<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
OCTOBER 28, 1996
GENZYME CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 0-14680 06-1047163
(State or other jurisdiction (Commission File (IRS Employer
of incorporation) Number) Identification No.)
ONE KENDALL SQUARE, CAMBRIDGE, MASSACHUSETTS 02139
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code:
(617) 252-7500
<PAGE> 2
ITEM 2. ACQUISITION AND DISPOSITION OF ASSETS.
--------------------------------------
On October 28, 1996, Genzyme Corporation ("Genzyme"), through a
wholly-owned subsidiary, completed its tender offer for the outstanding units
(the "Units") of Neozyme II Corporation ("Neozyme II"), each Unit consisting of
(i) one share of the Callable Common Stock (the "Callable Common Stock"), $1.00
par value per share, of Neozyme II and (ii) one Callable Warrant (the "Callable
Warrants") to purchase two shares of General Division Common Stock ("General
Division Stock"), $0.01 par value per share, and .135 share of Tissue Repair
Division Common Stock ("TR Stock"), $0.01 par value per share, of Genzyme, for
$45 per Unit in cash. 2,385,686 Units, or 98.8%, were tendered and accepted
for payment, resulting in an aggregate tender offer price of $107,355,870.
Genzyme will acquire all of the remaining shares of Callable Common
Stock through a merger of Neozyme II into the Genzyme subsidiary that acquired
the tendered Units. As a result of the merger, holders of Units who did not
tender their units will receive $29 in cash for each share of Callable Common
Stock. The Callable Warrants included in the untendered Units will become
exercisable on the effective date of the merger and will remain outstanding
following the merger. The exercise price of the Callable Warrants will be equal
to the average closing price of two shares of General Division Stock and .135
share of TR Stock for the 20 trading days prior to the effective date of the
merger.
Funds for the tender offer were provided, and the funds for the merger
will be provided, as follows: $80.0 million from borrowings under a revolving
credit facility from Fleet National Bank, and the balance from Genzyme General
Division cash balances.
The nature and amount of the consideration paid pursuant to the tender
offer and the merger were determined by negotiation between Genzyme and a
special committee of independent directors of Neozyme II who are neither
executive officers nor directors of Genzyme.
ITEM 5. OTHER.
-----
In order to update the information previously filed with the Securities
and Exchange Commission at pages F-2 to F-29 to the Prospectus included in the
Registration Statement of Genzyme on Form S-3 (Commission File No. 333-05979)
that was filed on June 14, 1996, Genzyme hereby files as Exhibit 99.1 unaudited
pro forma financial statements and the related notes thereto for both Genzyme
and Genzyme General Division (the "General Division") giving effect to the
acquisition by Genzyme of Genetrix, Inc. ("Genetrix") on May 1, 1996 (the
"Genetrix Acquisition"), the acquisition of Deknatel Snowden Pencer, Inc.
("DSP") on July 1, 1996 (the "DSP Acquisition"), and the acquisition (the
"Neozyme II Acquisition") of Neozyme II (collectively, the "Acquisitions"). Pro
forma condensed statements of operations have been presented for both Genzyme
and the General Division assuming that the Acquisitions occurred as of January
1, 1995, using the purchase accounting method. Pro forma balance sheets have
been presented for both Genzyme and the General Division assuming that the DSP
Acquisition and Neozyme II Acquisition occurred as of June 30, 1996. The
historical Genzyme and General Division results included in the pro forma
balance sheets reflect the effect of the Genetrix Acquisition which was
completed on May 1, 1996. Historical balance sheets have been presented for DSP
as of December 31, 1994 and 1995 and June 30, 1996 (unaudited). Historical
statements of operations for DSP have been presented for the years ended
September 30, 1994 and 1995 and for the nine-months ended June 30, 1995 and 1996
(unaudited).
In addition, historical financial statements and notes thereto of DSP
and Neozyme II are filed herewith as Exhibits 99.2 and 99.3, respectively.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
---------------------------------
Genzyme hereby incorporates by reference into this report the following
financial statements:
(a)(1) Historical financial statements (and related notes) of Deknatel
Snowden Pencer, Inc. as of September 30, 1995 and 1994 and June
30, 1996 (unaudited) and for the years ended September 30, 1994
and 1995 and the nine months ended June 30, 1995 and 1996
(unaudited). Filed as Exhibit 99.2 hereto.
(2) Historical financial statements (and related notes) of Neozyme
II Corporation as of December 31, 1994 and 1995 and June 30,
1996 (unaudited) and for the years ended December 31, 1993, 1994
and 1995 and the six months ended June 30, 1995 and 1996
(unaudited). Filed as Exhibit 99.3 hereto.
(b) Unaudited pro forma balance sheets as of June 30, 1996 and
statements of operations (and related notes) for the year ended
December 31, 1995 and for the six months ended June 30, 1996 for
Genzyme Corporation and Genzyme General Division, giving effect
to the acquisitions by Genzyme of Genetrix, Inc., Deknatel
Snowden Pencer, Inc. and Neozyme II Corporation. Filed as
Exhibit 99.1 hereto.
<TABLE>
<CAPTION>
(c) Exhibits.
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
2.1 Purchase Agreement dated as of September 20, 1996 by and among
Genzyme Corporation, Neozyme II Acquisition Corp. and Neozyme II
Corporation. Filed as Exhibit A to Amendment No. 2 to the Schedule 13D
filed by Genzyme Corporation on September 24, 1996, and incorporated
herein by reference.
99.1 Unaudited pro forma balance sheets as of June 30, 1996 and statements of operations (and related
notes) for the year ended December 31, 1995 and for the six-months ended June 30, 1996 for Genzyme
and the General Division, giving effect to the Acquisitions. Filed herewith.
99.2 Historical financial statements (and related notes) of DSP as of September 30, 1994 and
1995 and June 30, 1996 (unaudited) and for the years ended September 30, 1994, 1995 and
for the nine-months ended June 30, 1995 and 1996 (unaudited). Filed herewith.
99.3 Historical financial statements (and related notes) of Neozyme II Corporation
as of December 31, 1994 and 1995 and June 30, 1996 (unaudited) and for the years
ended December 31, 1993, 1994 and 1995 and the six months ended June 30, 1995
and 1996 (unaudited). Filed herewith.
</TABLE>
<PAGE> 3
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 hereunto duly authorized.
Date: November 5, 1996 GENZYME CORPORATION
By:/s/ David J. McLachlan
------------------------------------
David J. McLachlan
Executive Vice President, Finance;
Chief Financial Officer
<PAGE> 4
EXHIBIT INDEX
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
--- ----------- --------
2.1 Purchase Agreement dated as of September 20, 1996 by
and among Genzyme Corporation, Neozyme II Acquisition
Corp. and Neozyme II Corporation. Filed as Exhibit A
to Amendment No. 2 to the Schedule 13D filed by Genzyme
Corporation on September 24, 1996 and incorporated
herein by reference.
99.1 Unaudited pro forma balance sheets as of June 30, 1996 7
and statements of operations (and related notes) for the
year ended December 31, 1995 and for the six-months ended
June 30, 1996 for Genzyme and the General Division, giving
effect to the Acquisitions. Filed herewith.
99.2 Historical financial statements (and related notes) of 23
DSP as of September 30, 1994 and 1995 and June 30, 1996
(unaudited) and for the years ended September 30, 1994,
1995 and for the nine-months ended June 30, 1995
and 1996 (unaudited). Filed herewith.
99.3 Historical financial statements (and related notes) 40
of Neozyme II Corporation as of December 31, 1994 and
1995 and June 30, 1996 (unaudited) and for the years
ended December 31, 1993, 1994 and 1995 and the six
months ended June 30, 1995 and 1996 (unaudited).
Filed herewith.
<PAGE> 1
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
PRO FORMA FINANCIAL STATEMENTS:
Introduction to Unaudited Pro Forma Financial Statements F-2...................... F-2
GENZYME CORPORATION:
Pro Forma Consolidated Balance Sheets as of June 30, 1996....................... F-3
Pro Forma Consolidated Statements of Operations for the Six Months
Ended June 30, 1996.......................................................... F-4
Pro Forma Consolidated Statements of Operations for the Year Ended December 31,
1995......................................................................... F-6
GENZYME GENERAL DIVISION:
Pro Forma Combined Balance Sheets as of June 30, 1996........................... F-8
Pro Forma Combined Statements of Operations for the Six Months Ended June 30,
1996......................................................................... F-9
Pro Forma Combined Statements of Operations for the Year Ended December 31,
1995......................................................................... F-11
Notes to Unaudited Pro Forma Financial Statements................................. F-13
DSP CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants........................................ F-18
Consolidated Balance Sheets as of September 30, 1994 and 1995 and
June 30, 1995 (unaudited)..................................................... F-19
Consolidated Statements of Operations for the Years Ended September 30, 1994
and 1995, and for the Nine Months Ended June 30, 1994 and 1995 (unaudited).... F-20
Consolidated Statements of Stockholders' Investment for the Years Ended
September 30, 1994 and 1995, and for the Nine Months Ended June 30, 1994
and 1995 (unaudited).......................................................... F-21
Consolidated Statements of Cash Flows for the Years Ended September 30, 1994
and 1995, and for the Nine Months Ended June 30, 1994 and 1995 (unaudited).... F-22
Notes to Consolidated Financial Statements...................................... F-23
NEOZYME II FINANCIAL STATEMENTS:
Report of Independent Accountants............................................... F-35
Statements of Operations for the Years Ended December 31, 1993, 1994 and 1995
and Cumulative from March 2, 1992 (date of inception) through December
31, 1995...................................................................... F-36
Balance Sheets as of December 31, 1994 and 1995................................. F-37
Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and 1995
and Cumulative from March 2, 1992 (date of inception) through December
31, 1995...................................................................... F-38
Statement of Stockholders' Equity for the Years Ended December 31, 1992, 1993,
1994 and 1995................................................................. F-39
Notes to Financial Statements................................................... F-40
Unaudited Statements of Operations for the Three and Six Months Ending
June 30, 1995 and 1996 and Cumulative from March 2, 1992 (date of inception)
through June 30, 1996......................................................... F-43
Balance Sheets as of December 31, 1995 and June 30, 1996 (unaudited)............ F-44
Unaudited Statements of Cash Flows for the Six Months Ended June 30, 1995 and
1996 and Cumulative from March 2, 1992 (date of inception) through June
30, 1996...................................................................... F-45
Notes to Unaudited Condensed Financial Statements............................... F-46
</TABLE>
F-1
<PAGE> 2
Exhibit 99.1
------------
GENZYME CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED PRO FORMA FINANCIAL STATEMENTS
INTRODUCTION:
These unaudited condensed pro forma financial statements and the related
notes are presented to give effect to the Genetrix Acquisition using shares of
General Division Stock (as described in Note 3), the DSP Acquisition (as
described in Note 4) and the Neozyme II Acquisition (as described in Note 5).
Pro forma condensed statements of operations have been presented for both
Genzyme and the General Division assuming that the Acquisitions each occurred as
of January 1, 1995, using the purchase accounting method. Pro forma balance
sheets have been presented for both Genzyme and the General Division assuming
that the DSP Acquisition and the Neozyme II Acquisition occurred as of June 30,
1996. The historical Genzyme Corporation and Genzyme General Division results
included in the pro forma balance sheets reflect the effect of the Genetrix
Acquisition which was completed on May 1, 1996. To distinguish the effect of
each transaction, the pro forma statements of operations include subtotal
columns which give effect to the Genetrix Acquisition, after certain pro forma
adjustments, and the DSP Acquisition, after certain pro forma adjustments,
before consideration of the Neozyme II Acquisition. The pro forma balance sheets
include a subtotal column which reflects the effect of the DSP Acquisition,
after certain pro forma adjustments, before giving effect to the Neozyme II
Acquisition and the pro forma adjustments related thereto. The notes to the
unaudited pro forma financial statements are defined as related either to the
Genetrix Acquisition, the DSP Acquisition or the Neozyme II Acquisition.
Year end for Genzyme, Genetrix and Neozyme II is December 31, while year
end for DSP prior to the acquisition by Genzyme was September 30. The pro forma
financial statements for the year ended December 31, 1995 included herein are
based on the historical income statements of Genzyme, Genetrix, and Neozyme II
for the year ended December 31, 1995 and the historical income statement for DSP
for the year ended September 30, 1995. Revenues and operating costs and expenses
for DSP for the three months ended December 31, 1995 were $22,001,000 and
$18,260,000, respectively.
F-2
<PAGE> 3
GENZYME CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996
(AMOUNTS IN THOUSANDS)
ASSETS
PRO
FORMA PRO
HISTORICAL PRO FOOT- GENZYME PRO FOOT- FORMA
GENZYME HISTORICAL FORMA NOTE CORP. HISTORICAL FORMA NOTE GENZYME
CORP. DSP ADJS. REF. & DSP NEOZYME II ADJS. REF. CORP.
---------- ---------- -------- ---- ---------- ---------- --------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents............. $ 119,331 $ 1,703 $(50,950) (C) $ 70,084 $ 8,636 $ -- $ 78,720
Short-term investments.... 163,063 -- -- 163,063 5,178 (108,206) (K) 60,035
Accounts receivable, less
allowance for doubtful
accounts................ 97,935 14,977 112,912 -- -- 112,912
Inventories............... 64,363 24,240 5,668 (D) 94,271 -- -- 94,271
Prepaid expenses and other
current assets.......... 13,433 681 -- 14,114 527 (556) (I) 14,085
Deferred tax
assets -- current....... 7,729 -- 7,729 -- -- 7,729
---------- -------- -------- ---------- -------- --------- ----------
Total current assets.... 465,854 41,601 (45,282) 462,173 14,341 (108,762) 367,752
Property, plant and
equipment, net.......... 365,341 17,475 -- 382,816 -- -- 382,816
Other Assets:
Long-term investments..... 52,141 -- -- 52,141 -- -- 52,141
Notes
receivable -- related
party................... 1,467 -- -- 1,467 -- -- 1,467
Intangibles, net of
accumulated
amortization............ 64,049 49,176 145,937 (E) 259,162 -- -- 259,162
Deferred tax
assets -- noncurrent.... 27,487 2,874 (10,977) (E) 19,384 -- -- 19,384
Other noncurrent assets... 29,990 152 -- 30,142 -- (100) (I) 30,042
---------- -------- -------- ---------- -------- --------- ----------
Total other assets........ 175,134 52,202 134,960 362,296 -- (100) 362,196
---------- -------- -------- ---------- -------- --------- ----------
Total assets............ $1,006,329 $111,278 $ 89,678 $1,207,285 $ 14,341 $(108,862) $1,112,764
========== ======== ======== ========== ======== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......... $ 13,436 $ 4,434 $ -- $ 17,870 $ -- $ -- $ 17,870
Accrued expenses.......... 49,065 20,298 -- 69,363 158 971 (I, K) 70,492
Income taxes payable...... 8,828 -- -- 8,828 -- 8,828
Deferred revenue.......... 3,273 -- -- 3,273 -- (527) (I) 2,746
Short-term borrowings..... 15,000 -- 200,000 (G) 215,000 -- -- (K) 215,000
Current portion of
long-term debt and
capital lease
obligations............. 2,761 9,418 (9,024) (A) 3,155 -- -- 3,155
---------- -------- -------- ---------- -------- --------- ----------
Total current
liabilities........... 92,363 34,150 190,976 317,489 158 444 318,091
Noncurrent liabilities:
Long-term debt and capital
lease obligations....... 24,242 45,726 (45,726) (A) 24,242 -- -- 24,242
Note payable to Genzyme... -- -- -- -- 100 (100) (I) --
Other noncurrent
liabilities............. 8,679 -- -- 8,679 -- -- 8,679
---------- -------- -------- ---------- -------- --------- ----------
32,921 45,726 (45,726) 32,921 100 (100) 32,921
Stockholders' Equity:
General Division Stock,
$.01 par value.......... 347 -- 347 -- -- 347
TR Stock, $.01 par
value................... 124 -- 124 -- -- 124
Treasury Stock, at cost... (881) -- (881) -- -- (881)
Neozyme II callable common
stock................... -- 2,415 (2,415) (J) --
DSP common stock.......... -- 5 (5) (B) -- -- -- --
Additional paid-in
capital................. 879,513 58,037 (45,947) (B)
-- -- (12,090) (F) 879,513 75,620 (75,620) (J)
-- -- -- -- -- 469 (K) 879,982
Accumulated earnings
(deficit)............... 2,918 (26,371) 26,371 (B)
(24,170) (H) (21,252) (63,918) 63,918 (J)
(109,675) (K)
14,117 (K) (116,810)
Other equity
adjustments............. (976) (269) 269 (B) (976) (34) -- (1,010)
---------- -------- -------- ---------- -------- --------- ----------
Total stockholders'
equity................ 881,045 31,402 (55,572) 856,875 14,083 (109,206) 761,752
---------- -------- -------- ---------- -------- --------- ----------
Total liabilities and
stockholders' equity.... $1,006,329 $111,278 $ 89,678 $1,207,285 $ 14,341 $(108,862) $1,112,764
========== ======== ======== ========== ======== ========= ==========
</TABLE>
See notes to unaudited pro forma financial statements.
F-3
<PAGE> 4
GENZYME CORPORATION AND SUBSIDIARIES
<TABLE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<CAPTION>
PRO
FORMA
HISTORICAL HISTORICAL PRO FOOT- GENZYME PRO FOOT-
GENZYME GENETRIX, FORMA NOTE CORP. AND HISTORICAL FORMA NOTE
CORP. INC. ADJS. REF. GENETRIX DSP ADJS. REF.
---------- ---------- ----- ----- --------- ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues............................ $229,132 $7,239 $ -- $236,371 $ 54,138 $ --
Operating costs and expenses:
Cost of products sold................. 62,488 -- -- 62,488 26,138 --
Cost of services sold................. 25,533 5,631 -- 31,164 -- --
Selling, general and administrative
expenses............................ 76,033 1,634 (33) [M] 77,634 18,189 (725) [Q]
Research and development expenses..... 36,255 -- -- 36,255 1,365 --
Amortization of intangibles........... 2,536 187 770 [L] 3,493 3,532 1,941 [P]
Charge for junior stock options....... -- -- -- -- 12,090 (12,090) [S]
Other expenses........................ 1,465 -- 1,465 546 --
-------- ------ ----- -------- -------- -------
Total operating expenses................ 204,310 7,452 737 212,499 61,860 (10,874)
-------- ------ ----- -------- -------- -------
Operating income........................ 24,822 (213) (737) 23,872 (7,722) 10,874
Other income and (expenses):
Investment income..................... 9,103 -- -- 9,103 -- --
Interest expense...................... (395) (115) 59 [N] (451) (3,039) (3,121) [R]
Other................................. (347) (43) -- (390) (894) --
-------- ------ ----- -------- -------- -------
8,361 (158) 59 8,262 (3,933) (3,121)
-------- ------ ----- -------- -------- -------
Income before income taxes.............. 33,183 (371) (678) 32,134 (11,655) 7,753
Provision for income taxes.............. (13,107) -- 119 [O] (12,988) 96 (1,018) [T]
-------- ------ ----- -------- -------- -------
Net income.............................. $ 20,076 $ (371) $(559) $ 19,146 $(11,559) $ 6,735
======== ====== ===== ======== ======== =======
Attributable to the General Division:
Net income............................ $ 31,516 $ 30,586
Tax benefit allocated from Tissue
Repair Division................... 7,802 7,802
-------- --------
Net income attributable to General
Division Stock........................ $ 39,318 $ 38,388
======== ========
</TABLE>
<TABLE>
<CAPTION>
PRO
FORMA
GENZYME PRO
CORP., PRO FOOT- FORMA
GENETRIX HISTORICAL FORMA NOTE GENZYME
AND DSP NEOZYME II ADJS. REF. CORP.
-------- ---------- -------- ----- --------
<S> <C> <C> <C> <C> <C>
Net revenues............................ $290,509 $ -- $(10,631) [U] $279,878
Operating costs and expenses:
Cost of products sold................. 88,626 -- -- 88,626
Cost of services sold................. 31,164 -- -- 31,164
Selling, general and administrative
expenses............................ 95,098 162 (38) [U] 95,222
Research and development expenses..... 37,620 10,596 (10,596) [U] 37,620
Amortization of intangibles........... 8,966 -- -- 8,966
Charge for junior stock options....... -- -- -- --
Other expenses........................ 2,011 -- -- 2,011
-------- -------- -------- --------
Total operating expenses................ 263,485 10,758 (10,634) 263,609
-------- -------- -------- --------
Operating income........................ 27,024 (10,758) 3 16,269
Other income and (expenses):
Investment income..................... 9,103 453 (2,705) [U,V] 6,851
Interest expense...................... (6,611) -- -- (6,611)
Other................................. (1,284) -- -- (1,284)
-------- -------- -------- --------
1,208 453 (2,705) (1,044)
-------- -------- -------- --------
Income before income taxes.............. 28,232 (10,305) (2,702) 15,225
Provision for income taxes.............. (13,910) -- 5,528 [W] (8,382)
-------- -------- -------- --------
Net income.............................. $ 14,322 $(10,305) $ 2,826 $ 6,843
======== ======== ======== ========
Attributable to the General Division:
Net income............................ $ 25,762 $ 18,283
Tax benefit allocated from Tissue
Repair Division................... 7,802 7,802
-------- --------
Net income attributable to General
Division Stock........................ $ 33,564 $ 26,085
======== ========
</TABLE>
See notes to unaudited pro forma financial statements.
F-4
<PAGE> 5
GENZYME CORPORATION AND SUBSIDIARIES
<TABLE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS -- (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<CAPTION>
PRO
FORMA
HISTORICAL HISTORICAL PRO FOOT- GENZYME PRO FOOT-
GENZYME GENETRIX, FORMA NOTE CORP. AND HISTORICAL FORMA NOTE
CORP. INC. ADJS. REF. GENETRIX DSP ADJS. REF.
---------- ---------- ----- ----- --------- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income per General Division common
and common equivalent share.............. $ 0.54 $ 0.52
======== ========
Pro forma weighted average shares
outstanding.............................. 72,880 920 73,800
======== === ========
Income per General Division common and
common equivalent share assuming full
dilution................................. $ 0.53 $ 0.51
======== ========
Pro forma fully diluted weighted average
shares outstanding....................... 74,300 920 75,220
======== === ========
Attributable to the Tissue Repair Division:
Net loss................................. $(19,242) $(19,242)
======== ========
Loss per Tissue Repair Division common
share.................................. $ (1.55) $ (1.55)
======== ========
Historical weighted average shares
outstanding............................ 12,411 12,411
======== ========
</TABLE>
<TABLE>
<CAPTION>
PRO
FORMA
GENZYME PRO
CORP., PRO FOOT- FORMA
GENETRIX HISTORICAL FORMA NOTE GENZYME
AND DSP NEOZYME II ADJS. REF. CORP.
-------- ---------- ----- ----- --------
<S> <C> <C> <C> <C> <C>
Income per General Division common
and common equivalent share.............. $ 0.45 $ 0.35
======== ========
Pro forma weighted average shares
outstanding.............................. 73,800 73,800
======== ========
Income per General Division common and
common equivalent share assuming full
dilution................................. $ 0.45 $ 0.35
======== ========
Pro forma fully diluted weighted average
shares outstanding....................... 75,220 75,220
======== ========
Attributable to the Tissue Repair Division:
Net loss................................. $(19,242) $(19,242)
======== ========
Loss per Tissue Repair Division common
share.................................. $ (1.55) $ (1.55)
======== ========
Historical weighted average shares
outstanding............................ 12,411 12,411
======== ========
</TABLE>
See notes to unaudited pro forma financial statements.
F-5
<PAGE> 6
GENZYME CORPORATION AND SUBSIDIARIES
<TABLE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<CAPTION>
PRO
FORMA
HISTORICAL HISTORICAL PRO FOOT- GENZYME PRO FOOT-
GENZYME GENETRIX, FORMA NOTE CORP. AND HISTORICAL FORMA NOTE
CORP. INC. ADJS. REF. GENETRIX DSP ADJS. REF.
---------- ---------- ------- ----- --------- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues.......................... $383,783 $ 22,006 $ -- $405,789 $ 95,259 $ --
Operating costs and expenses:
Cost of products sold............... 113,964 -- -- 113,964 48,191 5,668 (S)
Cost of services sold............... 35,868 11,328 -- 47,196 -- --
Selling, general and administrative
expenses.......................... 110,417 10,289 (100) (M) 120,606 28,984 (1,450) (Q)
Research and development expenses... 68,845 -- -- 68,845 1,971 --
Amortization of intangibles......... 4,677 534 2,310 (L) 7,521 2,750 3,881 (P)
Other expenses...................... 14,216 -- -- 14,216 3,585
-------- -------- ------- -------- -------- --------
Total operating expenses.............. 347,987 22,151 2,210 372,348 85,481 8,099
-------- -------- ------- -------- -------- --------
Operating income...................... 35,796 (145) (2,210) 33,441 9,778 (8,099)
Other income and (expenses):
Investment income................... 8,814 25 -- 8,839 -- --
Interest expense.................... (1,109) (260) 178 (N) (1,191) (6,937) (5,383) (R)
Other............................... (202) -- -- (202) (1,354) --
-------- -------- ------- -------- -------- --------
7,503 (235) 178 7,446 (8,291) (5,383)
-------- -------- ------- -------- -------- --------
Income before income taxes............ 43,299 (380) (2,032) 40,887 1,487 (13,482)
Provision for income taxes............ (21,649) -- 43 (O) (21,606) (172) 1,672 (T)
-------- -------- ------- -------- -------- --------
Net income............................ $ 21,650 $ (380) $(1,989) $ 19,281 $ 1,315 $(11,810)
======== ======== ======= ======== ======== ========
Applicable to the General Division:
Net income.......................... $ 34,823 $ 32,454
Tax benefit allocated from Tissue
Repair Division................. 8,857 8,857
-------- --------
Net income attributable to General
Division Stock...................... $ 43,680 $ 41,311
======== ========
</TABLE>
<TABLE>
<CAPTION>
PRO
FORMA
GENZYME PRO
CORP. PRO FOOT- FORMA
GENETRIX, HISTORICAL FORMA NOTE GENZYME
& DSP NEOZYME II ADJS. REF. CORP.
-------- ---------- -------- ----- --------
<S> <C> <C> <C> <C> <C>
Net revenues.......................... $501,048 $ -- $(24,198) [U] $476,850
Operating costs and expenses:
Cost of products sold............... 167,823 -- -- 167,823
Cost of services sold............... 47,196 -- -- 47,196
Selling, general and administrative
expenses.......................... 148,140 327 (77) [U] 148,390
Research and development expenses... 70,816 24,128 (24,128) [U] 70,816
Amortization of intangibles......... 14,152 -- -- 14,152
Other expenses...................... 17,801 -- -- 17,801
-------- -------- -------- --------
Total operating expenses.............. 465,928 24,455 (24,205) 466,178
-------- -------- -------- --------
Operating income...................... 35,120 (24,455) 7 10,672
Other income and (expenses):
Investment income................... 8,839 1,497 (5,410) [U,V] 4,926
Interest expense.................... (13,511) -- -- (13,511)
Other............................... (1,556) -- -- (1,556)
-------- -------- -------- --------
(6,228) 1,497 (5,410) (10,141)
-------- -------- -------- --------
Income before income taxes............ 28,892 (22,958) (5,403) 531
Provision for income taxes............ (20,106) -- 12,053 [W] (8,053)
-------- -------- -------- --------
Net income............................ $ 8,786 $(22,958) $ 6,650 $ (7,522)
======== ======== ======== ========
Applicable to the General Division:
Net income.......................... $ 21,959 $ 5,651
Tax benefit allocated from Tissue
Repair Division................. 8,857 8,857
-------- --------
Net income attributable to General
Division Stock...................... $ 30,816 $ 14,508
======== ========
</TABLE>
See notes to unaudited pro forma financial statements.
F-6
<PAGE> 7
GENZYME CORPORATION AND SUBSIDIARIES
<TABLE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS --
(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1995
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<CAPTION>
PRO
FORMA
HISTORICAL HISTORICAL PRO FOOT- GENZYME PRO FOOT-
GENZYME GENETRIX, FORMA NOTE CORP. AND HISTORICAL FORMA NOTE
CORP. INC. ADJS. REF. GENETRIX DSP ADJS. REF.
---------- ---------- ------ ----- --------- ---------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income per General Division common
and common equivalent share.............. $ 0.73 $ 0.67
-------- --------
Pro forma weighted average shares
outstanding.............................. 60,185 1,380 61,565
======== ===== ========
Income per General Division common and
common equivalent share assuming full
dilution................................. $ 0.66 $ 0.61
======== ========
Pro forma fully diluted weighted average
shares outstanding....................... 66,621 1,380 68,001
======== ===== ========
Applicable to the Tissue Repair Division:
Net loss................................. $(22,030) $(22,030)
======== ========
Loss per Tissue Repair Division common
share.................................. $ (2.28) $ (2.28)
======== ========
Historical weighted average shares
outstanding............................ 9,659 9,659
======== ========
</TABLE>
<TABLE>
<CAPTION>
PRO
FORMA
GENZYME PRO
CORP. PRO FOOT- FORMA
GENETRIX HISTORICAL FORMA NOTE GENZYME
& DSP NEOZYME II ADJS. REF. CORP.
-------- ---------- ------ ----- --------
<S> <C> <C> <C> <C> <C>
Income per General Division common
and common equivalent share.............. $ 0.50 $ 0.24
-------- --------
Pro forma weighted average shares
outstanding.............................. 61,565 61,565
======== ========
Income per General Division common and
common equivalent share assuming full
dilution................................. $ 0.45 $ 0.21
======== ========
Pro forma fully diluted weighted average
shares outstanding....................... 68,001 68,001
======== ========
Applicable to the Tissue Repair Division:
Net loss................................. $(22,030) $(22,030)
======== ========
Loss per Tissue Repair Division common
share.................................. $ (2.28) $ (2.28)
======== ========
Historical weighted average shares
outstanding............................ 9,659 9,659
======== ========
</TABLE>
See notes to unaudited pro forma financial statements.
F-7
<PAGE> 8
GENZYME GENERAL DIVISION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS
JUNE 30, 1996
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
PRO
FORMA PRO
HISTORICAL GENZYME FORMA
GENZYME PRO FOOT- GENERAL PRO FOOT- GENZYME
GENERAL HISTORICAL FORMA NOTE DIVISION HISTORICAL FORMA NOTE GENERAL
DIVISION DSP ADJS. REF. AND DSP NEOZYME II ADJS. REF. DIVISION
---------- ---------- -------- ----- ---------- ---------- --------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash
equivalents.......... $ 85,354 $ 1,703 $(50,950) [Z] $ 36,107 $ 8,636 $ $ 44,743
Short-term
investments.......... 161,060 -- -- 161,060 5,178 (108,206) [AH] 58,032
Accounts receivable,
less allowance for
doubtful accounts.... 96,719 14,977 111,696 -- -- 111,696
Inventories............. 62,989 24,240 5,668 [AA] 92,897 -- -- 92,897
Prepaid expenses and
other current
assets............... 13,002 681 -- 13,683 527 (556) [AF] 13,654
Due from Tissue Repair
Division............. 2,308 -- -- 2,308 -- -- 2,308
Deferred tax
assets -- current.... 7,729 -- -- 7,729 -- -- 7,729
-------- -------- -------- ---------- -------- --------- ----------
Total current
assets........ 429,161 41,601 (45,282) 425,480 14,341 (108,762) 331,059
Property, plant &
equipment, net.......... 344,658 17,475 -- 362,133 -- -- 362,133
Other Assets:
Long-term investments... 52,141 -- -- 52,141 -- -- 52,141
Notes
receivable -- related
party................ 1,467 -- -- 1,467 -- -- 1,467
Intangibles, net of
accumulated
amortization......... 64,049 49,176 145,937 [AB] 259,162 -- -- 259,162
Deferred tax
assets -- noncurrent... 27,487 2,874 (10,977) [AB] 19,384 -- -- 19,384
Other noncurrent
assets............... 29,878 152 -- 30,030 -- (100) [AF] 29,930
-------- -------- -------- ---------- ------- --------- ----------
Total other
assets........ 175,022 52,202 134,960 362,184 -- (100) 362,084
-------- -------- -------- ---------- ------- --------- ----------
Total assets.... $948,841 $111,278 $ 89,678 $1,149,797 $14,341 $(108,862) $1,055,276
======== ======== ======== ========== ======= ========= ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current Liabilities:
Accounts payable........ $ 12,063 $ 4,434 $ -- $ 16,497 -- -- $ 16,497
Accrued expenses........ 46,847 20,298 67,145 158 971 [AF, AH] 68,274
Income taxes payable.... 8,828 -- -- 8,828 -- 8,828
Deferred revenue........ 3,273 -- -- 3,273 -- (527) [AF] 2,746
Short-term borrowings... -- -- 200,000 [AD] 200,000 -- -- [AH] 200,000
Current portion of
long-term debt and
capital lease
obligations.......... 2,724 9,418 (9,024) [X] 3,118 -- -- 3,118
-------- -------- -------- ---------- -------- --------- ----------
Total current
liabilities... 73,735 34,150 190,976 298,861 158 444 299,463
Noncurrent Liabilities:
Long-term debt and
capital lease
obligations.......... 24,242 45,726 (45,726) [X] 24,242 -- -- 24,242
Note Payable to
Genzyme.............. -- -- -- -- 100 (100) [AF] --
Other noncurrent
liabilities............. 7,928 -- -- 7,928 -- -- 7,928
-------- -------- -------- ---------- -------- --------- ----------
32,170 45,726 (45,726) 32,170 100 (100) 32,170
Division Equity:
Division equity......... 842,936 (269) 269 [Y]
-- (24,170) [AE] 818,766 (34) (109,675) [AH]
-- -- -- -- -- 14,117 [AH]
-- -- -- -- -- 469 [AH] 723,643
DSP common
stock................ -- 5 (5) [Y] -- -- -- --
Neozyme II, callable
common stock......... -- -- -- -- 2,415 (2,415) [AG] --
Additional paid-in
capital.............. -- 58,037 (45,947) [Y]
(12,090) [AC] -- 75,620 (75,620) [AG] --
Accumulated deficit..... -- (26,371) 26,371 [Y] -- (63,918) 63,918 [AG] --
-------- -------- -------- ---------- -------- --------- ----------
Total division
equity........ 842,936 31,402 (55,572) 818,766 14,083 (109,206) 723,643
-------- -------- -------- ---------- -------- --------- ----------
Total liabilities and
division equity......... $948,841 $111,278 $ 89,678 $1,149,797 $ 14,341 $(108,862) $1,055,276
======== ======== ======== ========== ======== ========= ==========
</TABLE>
See notes to unaudited pro forma financial statements.
F-8
<PAGE> 9
GENZYME GENERAL DIVISION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
PRO
FORMA
GENZYME
HISTORICAL GENERAL
GENZYME HISTORICAL PRO FOOT- DIVISION PRO FOOT-
GENERAL GENETRIX, FORMA NOTE AND HISTORICAL FORMA NOTE
DIVISION INC. ADJS. REF. GENETRIX DSP ADJS. REF.
---------- ---------- ------- ----- --------- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues.......................... $225,771 $7,239 $ -- $233,010 $54,138 $ --
Operating costs and expenses:
Cost of products sold............... 62,488 -- -- 62,488 26,138 --
Cost of services sold............... 19,651 5,631 -- 25,282 -- --
Selling, general and administrative
expenses.......................... 63,057 1,634 (33) [AJ] 64,658 18,189 (725) [AN]
Research and development expenses... 31,551 -- -- 31,551 1,365 --
Amortization of intangibles......... 2,536 187 770 [AI] 3,493 3,532 1,941 [AM]
Charge for junior stock options..... -- -- -- -- 12,090 (12,090) [AP]
Other expenses...................... 1,465 -- -- 1,465 546 --
-------- ------ ----- -------- -------- --------
Total operating expenses.............. 180,748 7,452 737 188,937 61,860 (10,874)
-------- ------ ----- -------- -------- --------
Operating income...................... 45,023 (213) (737) 44,073 (7,722) 10,874
Other income and (expenses):
Investment income................... 8,144 -- -- 8,144 -- --
Interest expense.................... (395) (115) 59 [AK] (451) (3,039) (3,121) [AO]
Other............................... (347) (43) -- (390) (894) --
-------- ------ ----- -------- -------- --------
7,402 (158) 59 7,303 (3,933) (3,121)
-------- ------ ----- -------- -------- --------
Income before income taxes............ 52,425 (371) (678) 51,376 (11,655) 7,753
Provision for income taxes............ (20,909) -- 119 [AL] (20,790) 96 (1,018) [AQ]
-------- ------ ----- -------- -------- --------
Net income (loss)..................... 31,516 (371) (559) 30,586 (11,559) 6,735
Tax benefit allocated from Tissue
Repair Division..................... 7,802 -- -- 7,802 -- --
-------- ------ ----- -------- -------- --------
Net income attributable to General
Division Stock...................... $ 39,318 $ (371) $(559) $ 38,388 $(11,559) $ 6,735
======== ====== ===== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
PRO
FORMA
GENZYME PRO
GENERAL FORMA
DIVISION, PRO FOOT- GENZYME
GENETRIX HISTORICAL FORMA NOTE GENERAL
AND DSP NEOZYME II ADJS. REF. DIVISION
-------- ---------- -------- ----- --------
<S> <C> <C> <C> <C> <C>
Net revenues.......................... $287,148 $ -- $(10,631) [AR] $276,517
Operating costs and expenses:
Cost of products sold............... 88,626 -- -- 88,626
Cost of services sold............... 25,282 -- -- 25,282
Selling, general and administrative
expenses.......................... 82,122 162 (38) [AR] 82,246
Research and development expenses... 32,916 10,596 (10,596) [AR] 32,916
Amortization of intangibles......... 8,966 -- -- 8,966
Charge for junior stock options..... -- -- -- --
Other expenses...................... 2,011 -- -- 2,011
-------- -------- -------- --------
Total operating expenses.............. 239,923 10,758 (10,634) 240,047
-------- -------- -------- --------
Operating income...................... 47,225 (10,758) 3 36,470
Other income and (expenses):
Investment income................... 8,144 453 (2,705) [AT] 5,892
Interest expense.................... (6,611) -- -- (6,611)
Other............................... (1,284) -- -- (1,284)
-------- -------- -------- --------
249 453 (2,705) (2,003)
-------- -------- -------- --------
Income before income taxes............ 47,474 (10,305) (2,702) 34,467
Provision for income taxes............ (21,712) -- 5,528 [AS] (16,184)
-------- -------- -------- --------
Net income (loss)..................... 25,762 (10,305) 2,826 18,283
Tax benefit allocated from Tissue
Repair Division..................... 7,802 -- -- 7,802
-------- -------- -------- --------
Net income attributable to General
Division Stock...................... $ 33,564 $(10,305) $ 2,826 $ 26,085
======== ======== ======== ========
</TABLE>
See notes to unaudited pro forma financial statements.
F-9
<PAGE> 10
GENZYME GENERAL DIVISION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS --
(CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
PRO
FORMA
GENZYME
HISTORICAL GENERAL
GENZYME HISTORICAL PRO FOOT- DIVISION PRO FOOT-
GENERAL GENETRIX, FORMA NOTE AND HISTORICAL FORMA NOTE
DIVISION INC. ADJS. REF. GENETRIX DSP ADJS. REF.
---------- ---------- ----- ----- --------- ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income per General Division
common and common equivalent share.... $ 0.54 $ 0.52
======= =======
Pro forma weighted average shares
outstanding........................... 72,880 920 73,800
======= === =======
Income per General Division common and
common equivalent share assuming full
dilution.............................. $ 0.53 $ 0.51
======= =======
Pro forma fully diluted weighted average
shares outstanding.................... 74,300 920 75,220
======= === =======
</TABLE>
<TABLE>
<CAPTION>
PRO
FORMA
GENZYME PRO
GENERAL FORMA
DIVISION, PRO FOOT- GENZYME
GENETRIX HISTORICAL FORMA NOTE GENERAL
AND DSP NEOZYME II ADJS. REF. DIVISION
-------- ---------- -------- ----- --------
<S> <C> <C> <C> <C> <C>
Income per General Division
common and common equivalent share.... $ 0.45 $ 0.35
======= =======
Pro forma weighted average shares
outstanding........................... 73,800 73,800
======= =======
Income per General Division common and
common equivalent share assuming full
dilution.............................. $ 0.45 $ 0.35
======= =======
Pro forma fully diluted weighted average
shares outstanding.................... 75,220 75,220
======= =======
</TABLE>
See notes to unaudited pro forma financial statements.
F-10
<PAGE> 11
GENZYME GENERAL DIVISION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
PRO
FORMA
GENZYME
HISTORICAL GENERAL
GENZYME HISTORICAL PRO FOOT- DIVISION PRO FOOT-
GENERAL GENETRIX, FORMA NOTE AND HISTORICAL FORMA NOTE
DIVISION INC. ADJS. REF. GENETRIX DSP ADJS. REF.
---------- ---------- ------- ----- -------- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues.......................... $378,563 $22,006 $ -- $400,569 $95,259 $ --
Operating costs and expenses:
Cost of products sold............... 113,964 -- -- 113,964 48,191 5,668 [AP]
Cost of services sold............... 31,137 11,328 -- 42,465 -- --
Selling, general and administrative
expenses.......................... 97,490 10,289 (100) [AJ] 107,679 28,984 (1,450) [AN]
Research and development expenses... 57,907 -- -- 57,907 1,971 --
Amortization of intangibles......... 4,677 534 2,310 [AI] 7,521 2,750 3,881 [AM]
Other expenses...................... 14,216 -- -- 14,216 3,585
-------- ------- ------- -------- ------- --------
Total operating expenses.............. 319,391 22,151 2,210 343,752 85,481 8,099
-------- ------- ------- -------- ------- --------
Operating income...................... 59,172 (145) (2,210) 56,817 9,778 (8,099)
Other income and (expenses):
Investment income................... 7,428 25 -- 7,453 -- --
Interest expense.................... (1,069) (260) 178 [AK] (1,151) (6,937) (5,383) [AO]
Other............................... (202) -- -- (202) (1,354) --
-------- ------- ------- -------- ------- --------
6,157 (235) 178 6,100 (8,291) (5,383)
-------- ------- ------- -------- ------- --------
Income before income taxes............ 65,329 (380) (2,032) 62,917 1,487 (13,482)
Provision for income taxes............ (30,506) -- 43 [AL] (30,463) (172) 1,672 [AQ]
-------- ------- ------- -------- ------- --------
Net income............................ 34,823 $ (380) $(1,989) 32,454 $ 1,315 $(11,810)
======= ======= ======= ========
Tax benefit allocated from Tissue
Repair Division..................... 8,857 8,857
-------- --------
Net income attributable to General
Division Stock...................... $ 43,680 $ 41,311
======== ========
</TABLE>
<TABLE>
<CAPTION>
PRO
FORMA
GENZYME PRO
GENERAL FORMA
DIVISION, PRO FOOT- GENZYME
GENETRIX HISTORICAL FORMA NOTE GENERAL
AND DSP NEOZYME II ADJS. REF. DIVISION
-------- ---------- -------- ----- --------
<S> <C> <C> <C> <C> <C>
Net revenues.......................... $495,828 $ -- $(24,198) [AR] $471,630
Operating costs and expenses:
Cost of products sold............... 167,823 -- -- 167,823
Cost of services sold............... 42,465 -- -- 42,465
Selling, general and administrative
expenses.......................... 135,213 327 (77) [AR] 135,463
Research and development expenses... 59,878 24,128 (24,128) [AR] 59,878
Amortization of intangibles......... 14,152 -- -- 14,152
Other expenses...................... 17,801 -- -- 17,801
-------- -------- -------- --------
Total operating expenses.............. 437,332 24,455 (24,205) 437,582
-------- -------- -------- --------
Operating income...................... 58,496 (24,455) 7 34,048
Other income and (expenses):
Investment income................... 7,453 1,497 (5,410) [AT] 3,540
Interest expense.................... (13,471) -- -- (13,471)
Other............................... (1,556) -- -- (1,556)
-------- -------- -------- --------
(7,574) 1,497 (5,410) (11,487)
-------- -------- -------- --------
Income before income taxes............ 50,922 (22,958) (5,403) 22,561
Provision for income taxes............ (28,963) -- 12,053 [AS] (16,910)
-------- -------- -------- --------
Net income............................ 21,959 $(22,958) $ 6,650 5,651
======== ========
Tax benefit allocated from Tissue
Repair Division..................... 8,857 8,857
-------- --------
Net income attributable to General
Division Stock...................... $ 30,816 $ 14,508
======== ========
</TABLE>
See notes to unaudited pro forma financial statements.
F-11
<PAGE> 12
GENZYME GENERAL DIVISION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1995
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
PRO
FORMA
GENZYME
HISTORICAL GENERAL
GENZYME HISTORICAL PRO FOOT- DIVISION PRO FOOT-
GENERAL GENETRIX, FORMA NOTE AND HISTORICAL FORMA NOTE
DIVISION INC. ADJS. REF. GENETRIX DSP ADJS. REF.
---------- ---------- ----- ----- --------- ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income per General Division
common and common equivalent share.... $ 0.73 $ 0.67
======= =======
Pro forma weighted average shares
outstanding........................... 60,185 1,380 61,565
======= ===== =======
Income per General Division common and
common equivalent share assuming full
dilution.............................. $ 0.66 $ 0.61
======= =======
Pro forma fully diluted weighted average
shares outstanding.................... 66,621 1,380 68,001
======= ===== =======
</TABLE>
<TABLE>
<CAPTION>
PRO
FORMA
GENZYME PRO
GENERAL FORMA
DIVISION, PRO FOOT- GENZYME
GENETRIX HISTORICAL FORMA NOTE GENERAL
AND DSP NEOZYME II ADJS. REF. DIVISION
--------- ---------- -------- ----- --------
<S> <C> <C> <C> <C> <C>
Income per General Division
common and common equivalent share.... $ 0.50 $ 0.24
======= =======
Pro forma weighted average shares
outstanding........................... 61,565 61,565
======= =======
Income per General Division common and
common equivalent share assuming full
dilution.............................. $ 0.45 $ 0.21
======= =======
Pro forma fully diluted weighted average
shares outstanding.................... 68,001 68,001
======= =======
</TABLE>
See notes to unaudited pro forma financial statements.
F-12
<PAGE> 13
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES AND PROCEDURES:
The accounting policies and procedures for Genzyme, Genetrix, DSP and
Neozyme II are in conformity in all material respects. The pro forma financial
statements include both Genzyme, the registrant, and the General Division,
the stock of which was used to effect the Genetrix Acquisition. The General
Division is also the borrower of the $200 million under Genzyme's revolving
credit facility which was used to effect the DSP Acquisition and the Neozyme II
Acquisition and owner of the cash used to effect the Neozyme II Acquisition.
Amounts at the effective time of the Acquisitions may differ from the
information presented in the pro forma financial statements based on subsequent
changes in the purchase price allocations and any other related items which may
impact the amounts reflected herein.
2. THE GENERAL DIVISION'S 2-FOR-1 STOCK SPLIT:
In June 1996, the Board of Directors declared a 2-for-1 stock split of
shares of General Division Stock to be effected by means of a 100% stock
dividend payable on July 25, 1996 to stockholders of record on July 11, 1996,
subject to increasing the authorized shares of General Division Stock from
100,000,000 to 200,000,000 shares (the "Amendment"). The Amendment was approved
by holders of a majority in interest of the outstanding General Division Stock
and TR Stock, voting together as a single class, at a special meeting of the
stockholders held on July 24, 1996. On July 25, 1996, a total of 34,669,435
shares of General Division Stock were distributed to stockholders in connection
with the dividend. All General Division shares and per share amounts included
herein reflect this split.
3. GENZYME'S ACQUISITION OF GENETRIX:
On May 1, 1996, Genzyme acquired Genetrix, a privately held genetic testing
laboratory based in Phoenix, Arizona, in a tax-free exchange of General Division
Stock. In the aggregate, approximately 1,380,000 shares of General Division
Stock, valued at approximately $36.5 million, were issued for all the
outstanding shares of Genetrix preferred stock and Genetrix common stock. The
acquisition was accounted for as a purchase.
The historical balance sheets for Genzyme and the General Division as of
June 30, 1996 reflect the acquisition of Genetrix which was completed on May 1,
1996. The pro forma statement of operations for the period ended June 30, 1996
include pro forma accounts for Genetrix for the four month period ended April
30, 1996. The pro forma statements of operations for the year ended December 31,
1995 includes pro forma amounts for Genetrix for the twelve month period then
ended.
4. GENZYME'S ACQUISITION OF DSP:
On July 1, 1996, Genzyme completed the acquisition of DSP, a privately held
specialty surgical products company. The pro forma balance sheets and statements
of operations are presented assuming that this transaction occurred as of June
30, 1996 and January 1, 1995, respectively, using the purchase accounting
method.
<TABLE>
The purchase price was $251 million and consisted of cash of $245.0
million and acquisition costs of $6 million. The following is a summary of the
allocation of the purchase price to net assets acquired as a result of the
DSP Acquisition (amounts in thousands):
<S> <C>
Allocation of Purchase Price:
Current Assets.................................................. $ 47,421
Property and Equipment.......................................... 17,475
Patents......................................................... 15,319
Trade Names..................................................... 45,878
In-process technology........................................... 24,170
Goodwill........................................................ 133,916
Current Liabilities............................................. (25,126)
Deferred income taxes........................................... (8,103)
--------
$250,950
========
</TABLE>
The purchase price was allocated to the assets and liabilities of DSP based
on their estimated respective fair values. The final purchase price and
allocation of purchase price may vary from the value presented above.
F-13
<PAGE> 14
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
The pro forma adjustments to the pro forma statements of operations do not
give effect to the charge for in-process technology in the amount of
$24,170,000, which was charged to operations upon consummation of the DSP
Acquisition.
5. GENZYME CORPORATION'S ACQUISITION OF NEOZYME II:
On October 28, 1996, Genzyme completed its tender offer for outstanding
Units of Neozyme II for $45 per Unit in cash. 2,385,686 Units, or 98.8 percent,
were tendered and accepted for payment. Each Neozyme II Unit consists of one
share of Callable Common Stock and one Callable Warrant to purchase two shares
of General Division Stock and 0.135 share of TR Stock.
The tender offer was made pursuant to an agreement entered into by Genzyme
and Neozyme II announced on September 23, 1996. The agreement provides that
Genzyme will acquire all of the remaining shares of Callable Common Stock
through a merger of Neozyme II into the Genzyme subsidiary that acquired the
tendered Units. As a result of the merger, holders of Units who did not tender
their units will receive $29 in cash for each share of Callable Common Stock.
The Callable Warrants included in the untendered Units will become exercisable
on the effective date of the merger and will remain outstanding following the
merger. The exercise price of the Callable Warrants will be equal to the
average closing price of two shares of General Division Stock and .135 share of
TR Stock for the 20 trading days prior to the effective date of the merger. The
warrants will expire on December 31, 1998.
<TABLE>
The pro forma financial statements assume that 98.8% of the 2,415,000
shares of Callable Common Stock were purchased under the tender offer at $45 per
share and the remaining 1.2% of the shares were acquired in the merger for $29
per share. Funds for the tender offer were provided, and the funds for the
merger will be provided, as follows: $80 million from borrowings under a
revolving credit facility from Fleet National Bank, and the balance from the
General Division's cash balances. In addition, a $0.5 million increase to
additional paid-in capital will be recorded in effecting the merger to reflect
the value of the Callable Warrants ($16 per Callable Warrant) included in the
untendered Units which will become exercisable on the effective date of the
merger and remain outstanding after the merger. The aggregate purchase price of
$108,675,000 of the Neozyme II Acquisition (consisting of $28.2 million of cash,
$80 million of short-term borrowings, and $0.5 million of equity for the value
of the Callable Warrants) plus estimated acquisition costs of $1 million has
been allocated to the net assets acquired as follows (amounts in thousands):
<S> <C>
Cash $ 8,636
Short-term investments 5,212
Prepaid research and development (which offsets deferred revenue by Genzyme) 527
Assumed liabilities ($29K of which offsets interest receivable by Genzyme) (128)
Note payable to Genzyme (which offsets note receivable to Genzyme) (100)
In-process technology 95,558
--------
$109,675
========
</TABLE>
The pro forma adjustments to the pro forma statements of operations do not give
effect to the charge for in-process technology in the amount of $95,558,000
which will be charged to operations upon consummation of the acquisition.
Adjustments to the pro forma balance sheets which give effect to the Neozyme II
Acquisition reflect the repayment on October 3, 1996 of $80 million of the $200
million borrowed under a revolving credit facility with Fleet National Bank to
finance the DSP Acquisition and the subsequent withdrawal on October 31, 1996 of
$80 million under the same credit facility to finance the tender offer.
6. PRO FORMA ADJUSTMENTS RELATED TO THE GENETRIX ACQUISITION, DSP ACQUISITION
AND THE NEOZYME II ACQUISITION:
These adjustments reflect the retirement of all DSP Common Stock and the
retirement of all Callable Common Stock.
I. PRO FORMA ADJUSTMENTS TO GENZYME'S CONSOLIDATED BALANCE SHEETS:
Related to the DSP Acquisition:
A. Eliminate DSP's current portion of long-term debt and long-term
debt, $9.0 million and $45.7 million, respectively, which was
assumed by Genzyme and subsequently repaid.
B. Eliminate DSP's common stock of $5,000, additional paid-in capital
of $45.9 million and accumulated deficit of $26.4 million.
C. To record cash payments, including acquisition costs, totaling
$51 million in connection with the DSP Acquisition.
F-14
<PAGE> 15
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
D. To record a $5.7 million adjustment to the estimated fair value of
the inventory acquired.
E. To record the adjustments to the estimated fair values of patents,
tradenames, and goodwill acquired and the related deferred tax
liability.
F. Eliminate $12.1 million reserve for junior stock option charges.
G. To record the $200 million borrowing under a revolving credit
facility with a commercial bank, due September 1, 1997 with
interest payable at LIBOR plus 5/8% (6.16% at July 1, 1996)
H. To record the impact to accumulated earnings (deficit) of the
charge for acquired in-process technology.
Related to the Neozyme II Acquisition:
I. Eliminate Series 1992 note payable issued by Neozyme II to Genzyme
of $100,000 and related accrued interest of $29,000, and prepaid
research and development costs paid by Neozyme II to Genzyme of
$527,000.
J. Eliminate Callable Common Stock of $2.4 million, additional
paid-in capital of $75.6 million and accumulated deficit of $63.9
million.
K. Record the re-payment on October 3, 1996 of $80 million of the
$200 million borrowed under a revolving credit facility with Fleet
National Bank to finance the DSP Acquisition and the subsequent
withdrawal on October 31, 1996 of $80 million under the same credit
facility with interest payable at LIBOR plus 5/8% (6.1% on October
31, 1996) to finance the tender offer. The acquisition of Neozyme
II has been recorded as a purchase of in-process technology of
$95,558,000 million (aggregate purchase price of $108,675,000 plus
estimated acquisition costs of $1 million, less the fair value of
the net assets acquired of $14,117,000). The aggregate purchase
price consists of short-term investments of $28.2 million, $80
million of short-term borrowings, and $0.5 million in equity for
the value of the Callable Warrants.
II. PRO FORMA ADJUSTMENTS TO GENZYME'S CONSOLIDATED STATEMENTS OF
OPERATIONS:
Related to the Genetrix Acquisition:
L. Record amortization expense based on $35.0 million of goodwill
being amortized over 15 years, or $770,000 for the four months
ended April 30, 1996 and $2.3 million for the year ended December
31, 1995.
M. Eliminate certain administrative costs (i.e. audit, legal and
filing fees) of Genetrix which would not be incurred on a combined
basis, $33,000 for the four months ended April 30, 1996 and
$100,000 for the year ended December 31, 1995.
N. Eliminate interest expense related to debt assumed by Genzyme and
subsequently repaid.
O. Record income tax (provision) benefit.
Related to the DSP Acquisition:
P. Record amortization expense based on amortization of patents,
tradenames and goodwill over 12 years, 40 years and 40 years,
respectively, an adjustment of $1.9 million to amortization expense
for the six months ended June 30, 1996 and $3.9 million for the
year ended December 31, 1995.
Q. Eliminate certain administrative costs (i.e. senior management
salaries and related expenses and professional fees) of DSP which
would not be incurred on a combined basis, $725,000 for the six
months ended June 30, 1996 and $1.5 million for the year ended
December 31, 1995.
R. Reverse interest expense of DSP long-term debt, which was assumed
and repaid, in the amounts of $3.0 million and $6.9 million for the
six months ended June 30, 1996 and the year ended December 31,
1995, respectively, and record interest expense related to the
$200 million borrowed under a revolving credit line from a
F-15
<PAGE> 16
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
commercial bank at LIBOR plus 5/8% (6.16% at July 1, 1996).
Interest expense under the $200 million borrowing is $6.2 million
for the six months ended June 30, 1996 and $12.3 million for the
year ended December 31, 1995.
S. To record the cost of sales associated with the step-up
of inventory to fair value under the purchase accounting for the
year ended December 31, 1995 of $5.7 million and the reversal of a
$12.1 million pre-acquisition charge for junior stock options
recorded in the six months ended June 30, 1996.
T. Record income tax (provision) benefit.
Related to the Neozyme II Acquisition:
U. Eliminate intercompany research and development revenue
(Genzyme)/expense (Neozyme II) and service fees of $10,631,000 for
the six months ending June 30, 1996 and $24,198,000 for the year
ended December 31, 1995 and eliminate intercompany interest
income/expense related to Series 1992 note payable of $3,500 for
the six months ending June 30, 1996 and $7,000 for the year ended
December 31, 1995.
V. Reduce investment income at 5% per annum related to $28,206,000
cash and cash equivalents used to finance the Neozyme II
Acquisition. Interest expense has not been adjusted to reflect the
repayment of $80 million borrowed at an interest rate of 6.16%
per annum to finance the DSP Acquisition (Notes G and R) as an
additional $80 million was borrowed under the same revolving
credit line at an interest rate of 6.1% per annum thereafter to
finance the Neozyme II Acquisition. The resulting decrease in
interest expense is not considered material to the pro forma
financial statements.
W. Record income tax (provision) benefit.
III. PRO FORMA ADJUSTMENTS TO THE GENERAL DIVISION'S COMBINED BALANCE SHEETS:
Related to the DSP Acquisition:
X. Eliminate DSP's current portion of long-term debt and long-term
debt, $9 million and $45.7 million, respectively, which was
assumed by Genzyme and subsequently repaid.
Y. Eliminate DSP's Common Stock of $5,000, additional paid-in capital
of $45.9 million and accumulated deficit of $26.4 million.
Z. To record cash payments, including acquisition costs, totaling
$51 million in connection with the DSP Acquisition.
AA. To record a $5.7 million adjustment to the estimated fair value of
the inventory acquired.
AB. To record the adjustments to the estimated fair values of patents,
tradenames, and goodwill acquired and the related deferred tax
liability.
AC. Eliminate $12.1 million reserve for junior stock option charges.
AD. To record the $200 million borrowing under a revolving credit
facility with a commercial bank, due September 1, 1997 with
interest payable at LIBOR plus 5/8% (6.16% at July 1, 1996).
AE. To record the impact to division equity of the charge for
acquired in-process technology.
Related to the Neozyme II Acquisition:
AF. Eliminate Series 1992 note payable to Genzyme issued by Neozyme II
of $100,000, and related accrued interest of $29,000, and prepaid
research development costs paid by Neozyme II to Genzyme of
$527,000.
AG. Eliminate Callable Common Stock of $2.4 million additional paid-in
capital of $75.6 million and accumulated deficit of $63.9 million.
F-16
<PAGE> 17
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
AH. Record the re-payment on October 3, 1996 of $80 million of the $200
million borrowed under a revolving credit facility with Fleet
National Bank to finance the DSP Acquisition and the subsequent
withdrawal on October 31, 1996 of $80 million under the same credit
facility with interest payable at LIBOR plus 5/8% (6.1% on October
31, 1996) to finance the tender offer. The acquisition of Neozyme
II has been recorded as a purchase of in-process technology of
$95,558,000 million (the aggregate purchase price of $108,675,000
plus estimated acquisition costs of $1 million, less the fair value
of the net assets acquired of $14,117,000). The aggregate purchase
price consists of short-term investments of $28.2 million, $80
million of short-term borrowings, and $0.5 million of equity for
the value of the Callable Warrants.
IV. PRO FORMA ADJUSTMENTS TO THE GENERAL DIVISION'S COMBINED STATEMENTS OF
OPERATIONS:
Related to the Genetrix Acquisition:
AI. Record amortization expense, based on $35.0 million of goodwill
over 15 years, of $770,000 for the four months ended April 30, 1996
and $2.3 million for the year ended December 31, 1995.
AJ. Eliminate certain administrative costs (i.e. audit, legal and
filing fees) of Genetrix which would not be incurred on a combined
basis, $33,000 for the four months ended April 30, 1996 and
$100,000 for the year ended December 31, 1995.
AK. Eliminate interest expense on debt assumed by Genzyme and
subsequently repaid.
AL. Record income tax (provision) benefit.
Related to the DSP Acquisition:
AM. Record amortization expense based on amortization of patents,
tradenames, goodwill over 12, 40 and 40 years, respectively, an
adjustment of $1.9 million to amortization expense for the six
months ended June 30, 1996 and $3.9 million for the year ended
December 31, 1995.
AN. Eliminate certain administrative costs (i.e. senior management
salaries and related expenses and professional fees) of DSP which
would not be incurred on a combined basis, $725,000 for the six
months ended June 30, 1996 and $1.5 million for the year ended
December 31, 1995.
AO. Reverse interest expense of DSP long-term debt, which was assumed
and repaid, in the amounts of $3 million and $6.9 million for the
six months ended June 30, 1996 and the year ended December 31,
1995, respectively, and record interest expense related to a $200
million borrowed at 6.16% per annum. For the six months ended June
30, 1996, interest expense is $6.2 million and $12.3 million for
the year ended December 31, 1995.
AP. To record the cost of sales associated with the step-up of
inventory to fair value under the purchase accounting for the year
ended December 31, 1995 of $5.7 million and the reversal of a
$12.1 million pre-acquisition charge for junior stock options
recorded in the six months ending June 30, 1996.
AQ. Record income tax (provision) benefit.
Related to the Neozyme II Acquisition:
AR. Eliminate intercompany research and development revenue
(Genzyme)/expense (Neozyme II) and service fees of $10,631,000 for
the six months ending June 30, 1996 and $24,198,000 for the year
ended December 31, 1996. Eliminate intercompany interest income and
interest expense related to $100,000 Series 1992 Note Payable
issued by Neozyme II to Genzyme of $3,500 for the six months ending
June 30, 1996 and $7,000 for the year ended December 31, 1995.
AS. Record income tax (provision) benefit.
AT. Reduce investment income at 5% per annum related to $108,206,000
cash and cash equivalents used to finance the Neozyme II
Acquisition. Interest expense has not been adjusted to reflect the
repayment of $80 million borrowed at an interest rate of 6.16%
per annum to finance the DSP Acquisition (Notes AD and AO) as an
additional $80 million was borrowed under the same revolving
credit line at an interest rate of 6.1% per annum to finance
the Neozyme II Acquisition. The resulting decrease in
interest expense is not considered material to these pro forma
financial statements.
F-17
<PAGE> 18
Exhibit 99.2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Deknatel Snowden Pencer, Inc.:
We have audited the accompanying consolidated balance sheets of Deknatel
Snowden Pencer, Inc. (a Delaware corporation) and subsidiaries as of September
30, 1994 and 1995, and the related consolidated statements of operations,
stockholders' investment and cash flows for the years then ended. These
consolidated financial statements are the responsibility of Deknatel Snowden
Pencer, Inc.'s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Deknatel
Snowden Pencer, Inc. and Subsidiaries as of September 30, 1994 and 1995, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
November 21, 1995 (except with respect
to the matter discussed in Note 11, as to
which the date is May 24, 1996)
F-18
<PAGE> 19
DEKNATEL SNOWDEN PENCER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------- JUNE 30,
1994 1995 1996
-------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................................... $ 1,414 $ 6,288 $ 1,703
Accounts receivable, less allowance of $2,312 and $3,016 at
September 30, 1994 and 1995, respectively, and $2,879 at June
30, 1996........................................................ 16,187 14,640 14,977
Inventories........................................................ 22,781 18,627 24,240
Prepaid expenses................................................... 1,137 367 681
Prepaid tax assets................................................. 612 913 --
-------- -------- --------
Total current assets....................................... 42,131 40,835 41,601
-------- -------- --------
Property, plant and equipment:
Land............................................................... 670 673 641
Buildings and improvements......................................... 9,059 9,233 7,714
Machinery and equipment............................................ 14,421 17,699 18,289
Construction-in-process............................................ 149 271 306
-------- -------- --------
24,299 27,876 26,950
Less -- Accumulated depreciation and amortization.................... 5,495 9,581 9,475
-------- -------- --------
Net property, plant and equipment.......................... 18,804 18,295 17,475
-------- -------- --------
Investment in Joint Venture.......................................... 100 240 --
-------- -------- --------
Intangible Assets, Net............................................... 49,413 46,456 49,176
Deferred tax assets -- noncurent..................................... -- -- 2,874
Other assets......................................................... -- -- 152
-------- -------- --------
$110,448 $105,826 $ 111,278
======== ======== ========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Short-term loans................................................... $ 4,500 $ 161 $ 168
Current portion of long-term debt.................................. 4,750 6,750 9,250
Accounts payable................................................... 1,979 2,083 4,434
Accrued liabilities................................................ 16,262 18,860 18,477
Accrued income taxes............................................... 254 509
-------- -------- --------
Total current liabilities.................................. 27,745 28,363 34,150
-------- -------- --------
Long-term debt, less current portion................................. 58,500 51,750 45,500
-------- -------- --------
Other long-term liabilities.......................................... 358 367 226
-------- -------- --------
Deferred income taxes................................................ 685 748
-------- -------- --------
Commitments and contingencies (Note 4)
Stockholders' investment:
Class A common stock, $.01 par value --
Authorized -- 600,000 shares
Issued and outstanding -- 449,602 shares and 449,329 shares at
September 30, 1994 and 1995, respectively, and 449,205 at June 30,
1996............................................................... 4 4 5
Class B common stock, $.01 par value --
Authorized -- 60,000 shares
Issued and outstanding -- No shares at September 30, 1994 or 1995,
and 16,176 at June 30, 1996........................................ -- -- --
Additional paid-in capital......................................... 44,956 44,928 58,037
Accumulated deficit................................................ (21,586) (20,271) (26,371)
Cumulative translation adjustment.................................. (214) (63) (269)
-------- -------- --------
Total stockholders' investment 23,160 24,598 31,402
-------- -------- --------
$110,448 $105,826 $ 111,278
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-19
<PAGE> 20
DEKNATEL SNOWDEN PENCER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
SEPTEMBER 30, -------------------------
------------------- JUNE 30, JUNE 30,
1994 1995 1995 1996
------- ------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales........................................ $85,410 $95,259 $69,937 $76,139
Cost of products sold............................ 43,873 48,191 35,688 36,350
------- ------- ------- -------
Gross profit..................................... 41,537 47,068 34,249 39,789
------- ------- ------- -------
Operating costs and expenses:
Selling and marketing.......................... 16,318 17,247 13,240 14,668
Distribution................................... 2,702 2,940 2,211 2,479
Research and development....................... 2,839 1,971 1,499 1,871
General and administrative..................... 6,063 8,797 6,557 7,045
Amortization of intangibles.................... 3,832 2,750 2,399 4,317
Charge for junior stock options................ -- -- -- 12,090
Severance and other charges.................... 1,483 3,585 266 1,300
------- ------- ------- -------
33,237 37,290 26,172 43,770
------- ------- ------- -------
Operating income (loss).......................... 8,300 9,778 8,077 (3,981)
------- ------- ------- -------
Other income (expense):
Interest expense............................... (6,339) (6,937) (5,023) (4,493)
Cash discounts and other expenses.............. (1,704) (1,634) (1,206) 315
Other income (expense)......................... 194 280 165 (34)
------- ------- ------- -------
(7,849) (8,291) (6,064) (4,212)
------- ------- ------- -------
Income (loss) before provision for income
taxes and extraordinary loss......... 451 1,487 2,013 (8,193)
Provision (benefit) for income taxes............. 188 172 335 (1,802)
------- ------- ------- -------
Income (loss) before extraordinary loss.......... 263 1,315 1,678 (6,391)
Extraordinary loss from debt refinancing......... (2,360) -- -- --
------- ------- ------- -------
Net income (loss)................................ $(2,097) $ 1,315 $ 1,678 $(6,391)
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-20
<PAGE> 21
DEKNATEL SNOWDEN PENCER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK
----------------------- ----------------------- ADDITIONAL CUMULATIVE
NUMBER $.01 NUMBER $.01 PAID-IN TRANSLATION
OF SHARES PAR VALUE OF SHARES PAR VALUE CAPITAL ADJUSTMENT
--------- --------- --------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1993........... 401,901 $ 4 -- $-- 40,145 $(292)
Common stock issued in connection
with Snowden-Pencer Inc.
acquisition...................... 55,000 -- -- -- 5,500 --
Common stock repurchased, net of
collections of subscriptions
receivable....................... (7,299) -- -- -- (689) --
Foreign currency translation
adjustment....................... -- -- -- -- -- 78
Net loss............................ -- -- -- -- -- --
--
------- ------ --- ------- -----
Balance, September 30, 1994........... 449,602 4 -- -- 44,956 (214)
Common stock repurchased, net of
collections of subscriptions
receivable....................... (273) -- -- -- (28) --
Foreign currency translation
adjustment....................... -- -- -- -- -- 151
Net income.......................... -- -- -- -- -- --
--
------- ------ --- ------- -----
Balance, September 30, 1995........... 449,329 4 -- -- 44,928 (63)
Common stock repurchased............ (224) -- -- -- (22) --
Sale of common stock................ 100 1 16,176 -- 1,445 --
Joint venture write-off............. -- -- -- -- (404) --
Benefit from settlement of junior
stock options.................... -- -- -- -- 12,090 --
Gain on intercompany debt repayment,
net of tax....................... -- -- -- -- -- --
Foreign currency translation
adjustment....................... -- -- -- -- -- (206)
Net loss............................ -- -- -- -- -- --
--
------- ------ --- ------- -----
Balance, June 30, 1996 (unaudited).... 449,205 $ 5 16,176 $-- $58,037 $(269)
======= == ====== === ======= =====
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT INVESTMENT
----------- -------------
<S> <C> <C>
Balance, September 30, 1993........... $(19,489) $20,368
Common stock issued in connection
with Snowden-Pencer Inc.
acquisition...................... -- 5,500
Common stock repurchased, net of
collections of subscriptions
receivable....................... -- (689)
Foreign currency translation
adjustment....................... 78
Net loss............................ (2,097) (2,097)
-------- -------
Balance, September 30, 1994........... (21,586) 23,160
Common stock repurchased, net of
collections of subscriptions
receivable....................... -- (28)
Foreign currency translation
adjustment....................... -- 151
Net income.......................... 1,315 1,315
-------- -------
Balance, September 30, 1995........... (20,271) 24,598
Common stock repurchased............ -- (22)
Sale of common stock................ -- 1,446
Joint venture write-off............. -- (404)
Benefit from settlement of junior
stock options.................... -- 12,090
Gain on intercompany debt repayment,
net of tax....................... 291 291
Foreign currency translation
adjustment....................... -- (206)
Net loss............................ (6,391) (6,391)
-------- -------
Balance, June 30, 1996 (unaudited).... $(26,371) $31,402
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-21
<PAGE> 22
DEKNATEL SNOWDEN PENCER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
SEPTEMBER 30, -----------------------
-------------------- JUNE 30, JUNE 30,
1994 1995 1995 1996
-------- ------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................................. $ (2,097) $ 1,315 $ 1,678 $(6,391)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities --
Extraordinary loss on debt refinancing........................... 2,360 -- -- --
Depreciation..................................................... 2,389 2,789 2,086 2,369
Amortization..................................................... 4,350 3,179 2,399 4,317
Gain on sale of fixed assets..................................... -- -- -- --
Other noncash expenses........................................... 400 1,145 -- 12,890
Change in deferred income taxes.................................. (134) (238) -- (3,607)
Other, net....................................................... 38 43 (521) (225)
Changes in certain assets and liabilities --
Decrease (increase) in accounts receivable..................... 55 1,547 467 (737)
Decrease (increase) in inventories............................. (2,262) 2,817 1,956 (3,583)
Decrease in prepaid expenses................................... 74 770 75 499
Increase (decrease) in accounts payable........................ (66) 104 698 2,351
Increase (decrease) in accrued liabilities..................... 238 2,853 2,913 529
-------- ------- ------- -------
Net cash provided by operating activities................... 5,345 16,324 11,751 8,412
-------- ------- ------- -------
Cash flows from investing activities:
Construction and capital expenditures.............................. (1,318) (1,883) (1,309) (1,192)
Acquisitions, net of cash acquired................................. (16,804) -- -- (9,500)
Investment in joint venture........................................ (100) (250) (213) --
Proceeds from sale of fixed assets................................. -- -- --
-------- ------- ------- -------
Net cash used for investing activities...................... (18,222) (2,133) (1,522) (10,692)
-------- ------- ------- -------
Cash flows from financing activities:
Borrowings under term loan......................................... 55,000 -- -- --
Borrowings under revolving line of credit.......................... 6,327 -- -- 1,000
Repayments of revolving line of credit............................. (1,927) (4,400) (4,400) --
Principal payments of term loan.................................... (47,015) (4,750) (2,000) (4,750)
Repurchase of stock................................................ (689) (28) -- --
Fees paid in connection with refinancing........................... (2,439) -- -- --
Purchase of interest rate cap...................................... -- (235) -- --
Sale of common stock............................................... -- -- -- 1,445
Other, net......................................................... 33 70 -- --
-------- ------- ------- -------
Net cash (used for) provided by financing activities........ 9,290 (9,343) (6,400) (2,305)
-------- ------- ------- -------
Effect of exchange rate changes on cash.............................. 78 26 -- --
-------- ------- ------- -------
Increase (decrease) in cash and cash equivalents..................... (3,509) 4,874 3,829 (4,585)
Cash and cash equivalents, beginning of year......................... 4,923 1,414 1,414 6,288
-------- ------- ------- -------
Cash and cash equivalents, end of year............................... $ 1,414 $ 6,288 $ 5,243 $ 1,703
======== ======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for --
Interest......................................................... $ 5,038 $ 6,461 $ 4,525 $ 4,626
======== ======= ======= =======
Income taxes..................................................... $ 213 $ 206 $ 23 $ 595
======== ======= ======= =======
</TABLE>
Supplemental disclosure of noncash activity:
In connection with the acquisition of Snowden-Pencer, Inc. in April 1994,
DSP issued 55,000 shares of common stock valued at $5,500,000.
The accompanying notes are an integral part of these consolidated financial
statements.
F-22
<PAGE> 23
DEKNATEL SNOWDEN PENCER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND ACQUISITION
Deknatel Snowden Pencer, Inc. and Subsidiaries (DSP) designs, manufactures
and markets chest drainage devices, vascular punches, specialty needles and
sutures, and precision surgical instruments used in cardiovascular, endoscopic,
plastic and general surgical procedures.
On April 20, 1994, DSP was formed and made a tax-free exchange of all of
the outstanding common stock of Deknatel Holdings Corporation for DSP's common
stock. In accordance with Accounting Interpretation No. 39 of Accounting
Principles Board Opinion No. 16, Business Combinations, the accompanying
consolidated financial statements are presented in a manner similar to that in
pooling-of-interest accounting, with all assets and liabilities accounted for at
historical cost for all periods presented.
On April 20, 1994, DSP acquired 100% of the common stock of Snowden-Pencer
Inc., a manufacturer of surgical instruments, for $11,822,000 of cash (net of
cash acquired), $4,982,000 of assumed liabilities repaid at closing and 55,000
shares of common stock (valued at $5,500,000).
On November 19, 1991, DSP acquired, from Pfizer Hospital Products Group,
Inc. (HPG), certain assets and assumed certain liabilities of HPG's Deknatel
division and acquired all of the outstanding common stock of Deknatel
Medizinische Produkte GmbH (Deknatel GmbH). Total consideration paid (net of
cash acquired) by the Company was $96,507,000.
For financial reporting purposes, these acquisitions have been accounted
for using the purchase method of accounting, and their results of operations
have been included in the accompanying consolidated financial statements from
each acquired entity's respective date of acquisition. For each acquisition, the
purchase price was allocated to assets acquired and liabilities assumed based on
their estimated fair market values existing at the date of acquisition. The
excess of the purchase price over the estimated fair market value of net assets
acquired is reflected in the accompanying consolidated balance sheets as
goodwill and is included in intangible assets.
For income tax reporting purposes, the acquisitions of Deknatel GmbH and
Snowden-Pencer Inc. were treated as acquisitions of stock. As a result, the tax
basis of the related assets and liabilities carries over from amounts previously
reported for income tax purposes.
<TABLE>
Based on unaudited data, the following table presents selected financial
information for fiscal year 1994 for DSP and Snowden-Pencer Inc. on a pro forma
basis, assuming that the companies had been combined since the beginning of
fiscal 1994 (in thousands):
<S> <C>
Net sales.............................................. $93,360
Income before other income (expense)................... 13,230
Income before extraordinary item....................... 579
</TABLE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
DSP and its subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.
(b) Inventories
Inventories consist of materials, labor and overhead and are valued at the
lower of cost (first-in, first-out) or market, excluding those of DSP's
Snowden-Pencer Inc. subsidiary, which are stated at the lower of cost (last-in,
first-out) or market. As of September 30, 1995, approximately $6,672,000 of
total inventories were valued on the last-in, first-out method. Under the
first-in, first-out method, such inventories would have been $1,773,000 lower at
September 30, 1995 (in thousands).
F-23
<PAGE> 24
DEKNATEL SNOWDEN PENCER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Raw materials................................ $ 6,809 $ 5,648
Work-in-process.............................. 1,959 1,592
Finished goods............................... 14,013 11,387
------- -------
$22,781 $18,627
======= =======
</TABLE>
(c) Property, Plant and Equipment
Property, plant and equipment are stated at cost. DSP provides for
depreciation on property and equipment on a straight-line basis over their
estimated useful lives as follows:
Buildings and improvements........................... 25 - 40 years
Machinery and equipment.............................. 5 - 12 years
Leasehold improvements are amortized on a straight-line basis over the
shorter of the estimated useful life of the assets or the remaining lease term.
(d) Intangible Assets
<TABLE>
Included in intangible assets at September 30, 1994 and 1995 are the
following (in thousands):
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Customer sales contracts..................... $ 6,100 $ 6,100
Patents...................................... 15,833 15,833
Noncompete agreements........................ 18,000 18,000
Trade names.................................. 700 705
Deferred financing costs..................... 2,439 2,674
Goodwill..................................... 31,907 31,937
------- -------
Gross intangibles............................ 74,979 75,249
Less -- amortization......................... 25,566 28,793
------- -------
Net intangibles.............................. $49,413 $46,456
======= =======
</TABLE>
Customer sales contracts, patents, noncompete agreements and trade names
are being amortized on a straight-line basis over their estimated useful lives.
These lives are summarized as follows:
Customer sales contracts............................. 2 years
Patents.............................................. 3-16 years
Noncompete agreements................................ 2-10 years
Trade names.......................................... 40 years
Deferred financing costs represent costs associated with DSP's long-term
debt and interest rate protection agreements (see Note 3), which are being
amortized over the lives of the respective debt agreements. During 1994 and
1995, amortization of deferred financing costs was $518,000 and $429,000,
respectively, and has been included in interest expense in the accompanying
consolidated statements of operations.
Goodwill represents the excess of the purchase price over the fair market
value of identified net assets acquired related to the business acquisitions
more fully described in Note 1. Goodwill is amortized on a straight-line basis
over a 40-year period.
F-24
<PAGE> 25
DEKNATEL SNOWDEN PENCER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(e) Accrued Liabilities
<TABLE>
Included in accrued liabilities at September 30, 1994 and 1995 are the
following (in thousands):
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Accrued compensation and benefits............. $ 3,389 $ 5,402
Accrued employee benefit costs................ 4,442 4,036
Accrued customer rebates...................... 4,069 4,591
Other......................................... 4,362 4,831
------- -------
$16,262 $18,860
======= =======
</TABLE>
(f) Income Taxes
DSP records income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Under SFAS No.
109, deferred income taxes are recognized based on the expected future tax
consequences of differences between the financial statement basis and the tax
basis of assets and liabilities, calculated using enacted tax rates in effect
for the year in which the differences are expected to be reflected in the tax
return.
(g) Foreign Currency Translation
All assets and liabilities of DSP's foreign subsidiaries are translated at
exchange rates at the balance sheet date, and revenues and expenses are
translated at average exchange rates for the period in accordance with SFAS No.
52, Foreign Currency Translation. Resulting translation adjustments are
reflected as a separate component of stockholders' investment titled cumulative
translation adjustment. Exchange gains and losses on foreign currency
transactions consummated during the year are included in the accompanying
consolidated statements of operations and are immaterial.
(h) Cash Equivalents
Cash and cash equivalents include marketable securities with an original
maturity date of three months or less.
(i) Unaudited Interim Financial Statements
In the opinion of DSP's management, the June 30, 1995 and June 30, 1996
unaudited interim financial statements include all adjustments of a normal
recurring nature necessary for a fair presentation of results for this interim
period. The results of operations for the nine months ended June 30, 1995 and
June 30, 1996 are not necessarily indicative of the results to be expected for
the full year or for any future period.
(3) LONG-TERM DEBT
On April 20, 1994, in part to facilitate the acquisition of Snowden-Pencer
Inc. (see Note 1), DSP refinanced its then-outstanding term loan. At the date of
refinancing, approximately $2,360,000 of unamortized deferred financing costs
related to the original term loan was expensed and is reflected in the
accompanying consolidated statements of operations as an extraordinary loss.
Costs incurred in securing the new term loans of $2,439,000 have been
capitalized and included in intangible assets (see Note 2) and are being
amortized over the term of the loans.
F-25
<PAGE> 26
DEKNATEL SNOWDEN PENCER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) LONG-TERM DEBT (CONTINUED)
<TABLE>
Long-term debt as of September 30, 1994 and 1995 consists of the following
(in thousands):
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Term loan A, interest at LIBOR plus 3% (8.43% and 9.31% at
September 30, 1994 and 1995, respectively, subject to
adjustment for interest rate cap), payable in installments
through 1999................................................... $28,000 $23,250
Term loan B, interest at LIBOR plus 3.5% (8.93% and 9.81% at
September 30, 1994 and 1995, respectively, subject to
adjustment for interest rate cap), payable in installments
through 2001................................................... 25,000 25,000
12% Note due to Pfizer Hospital Products Group, Inc., interest at
12%, payable in installments in 1999 through 2001, interest
payable semiannually........................................... 10,250 10,250
------- -------
63,250 58,500
Less -- Current portion.......................................... 4,750 6,750
------- -------
Long-term portion........................................... $58,500 $51,750
======= =======
</TABLE>
(a) Term Loans A and B
<TABLE>
Minimum annual principal installments due under the term loans are
summarized as follows (in thousands):
<S> <C>
1996............................................... $ 6,750
1997............................................... 8,500
1998............................................... 9,500
1999............................................... 9,625
2000............................................... 9,250
Thereafter......................................... 4,625
-------
$48,250
=======
</TABLE>
In addition to the minimum installments shown above, the loan agreement
requires additional principal repayments to be made within 105 days after each
fiscal year-end equal to 75% of each year's adjusted excess cash flow (as
defined in the loan agreement). As of September 30, 1995, no additional
principal repayments will be required in 1996. Further accelerations of
principal repayments are required in the event of a sale of equity of DSP or the
incurrence of indebtedness. In any event, all remaining outstanding amounts due
under the term loan are payable in full in November 2001.
On January 23, 1995, DSP purchased an interest rate cap covering a notional
amount of $30,000,000 for the period from January 27, 1995 to April 20, 1997.
Under the terms of the cap, DSP's maximum interest rate expense for the covered
notional principal is 8%, unless LIBOR, at any measurement date, exceeds 9%. If
LIBOR, at any measurement date, exceeds 9%, then the maximum interest rate is
capped at 9%. Through September 30, 1995, the interest rate on the term loan was
less than the interest rate cap. The cost of the cap, $235,000, is included in
intangible assets and is being amortized over the period covered by the cap.
Substantially all of DSP's assets have been pledged in support of the term
loan and revolving line of credit (see Note 3(c)).
F-26
<PAGE> 27
DEKNATEL SNOWDEN PENCER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) LONG-TERM DEBT (CONTINUED)
(b) 12% Note Due to Pfizer Hospital Products Group, Inc.
<TABLE>
Minimum annual principal repayments due under the 12% note due to HPG (12%
note) are summarized as follows (in thousands):
<S> <C>
1999............................................. $3,416
2000............................................. 3,417
2001............................................. 3,417
</TABLE>
In addition, mandatory principal prepayments are required (1) in the event
of a significant sale of equity of DSP (other than stock options) and (2) in an
amount equal to 50% of excess cash flow (as defined) after the satisfaction of
all obligations for repayments under the term loans.
(c) Revolving Line of Credit
DSP has available up to $20 million under a secured revolving line of
credit that expires in April 1999. Available borrowings under the revolving line
of credit are limited to DSP's borrowing base, which is calculated as the sum of
80% of eligible domestic receivables plus 50% of eligible domestic inventory. As
of September 30, 1995, DSP's borrowing base was approximately $9.7 million.
Borrowings under the revolving line of credit bear interest at a rate of LIBOR
plus 3%, and a fee of 1/2% of the unused portion of the line is charged on an
annual basis. At September 30, 1994 and 1995, $4,400,000 and $0 were outstanding
under this agreement, respectively.
(d) Letter-of-credit Facility
Included in the revolving line-of-credit facility, DSP has available a
letter-of-credit facility under which irrevocable standby letters of credit may
be issued for up to $2.5 million in aggregate. No letters of credit were issued
as of September 30, 1995. The letter of credit facility provides for a
commitment fee equal to 2.25% to 2.5% of the letter of credit amount upon
issuance of such commitments.
The term loan, 12% note and revolving line-of-credit agreements contain
certain covenants that, among other things, restrict dividends or stock
repurchases, limit capital expenditures and annual operating lease payments, and
set minimum fixed charges, interest coverage and leverage ratios, and minimum
consolidated adjusted-net-worth requirements. The agreements also limit DSP's
ability to issue capital stock and set maximum inventory and accounts receivable
levels.
(4) COMMITMENTS AND CONTINGENCIES
<TABLE>
Future minimum rental commitments under third-party operating leases (see
Note 8 for discussion of related party commitments) that have initial or
noncancelable lease terms in excess of one year are as follows (in thousands):
<S> <C>
1996............................................. $ 656
1997............................................. 424
1998............................................. 44
1999............................................. 32
2000............................................. 16
------
$1,172
======
</TABLE>
DSP has a commitment to invest up to $600,000 in a 50%-owned joint venture.
As of September 30, 1995, DSP had advanced $350,000 of such committed funds.
F-27
<PAGE> 28
DEKNATEL SNOWDEN PENCER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) COMMITMENTS AND CONTINGENCIES (CONTINUED)
DSP is contingently liable with respect to certain lawsuits and other
matters that arise in the ordinary course of business. In the opinion of
management, resolution of these contingencies will not have a material effect on
the consolidated financial statements of DSP.
During 1995, DSP entered into foreign exchange forward contracts totaling
$6 million and maturing on a monthly basis throughout fiscal 1996. These forward
contracts require the purchase of German deuche marks at rates ranging from
1.4296 deuche marks per U.S. dollar to 1.4084 deuche marks per U.S. dollar. The
forward contracts are intended to hedge anticipated intercompany inventory
transfers and debt payments, and are marked to market, which could result in a
foreign currency gain or loss based on future fluctuations in exchange rates. No
gain or loss was reflected in the 1995 financial statements, as year-end
exchange rates approximated contract rates.
(5) INCOME TAXES
<TABLE>
The components of the income before provision for income taxes and
extraordinary loss for 1994 and 1995 are as follows (in thousands):
<CAPTION>
1994 1995
---- ------
<S> <C> <C>
Domestic.................................... $137 $1,881
Foreign..................................... 314 (394)
---- ------
$451 $1,487
==== ======
</TABLE>
<TABLE>
The provision for income taxes for 1994 and 1995 consists of the following
(in thousands):
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Current --
Federal................................... $ -- $ 115
Foreign................................... 200 102
State..................................... 92 192
---- ----
292 409
---- ----
Deferred --
Federal................................... -- --
Foreign................................... (114) (258)
State..................................... 10 21
---- ----
(104) (237)
---- ----
Provision for income taxes........... $ 188 $ 172
==== ====
</TABLE>
F-28
<PAGE> 29
DEKNATEL SNOWDEN PENCER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) INCOME TAXES (CONTINUED)
The provision for income taxes differs from the amounts calculated by
applying the statutory federal income tax rate of 34% to income before provision
for income taxes and extraordinary loss due to the following (in thousands):
<TABLE>
<CAPTION>
1994 1995
----- -----
<S> <C> <C>
Income tax provision at statutory federal income tax
rates..................................................... $ 153 $ 506
Effect of lower foreign tax rates........................... (21) (22)
State income taxes, net of federal benefit.................. 102 141
Nondeductible goodwill amortization......................... 52 127
Change in U.S. valuation allowance.......................... 221 (283)
Other....................................................... (319) (297)
----- -----
Provision for income taxes............................. $ 188 $ 172
===== =====
</TABLE>
At September 30, 1995, subject to Internal Revenue Service review, DSP has
U.S. net operating loss carryforwards (NOLs) available of approximately
$8,000,000 for tax purposes which expire if unutilized beginning in fiscal 2007.
The NOLs are available to offset future U.S. taxable income, but their use could
be limited if a change in control of DSP occurred.
<TABLE>
Prepaid income taxes and deferred income taxes at September 30, 1994 and
1995 consist of the following (in thousands):
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Prepaid income taxes --
Intangible asset amortization.......................... $ 5,670 $ 5,071
Accrued expenses....................................... 1,458 1,509
Inventory basis differences............................ 132 606
Other.................................................. 153 214
NOLs................................................... 2,537 2,711
------- -------
9,950 10,111
Valuation allowance.................................... (7,910) (7,627)
------- -------
Total deferred tax assets...................... $ 2,040 $ 2,484
======= =======
Deferred income taxes --
Depreciation........................................... $ 2,028 $ 2,312
Other.................................................. 85 7
------- -------
Total deferred tax liabilities................. $ 2,113 $ 2,319
======= =======
</TABLE>
DSP has recorded a valuation allowance against its otherwise recognizable
net deferred tax asset due to the uncertainty of realizing the future benefit of
the deferred tax assets.
(6) EMPLOYEE BENEFIT PLANS
(a) Pension Plans
DSP has a defined benefit pension plan, which covers substantially all U.S.
employees of DSP, excluding those employed by DSP's Snowden-Pencer Inc.
subsidiary. Plan assets consist primarily of U.S. government and corporate
securities.
F-29
<PAGE> 30
DEKNATEL SNOWDEN PENCER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) EMPLOYEE BENEFIT PLANS (CONTINUED)
<TABLE>
The funded status of the pension plan at September 30, 1994 and 1995 was as
follows (in thousands):
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Actuarial present value of accumulated benefit
obligation --
Vested................................................. $ 3,016 $ 4,257
Nonvested.............................................. 649 650
------- -------
Total.......................................... $ 3,665 $ 4,907
======= =======
Projected benefit obligation............................. $ 4,420 $ 5,567
Plan assets at market value.............................. 2,765 3,672
------- -------
Funded status -- plan assets less than projected benefit
obligation............................................. (1,655) (1,895)
Unrecognized prior service costs......................... (20) (19)
Unrecognized net loss from past experience different from
that assumed and changes in actuarial assumptions...... 526 664
------- -------
Accrued pension cost........................... $(1,149) $(1,250)
======= =======
</TABLE>
<TABLE>
Assumptions used in the computation for 1994 and 1995 are as follows:
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Weighted average discount rate................................. 8.5% 7.5%
Expected long-term rate of return on assets.................... 9.0 9.0
Rate of increase in future compensation levels................. 4.0 3.5
</TABLE>
Benefits under the pension plan are generally based on years of service and
the employees' career earnings. Employees become fully vested after five years.
<TABLE>
A summary of the components of net periodic pension cost for 1994 and 1995
is as follows (in thousands):
<CAPTION>
1994 1995
----- -----
<S> <C> <C>
Service cost................................................ $ 516 $ 417
Interest cost............................................... 334 341
Actual return on plan assets................................ 488 (533)
Net amortization and deferral............................... (741) 273
----- -----
Net periodic pension cost......................... $ 597 $ 498
===== =====
</TABLE>
F-30
<PAGE> 31
DEKNATEL SNOWDEN PENCER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) EMPLOYEE BENEFIT PLANS (CONTINUED)
<TABLE>
DSP's German subsidiary also has a defined benefit pension plan for its
employees. The funded status at September 30, 1994 and 1995 is as follows (in
thousands):
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Actuarial present value of accumulated benefit
obligation --
Vested................................................. $ 1,332 $ 1,470
Nonvested.............................................. 358 238
------- -------
Total.......................................... $ 1,690 $ 1,708
======= =======
Projected benefit obligation............................. 2,234 2,379
Plan assets at market value.............................. $ -- $ --
------- -------
Funded status -- plan assets less than projected benefit
obligation............................................. (2,234) (2,379)
Unrecognized net loss.................................... 498 72
------- -------
Accrued pension cost........................... $(1,736) $(2,307)
======= =======
</TABLE>
<TABLE>
Assumptions used in the computation for 1994 and 1995 are as follows:
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Weighted average discount rate........................... 6.0% 6.5%
Expected long-term rate of return on assets.............. N/A N/A
Rate of increase in future compensation levels........... 3.5% 3.0%
</TABLE>
<TABLE>
A summary of the components of net periodic pension cost for 1994 and 1995
are as follows (in thousands):
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Service cost............................................. $233 $203
Interest cost............................................ 134 154
Net amortization and deferral............................ 26 4
---- ----
Net periodic pension cost...................... $393 $361
==== ====
</TABLE>
(b) Savings and Investment and Profit Sharing Plans
DSP has a savings and investment plan for all U.S. employees. Employee
contributions to the savings plan can be made both on a pretax (salary deferral)
and after-tax basis. DSP may make a matching contribution in an amount equal to
100% of the first 2% of employee salary deferral contributions and 50% of the
next 4% of employee salary deferral contributions (subject to certain
limitations, as defined in the plan). DSP matched pretax salary deferrals
totaling $461,000 and $543,000 in fiscal 1994 and 1995, respectively.
Employees of Snowden-Pencer Inc. also participate in a noncontributory
profit sharing plan. The plan provides for discretionary contributions to be
determined annually. In fiscal 1995, the expense related to the plan included in
the accompanying 1995 consolidated statement of operations was $78,000.
(7) STOCKHOLDERS' AGREEMENTS AND CONVERTIBLE SECURITIES
(a) Stockholders' Agreement
Stockholders of DSP entered into an agreement that, among other provisions,
allows DSP and/or certain stockholders of DSP the right of first refusal to
purchase shares in the event that outstanding stock is offered
F-31
<PAGE> 32
DEKNATEL SNOWDEN PENCER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) STOCKHOLDERS' AGREEMENTS AND CONVERTIBLE SECURITIES (CONTINUED)
for sale by any stockholder. Additionally, in the event that DSP proposes to
issue any additional shares (other than in satisfaction of stock option
obligations), stockholders have the right of first refusal to purchase a portion
of such stock sufficient to maintain their percentage interest in outstanding
common stock immediately prior to such issuance.
During 1995, DSP amended its Stockholders' Agreement to allow for the
issuance of Class B common stock. Class B common stockholders are eligible to
receive dividends at a rate of 70% of those paid to Class A shareholders and, in
the event of a liquidation, will participate in the distribution of assets at a
rate equal to 70% of distributions received by Class A stockholders. Class B
stock will convert to Class A common stock upon (1) the completion of an initial
public offering of stock by the Company, (2) a change in control of the
ownership of DSP or (3) a resolution of the Board of Directors authorizing such
a conversion.
(b) Employee Stock Options
In November 1991, DSP granted to certain members of management options to
purchase common stock at $100 per share. The options are exercisable at the rate
of 20% each year from the date of grant. A summary of the option activity is as
follows:
EXERCISABLE NONEXERCISABLE TOTAL
----------- -------------- ------
October 1, 1993................ 9,093 15,684 24,777
Terminated................... 7,910 13,909 21,819
----- ------ ------
September 30, 1994............. 1,183 1,775 2,958
Terminated................... 828 1,775 2,603
----- ------ ------
September 31, 1995............. 355 -- 355
===== ====== ======
During 1995, DSP granted to certain members of management, options to
purchase 40,293 shares of Class B common stock at $70 per share. Options granted
become exercisable ratably over a five-year period. As of September 30, 1995,
10,627 options were exercisable.
DSP has the right to repurchase, at fair market value, as determined by the
Board of Directors, any stock issued under the stock option plan. The options
expire at the earlier of 10 years from grant date or the termination of the
executive's employment. No options were exercised in fiscal 1994 and 1995. The
option price for all options approximated fair market value at grant date as
determined by the Board of Directors.
(c) Royalty Capital Partners' Stock Options
As partial compensation for services in connection with the acquisition of
certain assets and liabilities from HPG (see Note 1), DSP granted to Royalty
Capital Partners (RCP) options to purchase 1,172 shares of common stock at the
price of $100 per share. The options vest and become exercisable upon the
achievement of both earnings and working capital as a percentage of sales
targets, as defined, on a cumulative basis for the five years ending December
31, 1996. All unvested RCP options expire after December 31, 1996, and to the
extent not exercised, all RCP options expire as of November 20, 2001.
(8) RELATED PARTY TRANSACTIONS
Fees of $256,000 and $170,000 were paid during 1994 to affiliates of two of
the principal stockholders of DSP for services rendered in connection with the
acquisition of Snowden-Pencer (described in Note 1) and with the arrangement of
the long-term debt used to finance the acquisition (see Note 3). Such fees have
been
F-32
<PAGE> 33
DEKNATEL SNOWDEN PENCER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) RELATED PARTY TRANSACTIONS (CONTINUED)
allocated between deferred financing costs and goodwill and have been included
in the purchase price on the accompanying consolidated balance sheets, as
appropriate.
<TABLE>
DSP leases one of its facilities from one of its stockholders under a
20-year operating lease. During 1994 and 1995, DSP expensed approximately
$91,000 and $207,000, respectively, related to this facility lease. Future
minimum rental commitments under the remainder of the lease are as follows (in
thousands):
<S> <C>
1996..................................... $ 213
1997..................................... 220
1998..................................... 226
1999..................................... 233
2000..................................... 240
Thereafter............................... 4,066
------
$5,198
======
</TABLE>
DSP is also required to pay quarterly management fees to one of its
principal stockholders. During fiscal 1994 and 1995, $146,000 was expensed and
paid in each year.
(9) SEVERANCE AND OTHER CHARGES
<TABLE>
During 1994 and 1995, DSP expensed the following amounts in connection with
work force reductions, a plant closure, consolidation of the sales force and the
defense of rights under certain intangible assets (in thousands):
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
Severance and social benefits..................... $ 983 $1,651
Plant closure costs............................... -- 888
Sales and marketing relocation and severance...... -- 653
Patent defense.................................... 500 393
------ ------
$1,483 $3,585
====== ======
</TABLE>
The majority of the above amounts were paid in the year expensed; amounts
accrued at each of the year-ends were not material.
F-33
<PAGE> 34
DEKNATEL SNOWDEN PENCER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) GEOGRAPHIC AND CUSTOMER INFORMATION
<TABLE>
DSP's operations by geographic area for the years ended September 30, 1994
and 1995 are summarized as follows (in thousands):
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
Net sales --
United States................................ $ 60,105 $ 66,404
Europe....................................... 20,459 22,439
Other........................................ 4,846 6,416
-------- --------
$ 85,410 $ 95,259
======== ========
Income (loss) before provision for income taxes
and extraordinary loss --
United States................................ $ 137 $ 1,881
Europe....................................... 314 (394)
-------- --------
$ 451 $ 1,487
======== ========
Total assets --
United States................................ $ 96,388 $ 92,703
Europe....................................... 14,060 13,123
-------- --------
$110,448 $105,826
======== ========
</TABLE>
Two distributors accounted for 21% and 17% of net sales in 1994 and 17% and
16% of net sales in 1995. United States sales include export sales of $2,932,000
in 1994 and $3,623,000 in 1995.
(11) SUBSEQUENT EVENTS
On December 5, 1995, DSP purchased certain assets and assumed certain
liabilities relating to a product line of chest drainage and cardiovascular
autotransfusion products from Davol, Inc., a subsidiary of C.R. Bard, Inc. for
$9.5 million in cash. This acquisition was accounted for using the purchase
method. Pro forma results of the acquisition are not presented because they
would not be materially different from DSP's historical financial statements.
In January 1996, DSP sold 16,176 shares of Class B common stock, at a price
of $90 per share, to certain officers of DSP. The $90 per share represented
estimated fair market value per share as determined by the Board of Directors of
DSP.
In December 1995, DSP's German subsidiary sold its primary building for
approximately $1,900,000 in cash. DSP recorded a gain on the sale of $1,656,000
which is included in other income for the six months ended March 24, 1996.
July 1996, DSP was purchased by Genzyme Corporation for $250 million in
cash. In connection with the transaction, all outstanding Stock options were
acquired by Genzyme and retired for a net value of approximately $12.1 million
(which represents the difference between the strike price and the acquisition
price). This transaction was recorded as a "Charge for Junior Stock Options" in
the consolidated statement of operations for the nine months ending June 30,
1996 because the transaction became probable in June 1996.
During the period October 1, 1995 to June 30, 1996 the Company adopted the
provisions of Statement of Financial Accounting Standards No. 106 "Employee's
Accounting for Postretirement Benefits Other Than Pensions" (SFAS 106). In
connection with adopting SFAS 106 operations were charged approximately
$400,000 for the actuarily determined net present value of post-retirement
life insurance benefits the Company will provide.
F-34
<PAGE> 35
EXHIBIT 99.3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Neozyme II Corporation (A
Development Stage Enterprise):
We have audited the accompanying balance sheets of Neozyme II Corporation (a
development stage enterprise) as of December 31, 1995 and 1994, and the related
statements of operations and cash flows for each of the three years in the
period ended December 31, 1995 and cumulative from March 2, 1992 (date of
inception) to December 31, 1995. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Neozyme II Corporation (a
development stage enterprise) as of December 31, 1995 and 1994 and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1995 and cumulative from March 2, 1992 (date of inception)
to December 31, 1995 in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 1, 1996
F-35
<PAGE> 36
NEOZYME II CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
<TABLE>
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<CAPTION>
FOR THE
YEARS ENDED CUMULATIVE
DECEMBER 31, FROM MARCH 2,
----------------------------- 1992 (DATE OF
1995 1994 1993 INCEPTION)
-------- -------- ------- -------------
<S> <C> <C> <C> <C>
Investment income (Note A)............................. $ 1,497 $ 2,522 $ 5,567 $ 12,162
Costs and expenses (Note C):
Technology license fee............................ -- -- -- 5,000
Research and development.......................... 24,128 17,785 12,483 59,579
General and administrative........................ 327 227 324 1,196
-------- -------- ------- --------
Total costs and expenses..................... 24,455 18,012 12,807 65,775
-------- -------- ------- --------
Net loss............................................... $(22,958) $(15,490) $(7,240) $(53,613)
======== ======== ======= ========
Net loss per callable common share (Note A)............ $ (9.51) $ (6.41) $ (3.00) $ (23.26)
======== ======== ======= ========
Weighted average number of callable common shares
outstanding (Note A)................................. 2,415 2,415 2,415 2,305
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE> 37
NEOZYME II CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
<TABLE>
BALANCE SHEETS
(In thousands)
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 5,546 $ 135
Short-term investments (Notes A and D)............................. 21,501 13,116
Prepaid research and development to Genzyme Corporation............ -- 186
-------- --------
Total current assets.......................................... 27,047 13,437
Long-term investments (Notes A and D)................................... -- 32,958
-------- --------
Total assets............................................................ $ 27,047 $ 46,395
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Payable to Genzyme Corporation (Note C)............................ $ 2,469 $ 729
Accrued expenses................................................... 92 117
-------- --------
Total current liabilities..................................... 2,561 846
Note Payable to Genzyme Corporation (Note C)............................ 100 100
Commitments and contingencies (Note E)
Stockholders' equity (Note B):
Callable common stock, $1.00 par value; authorized 9,000,000
shares, 2,415,000 shares issued and outstanding................... 2,415 2,415
Additional paid-in capital......................................... 75,620 75,620
Deficit accumulated during the development stage................... (53,613) (30,655)
Unrealized loss on investments (Note A)............................ (36) (1,931)
-------- --------
Total stockholders' equity.................................... 24,386 45,449
-------- --------
Total liabilities and stockholders' equity.............................. $ 27,047 $ 46,395
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE> 38
NEOZYME II CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
<TABLE>
STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
FOR THE YEARS ENDED CUMULATIVE
DECEMBER 31, FROM MARCH 2,
----------------------------- 1992 (DATE OF
1995 1994 1993 INCEPTION)
-------- -------- ------- -------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $(22,958) $(15,490) $(7,240) $(53,613)
Reconciliation of net income to net cash used by
operating activities:
(Gain) loss on sale of investments........... 218 (8) (2,104) (1,894)
Amortization of premium...................... 559 602 -- 1,161
Prepaid research and development............. 186 (186) -- --
Payable to Genzyme Limited................... -- (7) (51) --
Payabl to Genzyme Corporation................ 1,740 286 443 2,469
Accrued expenses............................. (25) 6 (39) 92
-------- -------- ------- --------
Net cash used by operating activities........ (20,280) (14,797) (8,991) (51,785)
Cash flows from investing activities:
Purchases of short-term investments............... -- -- (20,160) (31,216)
Purchases of long-term investments................ -- -- (50,839) (109,521)
Sales of short-term investments................... 16,109 12,743 14,313 47,244
Sales of long-term investments.................... 9,582 -- 63,107 72,689
-------- -------- ------- --------
Net cash provided (used) by investing
activities................................. 25,691 12,743 6,421 (20,804)
Cash flows from financing activities:
Issuance of note payable to Genzyme Corporation... -- -- -- 100
Issuance of common stock.......................... -- -- -- 78,035
-------- -------- ------- --------
Net cash provided by financing activities.... -- -- -- 78,135
-------- -------- ------- --------
Increase (decrease) in cash and cash equivalents....... 5,411 (2,054) (2,570) 5,546
Cash and cash equivalents, beginning of period......... 135 2,189 4,759 0
-------- -------- ------- --------
Cash and cash equivalents, end of period............... $ 5,546 $ 135 $ 2,189 $ 5,546
======== ======== ======= ========
Supplemental disclosure:
Classification of investments -- Note A
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE> 39
NEOZYME II CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
<TABLE>
STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<CAPTION>
DEFICIT
UNREALIZED ACCUMULATED
COMMON STOCK ADDITIONAL GAIN/(LOSS) DURING THE
-------------------- PAID-IN ON DEVELOPMENT
SHARES AMOUNT CAPITAL INVESTMENTS STAGE
--------- -------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Shares issued upon
incorporation............................... 100 $ -- $ -- $ -- $ --
Shares canceled upon public
offering................................. (100) -- -- -- --
Issuance of Common Stock...................... 2,415,000 2,415 75,620 -- --
Net loss...................................... -- -- -- -- (7,925)
--------- ------ ------- ------- --------
Balance, December 31, 1992.................... 2,415,000 2,415 75,620 -- (7,925)
Net loss...................................... -- -- -- -- (7,240)
--------- ------ ------- ------- --------
Balance, December 31, 1993.................... 2,415,000 2,415 75,620 -- (15,165)
Unrealized loss on
investments................................. -- -- -- (1,931) --
Net Loss...................................... -- -- -- -- (15,490)
--------- ------ ------- ------- --------
Balance, December 31, 1994.................... 2,415,000 2,415 75,620 (1,931) (30,655)
Unrealized appreciation on
investments................................. -- -- -- 1,895 --
Net Loss...................................... -- -- -- -- (22,958)
--------- ------ ------- ------- --------
Balance, December 31, 1995.................... 2,415,000 $2,415 $75,620 $ (36) $(53,613)
========= ====== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE> 40
NEOZYME II CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS: Neozyme II Corporation was incorporated in March 1992 to develop
products for the treatment of cystic fibrosis by gene therapy or protein
replacement (the "Field"). In 1993 Neozyme II's research program was expanded to
include the products to be developed by Genzyme in collaboration with North
American Biologics, Inc. ("NABI," formerly Univax Biologics, Inc.)
The Company began operations on May 5, 1992 and is classified as a
development stage enterprise. The Company will experience significant losses as
substantially all of its capital will be spent to fund development of its
products. It is not anticipated that the Company will receive any significant
revenues unless and until it successfully commercializes any of its programs
upon expiration of the Purchase Option (see Note C).
EXHAUSTION OF AVAILABLE FUNDS Under the Development Agreement, Neozyme II
is obligated to engage Genzyme to perform all of its research, development and
clinical testing activities related to the Products. It is expected that
Available Funds to pay for such activities will be substantially exhausted by
December 31, 1996. There can be no assurance that, at such time, the development
of the Products will have progressed to a point where Genzyme will have enough
information to determine whether to exercise the Purchase Option.
EXERCISE OF PURCHASE OPTION Genzyme may purchase all (but not less
than all) of the Neozyme II Callable Common Stock at any time through December
31, 1996. Genzyme is not obligated to exercise the Purchase Option and will do
so only if Genzyme perceives that such exercise is in its best interest. There
can be no assurance that Genzyme's best interest in this regard will coincide
with the best interest of Neozyme II's shareholders. If Genzyme does not
exercise the Purchase Option, Neozyme II will need to find other ways to
complete clinical testing and commercialize the Products. Neozyme II will have
working capital of at least $1 million to fund these commercialization efforts.
If Genzyme does not exercise the Purchase Option and Neozyme II decides to
complete development, manufacture or market the products itself, Neozyme II
will need substantial additional funds. Genzyme is not obligated to provide
these funds and there can be no assurance that such funds will be available
from others on attractive terms, if at all.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
certain estimates and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS: Cash equivalents, consisting primarily of U.S.
Treasury bills and commercial paper purchased with initial maturities of three
months or less, are valued at cost plus accrued interest, which approximates
market.
INVESTMENTS: Short-term investments include all investments with remaining
maturities of twelve months or less. Long-term investments include all
investments with remaining maturities greater than twelve months. As of December
31, 1995 the Company's investment portfolio, consisting primarily of debt
securities classified as available for sale, is shown at market value and
classified as current assets. It is management's intention to sell these
securities in fiscal 1996. In computing realized gains or losses on the sale of
securities, the Company determines cost on a specific identification basis. In
1994, the Company adopted Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115").
The adoption of SFAS 115 did not have a material effect on the financial
position or results of operations of the Company. SFAS 115 requires that, except
for debt securities classified as held-to-maturity which are reported at
amortized cost, investments in debt and equity securities be reported at fair
value. The Company classifies its investments in debt securities as either
held-to-maturity or available-for-sale based on facts and circumstances present
F-40
<PAGE> 41
NEOZYME II CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
at the time the investments are purchased. As of December 31, 1995, the Company
classified all investments in debt securities as available-for-sale. (See Note D
- -Investments).
LOSS PER SHARE: Loss per share is based upon the weighted average number
of shares of Callable Common Stock outstanding during the period. From March 2,
1992 (date of inception) through May 4, 1992 (immediately prior to the initial
public offering), there were 100 shares outstanding.
UNCERTAINTIES: The Company is subject to risks common to companies in the
Biotechnology industry, including but not limited to, development by the Company
or its competitors of new technological innovations, dependence on key
personnel, protection of proprietary technology, and compliance with FDA
government regulations.
NOTE B. INITIAL PUBLIC OFFERING
In May 1992, the Company completed an initial public offering of 2,415,000
shares of Callable Common Stock for net proceeds of $78.0 million. Each share of
Callable Common Stock was accompanied by a warrant to purchase one share of
Genzyme common stock and a callable warrant to purchase one share of Genzyme
common stock. Neozyme II received all of the net proceeds of the offering and
paid all of the offering costs, fees and expenses. All of the shares of
Callable Common Stock are subject to an outstanding purchase option to Genzyme
which expires on December 31, 1996. (See Note C). Effective December 1994, the
stockholders of Genzyme approved the Genzyme Stock Proposal as described in
Genzyme's Prospectus/Proxy Statement dated November 10, 1994 to redesignate
Genzyme's Common Stock as General Division Common Stock on a share-for-share
basis and a second class of common stock, designated as Tissue Repair Division
Common Stock. Each warrant when exercised will grant the holder one share of
General Division common stock and .135 of one share of Tissue Repair common
stock.
NOTE C. ARRANGEMENTS WITH GENZYME CORPORATION
Neozyme II has entered into the following arrangements with Genzyme:
DEVELOPMENT AGREEMENT: Under the Development Agreement, Genzyme has been
engaged to conduct research and development of the products and the Company is
required to pay Genzyme, based on Genzyme's costs of conducting the research and
development, all of the net proceeds of the initial public offering plus any
interest or other income earned thereon, less amounts for the Company's working
capital ($1.0 million) and administrative expenses and $5.0 million paid to
Genzyme under a technology license agreement. During 1995, 1994 and 1993,
Neozyme II incurred $24,128,000, $17,785,000, and $12,483,000, respectively, of
expenses related to this agreement. At December 31, 1995 and 1994 the Company
had a payable to Genzyme under the agreement of $2,469,000 and $729,000,
respectively.
TECHNOLOGY LICENSE AGREEMENT: The Company has an exclusive, worldwide
license to Genzyme's technology relating to the products for use in the Field.
Under this agreement, Neozyme II paid a nonrefundable fee of $5,000,000 to
Genzyme in 1992.
PURCHASE OPTION AGREEMENT: Under the Purchase Option Agreement, Genzyme
has the option, exercisable not later than December 31, 1996, to purchase all,
but not less than all, of the Callable Common Stock, at stated prices which
increase over time. The purchase price increases based on a formula which pro
rates evenly by month the difference between a given and a prior year purchase
price plus the prior year purchase price.
F-41
<PAGE> 42
NEOZYME II CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
<TABLE>
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
<CAPTION>
IF THE STOCK PURCHASE OPTION EXERCISE TOTAL
OPTION IS EXERCISED PRICE PER SHARE PAYMENT
- --------------------- --------------- ------------
<S> <C> <C>
During 1995..................... $ 83 $200,445,000
During 1996..................... $117 $282,555,000
</TABLE>
The Purchase Option Agreement terminates following a material incurred
breach of the development agreement or the Technology License Agreement by one
of the parties and the option exercise period may accelerate in the event of
exhaustion of funds.
SERVICES AGREEMENT: Under the Services Agreement, Genzyme's wholly-owned
subsidiary Genzyme Limited is paid for providing certain management and
administrative services to the Company, based upon actual costs. The Company
incurred expenses of $79,000, $78,000, and $88,000 in 1995, 1994 and 1993,
respectively, under this agreement.
SERIES 1992 NOTE: In 1992, the Company issued a promissory note to Genzyme
in the principal amount of $100,000, bearing interest at 7% annually. The note
is due on the day following termination of the Purchase Option Agreement and may
not be prepaid. While the note is outstanding, Neozyme II may not issue
additional capital stock, borrow more than $1 million in the aggregate, declare
or pay dividends utilizing funds committed to be paid to Genzyme under the
Development Agreement, merge, liquidate or sell all or substantially all of its
assets without Genzyme's approval.
NOTE D. INVESTMENTS
<TABLE>
Investments in marketable securities at December 31 consisted of the
following:
<CAPTION>
1995 1994
-------------------------------------
MARKET MARKET
(DOLLARS IN THOUSANDS) COST VALUE COST VALUE
- ---------------------------------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Short Term:
Corporate notes......................................... $21,537 $21,501 $13,226 $13,116
======= ======= ======= =======
Long Term:
Corporate notes......................................... $ 0 $ 0 $34,779 $32,958
======= ======= ======= =======
</TABLE>
Gross realized holding losses included in interest income for 1995 were
$218,000. In 1994, investment income included gross realized holding gains and
losses of $17,000 and $9,000, respectively. Net realized gains included in
investment income for 1993 were $2,104,000. Gross unrealized gains and losses
included in stockholders equity at December 31, 1995 were $45,000 and $81,000,
respectively, as compared to gross unrealized holding gains and losses at
December 31, 1994 of $36,000 and $1,931,000, respectively.
NOTE E COMMITMENTS AND CONTINGENCIES
In August 1993, Genzyme entered into a license and development agreement
with NABI whereby Genzyme received a license to the vaccine and passive
immunization antibody products being developed by NABI primarily for use in
treating Pseudomonas infections in cystic fibrosis patients. In connection with
the NABI license and development agreement, Neozyme II and Genzyme agreed to
expand the field of the Technology License Agreement and the Development
Agreement to include the products to be developed with NABI for any clinical
indication. Neozyme II also agreed to (i) assume Genzyme's obligation to make
milestone payments to NABI, (ii) fund Genzyme's share of the development costs
of the products being developed with NABI, (iii) appoint NABI as its agent for
the manufacture of such products and (iv) share the profits resulting from
commercialization of such products with NABI.
F-42
<PAGE> 43
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
NEOZYME II CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED CUMULATIVE
JUNE 30, JUNE 30, FROM
--------------------- ---------------------- INCEPTION
1996 1995 1996 1995 (MARCH 2, 1992)
---- ---- ---- ---- --------------
<S> <C> <C> <C> <C> <C>
Investment income .............. $ 209 $ 340 $ 453 $ 820 $ 12,615
Costs and expenses:
Technology license fee ....... - - - - 5,000
Research and development ..... 5,217 5,949 10,596 11,652 70,175
General and administrative ... 83 98 162 158 1,358
------- ------- -------- -------- --------
5,300 6,047 10,758 11,810 76,533
------- ------- -------- -------- --------
Net loss ....................... $(5,091) $(5,707) $(10,305) $(10,990) $(63,918)
======= ======= ======== ======== ========
Net loss per callable
common share .................. $ (2.11) $ (2.36) $ (4.27) $ (4.55) $ (27.59)
======= ======= ======== ======== ========
Weighted average callable
common shares outstanding ..... 2,415 2,415 2,415 2,415 2,317
======= ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
unaudited, condensed financial statements.
F-43
<PAGE> 44
<TABLE>
NEOZYME II CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE DATA)
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ....................... $ 8,636 $ 5,546
Short-term investments .......................... 5,178 21,501
Prepaid research and development ................ 527 -
-------- --------
$ 14,341 $ 27,047
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Payable to Genzyme Corporation .................. 29 2,469
Accrued expenses ................................ 129 92
-------- --------
Total current liabilities .................... 158 2,561
Note payable to Genzyme Corporation ................ 100 100
Stockholders' Equity:
Callable common Stock, $1.00 par value;
authorized 9,000,000 shares, 2,415,000
shares issued and outstanding .................. 2,415 2,415
Additional paid-in capital ...................... 75,620 75,620
Deficit accumulated during the
development stage .............................. (63,918) (53,613)
Unrealized loss on investments .................. (34) (36)
-------- --------
14,083 24,386
-------- --------
$ 14,341 $ 27,047
======== ========
</TABLE>
The accompanying notes are an integral part of these
unaudited, condensed financial statements.
F-44
<PAGE> 45
<TABLE>
NEOZYME II CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<CAPTION>
SIX MONTHS ENDED
JUNE 30, CUMULATIVE
-------------------- FROM INCEPTION
1996 1995 (MARCH 2, 1992)
---- ---- ---------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net loss ............................................ $(10,305) $(10,990) $ (63,918)
Reconciliation of net loss to net cash
used by operating activities:
(Gain)/loss on sale of investments ............... (25) 226 (1,919)
Accrued interest/amortization on investments ..... (365) 276 796
Prepaid research and development ................. (527) (374) (527)
Due from Genzyme Corporation ..................... - - -
Payable to Genzyme Limited ....................... - - -
Payable to Genzyme Corporation ................... (2,440) (729) 29
Accrued expenses ................................. 37 41 129
-------- -------- ---------
Net cash used by operating activities ............... (13,625) (11,550) (65,410)
Cash flow from investing activities:
Purchases of short-term investments ................. - - (31,216)
Purchase of long-term investment .................... - - (109,521)
Sales and maturities of short-term investments ...... 16,715 22,638 63,959
Sales and maturities of long-term investments ....... - - 72,689
-------- -------- ---------
Net cash provided (used) by investing activities .... 16,715 22,638 (4,089)
Cash flow from financing activities:
Issuance of note payable to Genzyme Corporation ..... - - 100
Issuance of callable common stock ................... - - 78,035
-------- -------- ---------
Net cash provided by financing activities ........... - - 78,135
-------- -------- ---------
Increase in cash and cash equivalents ................... 3,090 11,088 8,636
Cash and cash equivalents at beginning of period ........ 5,546 135 -
-------- -------- ---------
Cash and cash equivalents at end of period .............. $ 8,636 $ 11,223 $ 8,636
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these
unaudited, condensed financial statements.
F-45
<PAGE> 46
NEOZYME II CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
JUNE 30, 1996
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. BASIS FOR PRESENTATION:
Neozyme II Corporation ("Neozyme II" or the "Company") is a
development stage enterprise engaged in the research, development and
clinical testing of biotherapeutic products for the treatment of cystic
fibrosis.
These unaudited condensed 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
included therein. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
the Securities and Exchange Commission rules and regulations.
The financial statements for the three and six months ended June 30,
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 financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
As of June 30, 1996, investments totaling $5,178,000 were classified
as available for sale and, accordingly, unrealized holding losses totaling
$34,000 have been recognized in a separate component of stockholders'
equity.
3. PURCHASE OPTION AGREEMENT WITH GENZYME CORPORATION:
<TABLE>
Under the Purchase Option Agreement, Genzyme has the option (the
"Purchase Option"), exercisable not later than December 31, 1996, to
purchase all, but not less than all, of the Callable Common Stock, at
stated prices which increase over time. The purchase price increases based
on a formula which prorates evenly by month the difference between a given
and prior year purchase price plus the prior year purchase price.
<CAPTION>
IF THE STOCK PURCHASE OPTION EXERCISE TOTAL
OPTION IS EXERCISED: PRICE PER SHARE PAYMENT
------------------- --------------- ------------
<S> <C> <C>
On or before December 31, 1995... $ 83 $200,445,000
December 31, 1996................ 117 282,555,000
</TABLE>
The purchase price, if exercised at June 30, 1996, was $100.00 per share
for a total payment of $241,500,000.
The Purchase Option Agreement may be terminated by Neozyme II
following expenditure of the funds available for its development program
unless Genzyme funds or obtains funding to continue the development
program.
4. TERMINATION OF LICENSE AND DEVELOPMENT AGREEMENT WITH NABI
Under agreement with Genzyme, Neozyme II funds Genzyme's obligations
to provide development funding to NABI in exchange for the exclusive
rights that Genzyme has acquired to market, on a worldwide basis,
HyperGAM+[Trademark]CF, for the treatment of Pseudomonas lung infections
in Cystic Fibrosis patients. In June 1996, Neozyme II and NABI announced
the halt of their Phase II clinical trial for HyperGAM+[Trademark]CF after
receiving the results of an interim analysis of the data from the trial by
an independent statistician which showed no evidence of a reduction in the
number of acute pulmonary exacerbations in trial participants. No major
issues with the safety of the product were identified. On June 21, 1996,
after review of the interim analysis data, the Board of Directors of
Neozyme II voted unanimously to terminate the License and Development
Agreement with NABI. Under the terms of this Agreement, Neozyme II is
required to reimburse NABI for certain costs incurred in connection with
the wind down of the HyperGAM+[Trademark]CF program up to maximum of
$900,000.
F-46
