upon achieving performance goals (including
options granted under the Company's 1994 Officer Plan, December 1994 Key
Executive Program and 1995 Officer Plan), shall be fully vested and not subject
to forfeiture or repurchase on account of the termination of employment.
ARTICLE 4. CHANGE OF CONTROL OF THE COMPANY
4.1. CHANGE OF CONTROL SEVERANCE BENEFITS. In order to induce Executive to
remain in the employ of the Company and in consideration of the Executive's
agreement set forth in
-5-
<PAGE> 6
Subsection 4.3 (iii) hereof, the Company agrees that Executive shall receive
the severance benefits set forth in Section 4.5 in the event his employment with
the Company is terminated subsequent to a Change in Control (as defined in
Section 4.3(i) hereof) under the circumstances described below.
4.2. EXTENSION OF TERM OF AGREEMENT. Notwithstanding Section 1.1, no notice
of termination of the extension of this Agreement may be given during the
pendency of a Potential Change in Control (as defined in Section 4.3 (ii)
hereof). If a Change in Control shall have occurred during the original or
extended term of this Agreement, this Agreement shall continue in effect for a
period of thirty-six (36) months beyond the month in which the Change in Control
occurred. Notwithstanding anything provided herein to the contrary, the term of
this Agreement shall not extend beyond the end of the month in which the
Executive attains "normal retirement age" under the provisions of the Company's
benefit plans (the "Benefit Plans") or, if the Benefit Plans do not so provide,
the Executive reaches age sixty-five (65).
4.3. CHANGE IN CONTROL; POTENTIAL CHANGE IN CONTROL.
(i) No benefits shall be payable under Section 4.5 unless there shall have
been a Change in Control, as set forth below. For purposes of this Agreement, a
"Change in Control" shall mean a change in control of the Company of a nature
that would be required to be reported in response to Item 6(e) of Schedule 14A
of Regulation 14A promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), whether or not the Company is in fact required to
comply therewith; provided, that, without limitation, such a change in control
shall be deemed to have occurred if:
(A) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), other than the Company, any trustee or other fiduciary
holding securities under an employee benefit plan of the Company or a
corporation owned, directly or indirectly, by the stockholders of the
Company in substantially the same proportions as their ownership of stock
of the Company is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of the
Company representing 30% or more of the combined voting power of the
Company's then outstanding securities;
(B) during any period of twenty-four (24) consecutive months (not
including any period prior to the date of this Agreement), individuals who
at the beginning of such period constitute the Board and any new director
(other than a director designated by a person who has entered into an
agreement with the Company to effect a transaction described in paragraphs
(A), (C) or (D) of this Section 4.3(i)) whose election by the Board or
nomination for election by the Board or by the stockholders of the Company
was approved by a vote of at least two-thirds (2/3) of the directors then
still 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 thereof; or
(C) the stockholders of the Company approve a merger or consolidation
of the Company with any other corporation, other than (i) a merger or
consolidation which
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would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) at least 50% of the combined voting securities of the Company or
such surviving entity outstanding immediately after such merger or
consolidation or (ii) a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which no
"person" (as hereinabove defined) acquires 30% or more of the combined
voting power of the Company's then outstanding securities; or
(D) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by
the Company of all or substantially all of the Company's assets.
(ii) For purposes of this Agreement, a "Potential Change in Control" shall
be deemed to have occurred if:
(A) the Company enters into an agreement, the consummation of which
would result in the occurrence of a Change in Control;
(B) any person (as hereinabove defined), including the Company,
publicly announces an intention to take or consider taking actions which if
consummated would constitute a Change in Control;
(C) any person (as hereinabove defined), other than the Company, any
trustee or other fiduciary holding securities under an employee benefit
plan of the Company or a corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as their
ownership of stock of the Company (a) is or becomes the beneficial owner,
(b) discloses directly or indirectly to the Company or publicly a plan or
intention to become the beneficial owner, or (c) makes a filing under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, with
respect to securities to become the beneficial owner, directly or
indirectly, of securities representing 20% or more of the combined voting
power of the outstanding voting securities of the Company; or
(D) the Board adopts a resolution to the effect that, for purposes of
this Agreement, a Potential Change in Control of the Company has occurred.
(iii) Executive agrees that, subject to the terms and conditions of this
Agreement and notwithstanding Sections 1.1 and 3.1.5 , in the event of a
Potential Change in Control, he will remain in the employ of the Company until
the earliest of (a) a date which is one (1) year from the occurrence of such
Potential Change in Control, (b) the termination by the Executive of his
employment after he attains "normal retirement age" or by reason of death or
Disability as defined in Section 4.4(i), (c) the date of the occurrence of a
Change in Control, (d) the determination in good faith by the Board that the
event creating such Potential Change of Control has ceased to exist or (e) the
date when Executive would be required to end his employment in order to comply
with his ethical obligations as an attorney.
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4.4. TERMINATION FOLLOWING CHANGE IN CONTROL. If any of the events
described in Subsection 4.3(i) hereof constituting a Change in Control shall
have occurred, Executive shall be entitled to the benefits provided in
Subsection 4.5(iii) hereof upon the subsequent termination of his employment
during the term of this Agreement unless such termination is (A) because of
Executive's death or Disability, (B) by the Company for Cause, or (C) by
Executive other than for Good Reason. In the event Executive's employment with
the Company is terminated for any reason and subsequently a Change in Control
shall occur, Executive shall not be entitled to any benefits under Section 4.5.
(i) DISABILITY. If, as a result of Executive's incapacity due to physical
or mental illness, he shall have been absent from the normal performance of his
duties with the Company for six (6) consecutive months, and within thirty (30)
days after written notice of termination is given he shall not have returned to
the normal performance of his duties, Executive's employment may be terminated
for "Disability".
(ii) CAUSE. Termination by the Company of Executive's employment for
"Cause" shall mean termination upon (A) the willful and continued failure by him
to substantially perform his duties with the Company (other than any such
failure resulting from his incapacity due to physical or mental illness or any
such actual or anticipated failure after the issuance of a Notice of Termination
by him for Good Reason, as defined in Subsections 4.4(iv) and 4.4(iii),
respectively) after a written demand for substantial performance is delivered to
Executive by the Board, which demand specifically identifies the manner in which
the Board believes that he has not substantially performed his duties, or (B)
the willful engaging by Executive in conduct which is demonstrably and
materially injurious to the Company, monetarily or otherwise. For purposes of
this Subsection, no act, or failure to act, on Executive's part shall be deemed
"willful" unless done, or omitted to be done, by him not in good faith and
without reasonable belief that his action or omission was in the best interest
of the Company. Notwithstanding the foregoing, Executive shall not be deemed to
have been terminated for Cause unless and until there shall have been delivered
to him a copy of a resolution duly adopted by the affirmative vote of not less
than three-quarters (3/4) of the entire membership of the Board at a meeting of
the Board called and held for such purpose (after reasonable notice to Executive
and an opportunity for him, together with his counsel, to be heard before the
Board), finding that in the good faith opinion of the Board Executive was guilty
of conduct set forth above in this Subsection and specifying the particulars
thereof in detail.
(iii) GOOD REASON. Executive shall be entitled to terminate his employment
for Good Reason. For purposes of this Agreement, "Good Reason" shall mean (1)
during the nine (9) month period following a Change in Control, a good faith
determination by Executive that, as a result of the Change in Control, he is not
able to discharge his duties effectively, (2) at such time as a good faith
determination is made by the Executive that he cannot carry out his duties
consistent with his ethical responsibilities, or (3) without Executive's express
written consent, the occurrence after a Change in Control of any of the
following circumstances:
(A) the assignment to Executive of any duties inconsistent (except in
the nature of a promotion) with the position in the Company that he held
immediately prior to the Change in Control or a substantial adverse
alteration in the nature or status of his
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<PAGE> 9
position or responsibilities or the conditions of his employment from those
in effect immediately prior to the Change in Control;
(B) a reduction by the Company in Executive's annual base salary as in
effect on the date hereof or as the same may be increased from time to
time;
(C) the Company's requiring Executive to be based more than
twenty-five (25) miles from the Company's offices at which he was
principally employed immediately prior to the date of the Change in Control
except for required travel on the Company's business to an extent
substantially consistent with his present business travel obligations;
(D) the failure by the Company to pay to Executive any portion of his
current compensation or compensation under any deferred compensation
program of the Company, within seven (7) days of the date such compensation
is due;
(E) the failure by the Company to continue in effect any material
compensation or benefit plan in which Executive participates immediately
prior to the Change in Control unless an equitable arrangement (embodied in
an ongoing substitute or alternative plan) has been made with respect to
such plan, or the failure by the Company to continue the Executive's
participation therein (or in such substitute or alternative plan) on a
basis not materially less favorable, both in terms of the amount of
benefits provided and the level of his participation relative to other
participants, than existed at the time of the Change in Control;
(F) the failure by the Company to continue to provide Executive with
benefits substantially similar to those enjoyed by him under any of the
Company's pension, life insurance, medical, health and accident, or
disability plans in which he was participating at the time of the Change in
Control, the taking of any action by the Company which would directly or
indirectly materially reduce any of such benefits or deprive Executive of
any material fringe benefit enjoyed by him at the time of the Change in
Control, or the failure by the Company to provide Executive with the number
of paid vacation days to which he is entitled on the basis of his years of
service with the Company in accordance with the Company's normal vacation
policy in effect at the time of the Change in Control;
(G) the failure of the Company to obtain a satisfactory agreement from
any successor to assume and agree to perform this Agreement, as
contemplated in Section 8.4; or
(H) any purported termination of Executive's employment which is not
effected pursuant to a Notice of Termination satisfying the requirements of
Subsection (iv) below (and, if applicable, the requirements of Subsection
(ii) above), which purported termination shall not be effective for
purposes of this Agreement.
Executive's right to terminate his employment pursuant to this Subsection
shall not be affected by his incapacity due to physical or mental illness.
Executive's continued employment
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<PAGE> 10
shall not constitute consent to, or a waiver of rights with respect to, any
circumstance constituting Good Reason hereunder.
(iv) NOTICE OF TERMINATION. Any purported termination of Executive's
employment by the Company or by Executive shall be communicated by written
Notice of Termination to the other party hereto in accordance with Section 4.7.
For purposes of this Agreement, a "Notice of Termination" shall mean a notice
which shall indicate the specific termination provision in this Agreement relied
upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of Executive's employment under the
provision so indicated.
(v) DATE OF TERMINATION, ETC. "Date of Termination" shall mean (A) if
Executive's employment is terminated for Disability, thirty (30) days after
Notice of Termination is given (provided that Executive shall not have returned
to the full-time performance of his duties during such thirty (30) day period),
and (B) if Executive's employment is terminated pursuant to Subsection (ii) or
(iii) above or for any other reason (other than Disability), the date specified
in the Notice of Termination (which, in the case of a termination pursuant to
Subsection (ii) above shall not be less than thirty (30) days, and in the case
of a termination pursuant to Subsection (iii) above shall not be less than
fifteen (15) nor more than sixty (60) days, respectively, from the date such
Notice of Termination is given); provided that if within fifteen (15) days after
any Notice of Termination is given, or, if later, prior to the Date of
Termination (as determined without regard to this proviso), the party receiving
such Notice of Termination notifies the other party that a dispute exists
concerning the termination, the Date of Termination shall be the date on which
the dispute is finally determined, either by mutual written agreement of the
parties or by a binding arbitration award; and provided further that the Date of
Termination shall be extended by a notice of dispute only if such notice is
given in good faith and the party giving such notice pursues the resolution of
such dispute with reasonable diligence. During the pendency of any such dispute,
(i) Executive shall not be required to report for work or otherwise continue to
perform his duties with the Company and (ii) the Company will continue to pay
Executive his full compensation in effect when the notice giving rise to the
dispute was given (including, but not limited to, base salary) and continue
Executive and his dependents as a participant in all compensation, benefit and
insurance plans in which he or they were participating when the notice giving
rise to the dispute was given, until the dispute is finally resolved in
accordance with this Subsection. Amounts paid under this Subsection are in
addition to all other amounts due under this Agreement and shall not be offset
against or reduce any other amounts due under this Agreement.
4.5. COMPENSATION UPON TERMINATION OR DURING DISABILITY FOLLOWING A CHANGE
OF CONTROL. Following a Change in Control, upon either termination of
Executive's employment or during a period of disability he shall be entitled to
the following benefits:
(i) During any period that Executive fails to perform his normal duties
with the Company as a result of incapacity due to physical or mental illness, he
shall continue to receive his base salary at the rate in effect at the
commencement of any such period, together with all compensation payable to him
under the Company's disability plan or program or other similar plan during such
period, until this Agreement is terminated pursuant to Section 4.4(i) hereof.
Thereafter, or in the event Executive's employment shall be terminated by reason
of his death,
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<PAGE> 11
Executive's benefits shall be determined under the Company's retirement,
insurance and other compensation programs then in effect in accordance with the
terms of such programs.
(ii) If Executive's employment shall be terminated by the Company for Cause
or by Executive other than for Good Reason, the Company shall pay him his full
base salary through the Date of Termination at the rate in effect at the time
Notice of Termination is given, plus all other amounts to which he is entitled
under any compensation or benefit plan of the Company at the time such payments
are due and the Company shall have no further obligations to Executive under
this Agreement.
(iii) If Executive's employment by the Company shall be terminated (a) by
the Company other than for Cause or Disability or (b) by Executive for Good
Reason, then he shall be entitled to the benefits provided below:
(A) the Company shall pay Executive his full base salary through the
Date of Termination at the rate in effect at the time Notice of Termination
is given, plus all other amounts to which he is entitled under any
compensation or benefit plan of the Company, at the time such payments are
due, except as otherwise provided below;
(B) in lieu of any further salary payments to Executive for periods
subsequent to the Date of Termination, the Company shall pay as severance
pay to Executive a lump sum severance payment (together with the payments
provided in paragraphs (D), (E) and (F) below, the "Severance Payments")
equal to three (3) or, if less, the number of years, including fractions,
from the Date of Termination until the Executive reaches his normal
retirement age, times the sum of (1) the greatest of (a) his annual rate of
base salary in effect on the Date of Termination, (b) his annual rate of
base salary in effect immediately prior to the Change in Control or (c) an
amount equal to a 75% range penetration for base salaries for General
Counsel positions as reported in the then current TP Survey and (2) the
greatest of (a) the average of the last two annual bonuses (annualized in
the case of any bonus paid with respect to a partial year) paid to him
preceding the Date of Termination, (b) the average of the last two annual
bonuses (annualized in the case of any bonus paid with respect to a partial
year) paid to him preceding the Change in Control, (c) the most recent
annual bonus (annualized in the case of any bonus paid with respect to a
partial year) paid to him preceding the Date of Termination, (d) the most
recent annual bonus (annualized in the case of any bonus paid with respect
to a partial year) paid to him preceding the Change in Control or (e) an
amount equal to the average bonus for General Counsel positions as reported
in the then current TP Survey.
(C) the Company shall also pay to Executive, within five (5) days
after any such fees or expenses are incurred, all legal fees and expenses
incurred by him as a result of or in connection with such termination,
including all such fees and expenses, if any, incurred in contesting or
disputing any such termination or in seeking to obtain or enforce any right
or benefit provided by this Agreement (other than any such fees or expenses
incurred in connection with any such claim which is determined by
arbitration, in accordance with Section 8.5 of this Agreement, to be
frivolous) or in connection with any tax audit or proceeding to the extent
attributable to the application of section 4999 of the Code to any payment
or benefit provided hereunder;
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<PAGE> 12
(D) for a thirty-six (36) month period after such termination, the
Company shall arrange to provide Executive and his dependents with life,
disability, accident and health insurance benefits substantially similar to
those which he and they are receiving immediately prior to the Notice of
Termination. Benefits otherwise receivable by Executive pursuant to this
Subsection 4.5(iii)(D) shall be reduced to the extent comparable benefits
are actually received by him from a subsequent employer during the
thirty-six (36) month period following his termination, and any such
benefits actually received by him shall be reported to the Company;
(E) in addition to the retirement benefits to which Executive is
entitled under the Benefit Plans, any supplemental retirement or excess
benefit plan maintained by the Company or any of its subsidiaries or any
successor plans thereto (hereinafter collectively referred to as the
"Pension Plans"), the Company shall pay Executive in cash a lump sum equal
to the excess of (a) the actuarial equivalent of the retirement pension
(taking into account any early retirement subsidies associated therewith
and determined as a straight life annuity commencing at age sixty-five (65)
or any earlier date, but in no event earlier than the third anniversary of
the Date of Termination, whichever annuity the actuarial equivalent of
which is greatest) which Executive would have accrued under the terms of
the Pension Plans (without regard to the limitations imposed by Section
401(a)(17) of the Internal Revenue Code of 1986, as amended (the "Code"),
any temporary freeze on benefit accruals under the Pension Plans pursuant
to Internal Revenue Service Notice 88-131 or any amendment to the Pension
Plans made subsequent to a Change in Control and on or prior to the Date of
Termination, which amendment adversely affects in any manner the
computation of retirement benefits thereunder), determined as if Executive
was fully vested thereunder and had continued to be employed by the Company
(after the Date of Termination) for thirty-six (36) additional months and
as if he had accumulated thirty-six (36) additional months of compensation
(for purposes of determining his pension benefits thereunder), each in an
amount equal to the sum of the amounts determined under clauses (1) and (2)
of Section 4.5 (iii) (B) hereof (but in no event shall Executive be deemed
to have continued to be employed by the Company after his normal retirement
age) over (b) the actuarial equivalent of the vested retirement pension
(taking into account any early retirement subsidies associated therewith
and determined as a straight life annuity commencing at age sixty-five (65)
or any earlier date, but in no event earlier than the Date of Termination,
whichever annuity the actuarial equivalent of which is greatest) which
Executive had then accrued pursuant to the provisions of the Pension Plans.
For purposes of this Subsection, "actuarial equivalent" shall be determined
using the same actuarial assumptions utilized in determining the amount of
alternate forms of benefits under the Benefit Plans immediately prior to
the Change in Control; and
(F) should Executive move his residence in order to pursue other
business opportunities within one (1) year of the Date of Termination, the
Company shall pay him, within five (5) days after any such expenses are
incurred, an amount equal to the expenses incurred by him in connection
with such relocation (including expenses incurred in selling his home to
the extent such expenses were customarily reimbursed by the Company to
transferred executives prior to the Change in Control) and which are not
reimbursed by another employer.
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(iv) Amounts payable to Executive shall be reduced as set forth below.
(A) For purposes of this Subsection (iv), (1) a Payment shall mean any
payment or distribution in the nature of compensation to or for the benefit
of Executive, whether paid or payable pursuant to this Agreement or
otherwise; (2) an Agreement Payment shall mean a Payment paid or payable
pursuant to this Agreement (disregarding this Subsection (iv)); (3) Net
After Tax Receipt shall mean the Present Value of a Payment net of all
taxes imposed on Executive with respect thereto under Sections 1 and 4999
of the Internal Revenue Code of 1986, as amended (the "Code"), determined
by applying the highest marginal rate under Section 1 of the Code which
applied to Executive's taxable income for the immediately preceding taxable
year; (4) "Present Value" shall mean such value determined in accordance
with Section 280G(d)(4) of the Code; and (5) "Reduced Amount" shall mean
the smallest aggregate amount of Payments which (a) is less than the sum of
all Payments and (b) results in aggregate Net After Tax Receipts which are
equal to or greater than the Net After Tax Receipts which would result if
the aggregate Payments were any other amount less than the sum of all
Payments.
(B) Anything in this Agreement to the contrary notwithstanding, in the
event Coopers & Lybrand (the "Accounting Firm") shall determine that
receipt of all Payments would subject Executive to tax under Section 4999
of the Code, it shall determine whether some amount of Payments would meet
the definition of a "Reduced Amount." If the Accounting Firm determines
that there is a Reduced Amount, the aggregate Agreement Payments shall be
reduced to such Reduced Amount; provided, however, that if the Reduced
Amount exceeds the aggregate Agreement Payments, the aggregate Payments
shall, after the reduction of all Agreement Payments, be reduced (but not
below zero) in the amount of such excess.
(C) If the Accounting Firm determines that aggregate Agreement
Payments or Payments, as the case may be, should be reduced to the Reduced
Amount, the Company shall promptly give Executive notice to that effect and
a copy of the detailed calculation thereof, and Executive may then elect,
in his sole discretion, which and how much of the Payments shall be
eliminated or reduced (as long as after such election the present value of
the aggregate Payments equals the Reduced Amount), and shall advise the
Company in writing of his election within ten days of his receipt of
notice. If no such election is made by Executive within such ten-day
period, the Company may elect which and how much of the Agreement Payments
or Payments, as the case may be, shall be eliminated or reduced (as long as
after such election the present value of the aggregate Agreement Payments
or Payments, as the case may be, equals the Reduced Amount) and shall
notify Executive promptly of such election. All determinations made by the
Accounting Firm under this Subsection shall be binding upon the Company and
Executive and shall be made within 60 days of a termination of employment
of Executive. As promptly as practicable following such determination, the
Company shall pay to or distribute for the benefit of Executive such
payments as are then due to Executive under this Agreement and shall
promptly pay to or distribute for the benefit of Executive in the future
such Payments as become due to Executive under this Agreement.
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(D) While it is the intention of the Company and Executive to reduce
the amounts payable or distributable to Executive hereunder only if the
aggregate Net After Tax Receipts to Executive would thereby be increased,
as a result of the uncertainty in the application of Section 4999 of the
Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that amounts will have been paid or distributed
by the Company to or for the benefit of Executive pursuant to this
Agreement which should not have been so paid or distributed ("Overpayment")
or that additional amounts which will have not been paid or distributed by
the Company to or for the benefit of Executive pursuant to this Agreement
could have been so paid or distributed ("Underpayment"), in each case,
consistent with the calculation of the Reduced Amount hereunder. In the
event that the Accounting Firm, based either upon the assertion of a
deficiency by the Internal Revenue Service against the Company or Executive
which the Accounting Firm believes has a high probability of success or
controlling precedent or other substantial authority, determines that an
Overpayment has been made, any such Overpayment paid or distributed by the
Company to or for the benefit of Executive shall be treated for all
purposes as a loan AB INITIO to Executive which Executive shall repay to
the Company (together with interest at the rate provided for in Section
1274(b)(2)(B) of the Code); provided, however, that no such loan shall be
deemed to have been made and no amount shall be payable by Executive to the
Company if and to the extent such deemed loan and payment would not either
reduce the amount on which Executive is subject to tax under Section 1 and
Section 4999 of the Code or generate a refund of such taxes. In the event
that the Accounting Firm, based upon controlling precedent or other
substantial authority, determines that an Underpayment has occurred, any
such Underpayment shall be promptly paid by the Company to or for the
benefit of Executive (together with interest at the rate provided for in
Section 1274(b)(2)(B) of the Code).
(v) Except as otherwise specifically provided in paragraph (C) and (F)
thereof, the payments provided for in Subsection (iii) shall be made not later
than the fifth day following the Date of Termination; provided, however, that if
the amounts of such payments cannot be finally determined on or before such day,
the Company shall pay to Executive on such day an estimate, as determined in
good faith by the Company, of the minimum amount of such payments and shall pay
the remainder of such payments (together with interest at the rate provided in
Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be
determined but in no event later than the thirtieth day after the Date of
Termination. In the event that the amount of the estimated payments exceeds the
amount subsequently determined to have been due, such excess shall constitute a
loan by the Company to Executive payable on the fifth day after demand therefor
by the Company (together with interest at the rate provided in Section
1274(b)(2)(B) of the Code).
(vi) Executive shall not be required to mitigate the amount of any payment
provided for in this Section 4.5 by seeking other employment or otherwise, nor
shall the amount of any payment or benefit provided for in this Section 4.5 be
reduced by any compensation earned by Executive as the result of employment by
another employer, by retirement benefits, by offset against any amount claimed
to be owed by the Executive to the Company, or otherwise, except to the extent
expressly so provided.
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ARTICLE 5. COVENANTS AGAINST COMPETITION
5.1. NON-SOLICITATION OF EMPLOYEES. Executive agrees that during the term
of Executive's employment with the Company and for a period of two (2) years
after the termination of Executive's employment with the Company for any reason
occurring prior to a Change of Control, Executive shall not directly or
indirectly recruit, solicit or otherwise induce or attempt to induce any
employees of the Company to leave employment of the Company.
5.2. NONCOMPETITION. Executive agrees that during the term of Executive's
employment with the Company and for a period of two (2) years after the
termination of Executive's employment with the Company for any reason occurring
prior to a Change of Control, Executive shall not directly or indirectly, except
as a passive investor in publicly held companies and except for investments held
at the date hereof, own or control any interest in, or act as director, officer
or employee of, or consultant to, any firm, corporation or institution which
sells products which compete with (i) Ceredase for the treatment of Gaucher's
disease or (ii) products formulated in whole or in part with hyaluronic acid and
intended to reduce the incidence and severity of postoperative adhesions (the
"Major Products"); provided, however, that nothing in this section shall
prohibit Executive or any law firm with which he is affiliated from providing
legal services to clients consistent with applicable professional standards,
including standards pertaining to conflicts of interest. Executive and the
Company agree to review in good faith the list of Major Products at intervals of
not less than 12 months and not more than 24 months during the term of this
Agreement with a view to amending the list to include only those products which
accounted for or are expected to account for substantial percentages of the
Company's consolidated gross revenues at the time of the review; provided,
however, that any addition or deletion to the list of Major Products shall
require the prior written consent of both the Company and the Executive.
ARTICLE 6. CONFIDENTIAL INFORMATION
6.1. MAINTENANCE OF CONFIDENTIALITY. Executive agrees that Executive will
not (except as required in the course of employment with the Company), both
during the term of Executive's employment with the Company and thereafter,
communicate or divulge to, or use for Executive's own benefit or the benefit of
any other person, firm or organization, any confidential and proprietary
information of the Company and its subsidiaries. The provisions of this section
shall not apply to information which (i) was known to Executive at the time it
was received from the Company, other than by previous disclosure by the Company,
as evidenced by written records of Executive maintained at the time of receipt,
(ii) is at the time of disclosure or later becomes publicly known under
circumstances involving no breach of this agreement, (iii) is lawfully and in
good faith made available to Executive by a third person who did not derive it
from the Company and who imposes no obligation of confidence on Executive, (iv)
is approved for disclosure by prior written consent of the Company, or (v) is
required to be disclosed by a governmental or judicial authority, and reasonable
advance notice of such disclosure is given to the Company.
6.2. OWNERSHIP OF CONFIDENTIAL INFORMATION. Records, files, memoranda,
reports, price lists, customer lists, drawings, plans, sketches and documents
and the like, relating to
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the business of the Company, which Executive shall use or prepare or come
into contact within the course of, in connection with, or as a result of
employment with the Company, shall remain the Company's sole and exclusive
property.
ARTICLE 7. OWNERSHIP OF INVENTIONS
7.1. "INVENTION" DEFINED. As used in this Agreement, "Invention" means any
invention, discovery or innovation with regard to chemistry, enzymology,
biotechnology, genetic engineering or recombinant DNA technology, whether or not
patentable, made, conceived, or first actually reduced to practice by Executive,
alone or jointly with others, in the course of, in connection with, or as a
result of service as an executive of the Company, including any art, method,
process, machine, manufacture, design or composition of matter, or any
improvement thereof, or any variety of plant or microorganism.
7.2. DISCLOSURE OF INVENTIONS. Each Invention made, conceived or first
actually reduced to practice by Executive, whether alone or jointly with others,
during the term of Executive's employment with the Company and each Invention
made, conceived or first actually reduced to practice by Executive, whether
alone or jointly with others, within one year after the termination of
Executive's employment with the Company which relates in any way to work
performed for the Company during the term of Executive's employment, shall be
promptly disclosed in writing to such officer of the Company as the Board may
designate. Such report shall be sufficiently complete in technical detail and
appropriately illustrated by sketch or diagram to convey to one skilled in the
art of which the Invention pertains, a clear understanding of the nature,
purpose, operations, and, to the extent known, the physical, chemical,
biological or electrical characteristics of the Invention.
7.3. OWNERSHIP OF INVENTIONS. Each Invention, as herein defined, shall be
the sole and exclusive property of the Company.
7.4. ASSIGNMENT OF TITLE. Executive agrees to execute an assignment to the
Company or its nominee of Executive's entire right, title and interest in and to
any Invention, without compensation beyond that provided in this Agreement.
Executive further agrees, upon the request of the Company and its expense, that
Executive will execute any other instrument and document necessary or desirable
in applying for and obtaining patents in the United States and in any foreign
country with respect to any Invention. Executive further agrees, whether or not
Executive is then an employee of the Company to cooperate to the extent and in
the manner reasonably requested by the Company in the prosecution or defense of
any claim involving a patent covering any Invention or any litigation or other
claim or proceeding involving any Invention covered by this Agreement, but all
expenses thereof shall be paid by the Company.
ARTICLE 8. MISCELLANEOUS
8.1. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, and all of which
together shall be deemed to be one and the same instrument.
-16-
<PAGE> 17
8.2. BINDING EFFECT. This Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective lawful successors and
assigns and Executive's heirs and personal representatives. If Executive should
die while any amount would still be payable to him hereunder if he had continued
to live, all such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to his devisee, legatee or other
designee or, if there is no such designee, to his estate.
8.3. ASSIGNMENT. Except as otherwise provided in Section 8.4., neither this
Agreement nor any rights or obligations hereunder shall be assignable by either
party hereto without the prior written consent of the other party.
8.4. OBLIGATION OF THE COMPANY'S SUCCESSORS. Any successor to substantially
all of the Company's assets and business, whether by merger, consolidation,
purchase of assets or otherwise, shall succeed to the rights and obligations of
the Company hereunder. The Company shall require any such successor, by
agreement in form and substance satisfactory to Executive, to expressly assume
and agree to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform it if no such succession had taken
place. The failure of the Company to obtain such agreement prior to the
effectiveness of any such succession shall be a breach of this Agreement and
shall entitle Executive to compensation from the Company or its successor in the
same amount and on the same terms as Executive would be entitled hereunder if
Executive had terminated Executive's employment for Good Reason following a
change in control of the Company, except that for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination.
8.5. ARBITRATION. Any dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by arbitration conducted before
a panel of three arbitrators in the Commonwealth of Massachusetts in accordance
with the labor rules of the American Arbitration Association then in effect.
Judgment may be entered on the arbitrator's award in any court having
jurisdiction; provided, however, that Executive shall be entitled to seek
specific performance of his right to be paid until the Date of Termination
during the pendency of any dispute or controversy arising under or in connection
with this Agreement. The Company shall pay to Executive, within sixty (60) days
after any such fees or expenses are incurred, all legal fees and expenses
reasonably incurred by him as a result of or in connection with any dispute or
controversy arising under or in connection with this Agreement, including all
such fees and expenses, if any, reasonably incurred in seeking to obtain or
enforce any right or benefit provided by this Agreement (other than any such
fees or expenses incurred in connection with any such claim which is determined
to be frivolous).
8.6. NOTICES. All notices, requests, demands and other communications to be
given pursuant to this Agreement shall be in writing and shall be deemed to have
been duly given if delivered by hand or mailed by registered or certified mail,
return receipt requested, postage prepaid, as follows:
-17-
<PAGE> 18
If to the Company, to:
Genzyme Corporation
One Kendall Square
Cambridge, Massachusetts 02139
Attention: President
If to Executive, to:
Peter Wirth
[Address]
or such other address as either party hereto shall have designated by notice in
writing to the other party.
8.7. AMENDMENTS. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
and signed by Executive and such officer as may be specifically designated by
the Board. No waiver by either party hereto at any time of any breach by the
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made by either
party which are not expressly set forth in this Agreement.
8.8. GOVERNING LAW. This Agreement and the legal relations among the
parties hereto shall be governed by and construed in accordance with the laws of
the Commonwealth of Massachusetts.
8.9. SEVERABILITY. In case any provision hereof shall, for any reason, be
held to be invalid or unenforceable in any respect, such invalidity or
unenforceability shall not affect any other provision hereof, and this Agreement
shall be construed as if such invalid or unenforceable provision had not been
included herein. If any provision hereof shall, for any reason, be held by a
court to be excessively broad as to duration, geographical scope, activity or
subject matter, it shall be construed by limiting and reducing it to make it
enforceable to the extent compatible with applicable law as then in effect.
8.10. MISCELLANEOUS. All references to sections of the Exchange Act or the
Code shall be deemed also to refer to any successor provisions to such sections.
Any payments provided for hereunder shall be paid net of any applicable
withholding required under federal, state or local law.
8.11. SURVIVAL. Section 3.2 and Articles 4., 5., 6. and 7. shall survive
the termination of this Agreement for the periods of time indicated therein or
indefinitely if no period of time is indicated.
-18-
<PAGE> 19
8.12. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement of
the parties hereto in respect of the subject matter contained herein and during
the term of the Agreement supersedes the provisions of all prior agreements,
promises, covenants, arrangements, communications, representations or
warranties, whether oral or written, by any officer, employee or representative
of any party hereto with respect to the subject matter hereof.
IN WITNESS WHEREOF, the undersigned have duly executed and delivered this
Agreement under seal as of the date first above written.
GENZYME CORPORATION
By: /s/ Henri A. Termeer
Henri A. Termeer
Chairman and Chief Executive Officer
EXECUTIVE
/s/ Peter Wirth
Peter Wirth
19
<PAGE> 20
EXHIBIT 11
-38-
<PAGE> 1
<TABLE>
GENZYME CORPORATION AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF WEIGHTED AVERAGE SHARES
USED IN COMPUTING INCOME PER SHARE AMOUNTS
(Unaudited, in thousands)
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------
MARCH 31, 1996 MARCH 31, 1995
----------------------- ----------------------
COMMON COMMON
AND COMMON ASSUMING AND COMMON ASSUMING
EQUIVALENT FULL EQUIVALENT FULL
SHARE DILUTION SHARE DILUTION
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
APPLICABLE TO GENERAL DIVISION STOCK:
Common stock outstanding, beginning of period............. 31,186 31,186 26,447 26,447
Weighted average common stock issued during the period.... 831 831 41 41
Weighted average common stock assuming
exercise of options..................................... 2,119 2,121 879 1,013
Weighted average common stock assuming
exercise of warrants.................................... 1,554 1,619 578 578
Weighted average common stock assuming conversion of
6 3/4% Convertible Subordinated Notes................... (A) 1,339 (A) 1,891
------ ------ ------ ------
Weighted average number of shares outstanding............. 35,690 37,096 27,945 29,970
====== ====== ====== ======
APPLICABLE TO TR STOCK:
Common stock outstanding, beginning of period............. 12,113 8,675
Weighted average common stock issued during the period.... 133 76
Weighted average common stock assuming
exercise of options..................................... (B) (B)
Weighted average common stock assuming
exercise of warrants.................................... (B) (B)
Weighted average common stock assuming conversion of
6 3/4% Convertible Subordinated Notes................... (A) (A)
------ ------
Weighted average number of shares outstanding............. 12,246 8,751
====== =====
<FN>
(A) These securities are "other potentially dilutive" securities which effect
is included, to the extent such effect is dilutive, in the determination
of weighted average shares assuming full dilution.
(B) The effect of assumed conversion is antidilutive.
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMBINED
FINANCIAL STATEMENTS OF GENZYME CORPORATION GENERAL DIVISION AND GENZYME TISSUE
REPAIR DIVISION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 102,446
<SECURITIES> 182,228
<RECEIVABLES> 98,031
<ALLOWANCES> 11,432
<INVENTORY> 59,289
<CURRENT-ASSETS> 451,357
<PP&E> 413,479
<DEPRECIATION> 68,315
<TOTAL-ASSETS> 938,100
<CURRENT-LIABILITIES> 73,233
<BONDS> 33,070
<COMMON> 462
0
0
<OTHER-SE> 831,335
<TOTAL-LIABILITY-AND-EQUITY> 938,100
<SALES> 107,436
<TOTAL-REVENUES> 113,497
<CGS> 43,977
<TOTAL-COSTS> 100,239
<OTHER-EXPENSES> 937
<LOSS-PROVISION> 3,270
<INTEREST-EXPENSE> 209
<INCOME-PRETAX> 16,600
<INCOME-TAX> 6,308
<INCOME-CONTINUING> 10,292
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,292
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMBINED
FINANCIAL STATEMENTS OF GENZYME CORPORATION GENERAL DIVISION FOR THE THREE
MONTHS ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 74,254
<SECURITIES> 175,313
<RECEIVABLES> 95,469
<ALLOWANCES> 10,720
<INVENTORY> 57,858
<CURRENT-ASSETS> 413,525
<PP&E> 400,787
<DEPRECIATION> 67,477
<TOTAL-ASSETS> 888,363
<CURRENT-LIABILITIES> 62,272
<BONDS> 32,325
<COMMON> 336
0
0
<OTHER-SE> 793,430
<TOTAL-LIABILITY-AND-EQUITY> 888,363
<SALES> 105,722
<TOTAL-REVENUES> 111,783
<CGS> 41,601
<TOTAL-COSTS> 89,213
<OTHER-EXPENSES> 937
<LOSS-PROVISION> 2,887
<INTEREST-EXPENSE> 209
<INCOME-PRETAX> 25,342
<INCOME-TAX> 6,308
<INCOME-CONTINUING> 19,034
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,034
<EPS-PRIMARY> 0.53
<EPS-DILUTED> 0.51
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMBINED
FINANCIAL STATEMENTS OF GENZYME CORPORATION TISSUE REPAIR DIVISION FOR THE THREE
MONTHS ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 28,192
<SECURITIES> 6,915
<RECEIVABLES> 2,561
<ALLOWANCES> 711
<INVENTORY> 1,431
<CURRENT-ASSETS> 38,823
<PP&E> 12,692
<DEPRECIATION> 838
<TOTAL-ASSETS> 50,728
<CURRENT-LIABILITIES> 11,952
<BONDS> 745
<COMMON> 126
0
0
<OTHER-SE> 37,905
<TOTAL-LIABILITY-AND-EQUITY> 50,728
<SALES> 1,714
<TOTAL-REVENUES> 1,714
<CGS> 2,426
<TOTAL-COSTS> 11,026
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 386
<INTEREST-EXPENSE> 4
<INCOME-PRETAX> (8,742)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,742)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,742)
<EPS-PRIMARY> (0.71)
<EPS-DILUTED> 0
</TABLE>
