<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):
JUNE 18, 1997
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 OR DISPOSITION OF ASSETS.
On June 18, 1997, pursuant to an Agreement and Plan of Merger (the
"Merger Agreement") dated as of January 31, 1997 between Genzyme Corporation
("Genzyme"), a Massachusetts corporation, and PharmaGenics, Inc.
("PharmaGenics"), a Delaware corporation, PharmaGenics merged with and into
Genzyme (the "Merger"). The Merger was approved by the stockholders of Genzyme
at a Special Meeting of Stockholders held on June 12, 1997 (the "Genzyme Special
Meeting") and was approved by the stockholders of PharmaGenics at a Special
Meeting of Stockholders held on June 12, 1997.
As consideration for the Merger, the stockholders of PharmaGenics
received 3,928,572 shares of Genzyme Molecular Oncology Division Common Stock,
$0.01 par value ("GMO Stock") subject to reduction as described below. The GMO
Stock is intended to reflect the value and track the performance of Genzyme
Molecular Oncology ("GMO"), a new division established by Genzyme. GMO was
formed to develop and commercialize novel therapeutics and diagnostics for
cancer based on molecular tools and genomics information. GMO consists of all of
PharmaGenics's business, several Genzyme programs in the area of molecular
oncology and Genzyme's rights under agreements with third parties relating to
gene therapies for the treatment of cancer. As compensation to the Genzyme
General Division ("Genzyme General") for the assets it contributed to GMO,
6,000,000 shares of GMO Stock have been reserved for issuance for the benefit
of Genzyme General or its stockholders ("GMO Designated Shares"). The Board of
Directors of Genzyme may issue the GMO Designated Shares as a stock dividend to
the holders of Genzyme General Division Common Stock ("GGD Stock") or it may
sell such shares in a public or private sale and allocate all of the proceeds
to Genzyme General.
The number of shares of GMO Stock delivered by Genzyme as the merger
consideration was determined through arms-length negotiations between the
parties. Such number of shares is subject to reduction prior to delivery of the
GMO Stock certificates to the PharmaGenics stockholders by (i) the amount that
PharmaGenics's expenses in connection with the Merger exceed $1,000,000 and
(ii) payments made or reasonably expected to be made by Genzyme, as of the date
the GMO Stock certificates are delivered, to holders of PharmaGenics common
stock who have exercised appraisal rights under Delaware law and to holders of
PharmaGenics stock who have commenced or threatened (in writing) to commence
any action, suit or legal, administrative or arbitration proceeding against
either Genzyme or PharmaGenics challenging the Merger or seeking damages in
connection with the Merger, as well as any expenses incurred by Genzyme in
connection with any such action suit or proceeding, in each case divided by
$7.00, the agreed upon value of the GMO Stock.
There was no material relationship between PharmaGenics or its
stockholders and Genzyme or any of its affiliates, directors or officers, or any
associate of a Genzyme director or officer.
The assets acquired in the Merger were used by PharmaGenics in the
business of developing products and services for the treatment of cancer and
Genzyme intends that GMO, which includes the assets of PharmaGenics, will
operate in the same business.
ITEM 5. OTHER EVENTS
Also on June 18, 1997, Genzyme amended its articles of organization to
(i) redesignate each of Genzyme's then existing classes of common stock as
separate series of a single class of common stock with substantially the same
features as the shares of each of Genzyme's then existing classes of common
stock and (ii) authorize 110,000,000 shares of undesignated common stock that
may be issued from time by the Board of Directors of Genzyme in one or more
series (in addition to the GMO Stock).
Finally, on June 18, 1997, Genzyme distributed to each holder of GMO
Stock rights to purchase one one-hundredth of a share of Series C Junior
Participating Preferred Stock for each share of GMO Stock held and amended its
Rights Agreement with American Stock Transfer & Trust Company to reflect, among
other things, the distribution of rights to the holders of the GMO Stock and,
in the designation of the rights distributed to the holders of GGD Stock and
Genzyme Tissue Repair Division Common Stock, the redesignation of the Company's
existing classes of common stock.
<PAGE> 3
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND
EXHIBITS.
(a) Financial Statements of Business Acquired:
The financial statements of PharmaGenics for the most recent
fiscal year, the accountant's report covering such financial statements and
the interim financial statements required by this item are filed herewith as
Exhibit 99.1.
(b) Pro Forma Financial Information:
The financial statements of GMO for the most recent fiscal
year, the accountant's report covering such financial statements, the interim
financial statements and the pro forma financial information required by this
item are filed herewith as Exhibit 99.2.
(c) Exhibits:
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
2 Agreement and Plan of Merger dated as of January 31, 1997
between Genzyme Corporation and PharmaGenics, Inc. Filed as
Annex I to the Prospectus/Proxy Statement included in
Genzyme's Registration Statement on Form S-4 (File No. 333-
26351), and incorporated herein by reference. Pursuant to
Item 601(b)(2) of Regulation S-K, the schedules and certain
exhibits to the Agreement and Plan of Merger are omitted. A
list of such schedules and exhibits appears in the table of
contents to the Agreement and Plan of Merger. The Registrant
hereby undertakes to furnish supplementally a copy of any
omitted schedule or exhibit to the Commission upon request.
23.1 Consent of Coopers and Lybrand L.L.P., independent
accountants to Genzyme Corporation. Filed herewith.
23.2 Consent of Arthur Andersen LLP, independent accountants to
PharmaGenics, Inc. Filed herewith.
99.1 Financial statements of PharmaGenics for the most recent
fiscal year, the accountant's report covering such financial
statements, and the interim financial statements of
PharmaGenics. Filed herewith.
99.2 Financial statements of GMO for the most recent fiscal year,
the accountant's report covering such financial statements,
the interim financial statements, management's discussion
and analysis of financial condition and results of
operations and pro forma financial information giving effect
to the merger of PharmaGenics with and into Genzyme. Filed
herewith.
</TABLE>
<PAGE> 4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: June 30, 1997 GENZYME CORPORATION
By:/s/ David J. McLachlan
---------------------------------------
David J. McLachlan
Executive Vice President, Finance and
Chief Financial Officer
<PAGE> 5
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NO.
- ------- ----------- ---------
<S> <C> <C>
2 Agreement and Plan of Merger dated as of January 31, 1997
between Genzyme Corporation and PharmaGenics, Inc. Filed as
Annex I to the Prospectus/Proxy Statement included in
Genzyme's Registration Statement on Form S-4 (File No.
333-26351), and incorporated herein by reference. Pursuant to
Item 601(b)(2) of Regulation S-K, the schedules to the
Agreement and Plan of Merger are omitted. A list of such
schedules appears in the table of contents to the Agreement
and Plan of Merger. The Registrant hereby undertakes to
furnish supplementally a copy of any omitted schedule to the
Commission upon request.
23.1 Consent of Coopers and Lybrand L.L.P., independent accountants
to Genzyme Corporation. Filed herewith.
23.2 Consent of Arthur Andersen LLP, independent accountants to
PharmaGenics, Inc. Filed herewith.
99.1 Financial statements of PharmaGenics for the most recent
fiscal year, the accountant's report covering such financial
statements and the interim financial statements of
PharmaGenics. Filed herewith.
99.2 Financial statements of GMO for the most recent fiscal year,
the accountant's report covering such financial statements,
the interim financial statements, management's discussion and
analysis of results of operations and financial condition and
pro forma financial information giving effect to the merger of
PharmaGenics with and into Genzyme. Filed herewith.
</TABLE>
<PAGE> 6
PHARMAGENICS, INC.
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants F-1
Balance Sheets as of December 31, 1995 and 1996 F-2
Statements of Operations for the Years Ended
December 31, 1994, 1995 and 1996 F-3
Statement of Changes in Stockholders'
Equity (Deficit) F-4
Statements of Cash Flows for the Years
Ended December 31, 1994, 1995 and 1996 F-5
Notes to Financial Statements F-6
Balance Sheets as of March 31, 1997 (unaudited)
and December 31, 1996 F-18
Statement of Operations (unaudited) for the Three
Months Ended March 31, 1997 and 1996 F-19
Statements of Cash Flows (unaudited) for the Three
Months Ended March 31, 1997 and 1996 F-20
Notes to Financial Statements (unaudited) F-21
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We consent to the incorporation by reference in the Registration Statements of
Genzyme Corporation on Form S-8 (File Nos. 33-8881, 33-15616, 33-26329,
33-29918, 33-35067, 33-37236, 33-41933, 33-55656, 33-68188, 33-58359, 33-60437,
333-10003, 33-30007, 33-68208, 33-58351, 333-10005, 33-22464, 33-29440,
33-51416, 33-68186, 33-58353, 33-58355, 33-60435 and 33-21241) and on Form S-3
(File Nos. 33-61853, 333-15597 and 333-24361) of our report dated April 7, 1997
on our audit of the combined financial statements of Genzyme Molecular Oncology
as of December 31, 1995 and 1996 and for the period from December 1, 1994 (Date
of Inception) through December 31, 1994, for the years ended December 31, 1995
and 1996 and cumulative for the period from December 1, 1994 (Date of
Inception) through December 31, 1996, which report is included in the Company's
filing on Form 8-K dated June 30, 1997.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
June 30, 1997
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
We consent to the incorporation by reference in the Registration Statements of
Genzyme Corporation on Form S-8 (File Nos. 33-8881, 33-15616, 33-26329,
33-29918, 33-35067, 33-37236, 33-41933, 33-55656, 33-68188, 33-58359, 33-60437,
333-10003, 333-30007, 33-68208, 33-58351, 333-10005, 33-22464, 33-29440,
33-51416, 33-68186, 33-58353, 33-58355, 33-60435 and 33-21241) and on Form S-3
(File Nos. 33-61853, 333-15597 and 333-24361) of our report dated March 3, 1997
relating to the financial statements of PharmaGenics, Inc. included in Genzyme
Corporation's report on Form 8-K dated June 30, 1997.
/s/ Arthur Andersen LLP
------------------------------
ARTHUR ANDERSEN LLP
Roseland, New Jersey
June 30, 1997
<PAGE> 1
EXHIBIT 99.1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To PharmaGenics, Inc.:
We have audited the accompanying balance sheets of PharmaGenics, Inc. as of
December 31, 1995 and 1996, and the related statements of operations, changes in
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company'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 PharmaGenics, Inc. as of
December 31, 1995 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has incurred
significant losses from operations since its inception, has a stockholders'
deficit and requires substantial additional capital to fund its operations. In
addition, the Company has a significant operating lease commitment. As discussed
in Notes 1 and 14, as of January 31, 1997, the Company entered into an agreement
and plan of merger with Genzyme Corporation, which is subject to approval of the
stockholders of each company. If the merger is not consummated, management will
be required to consider other alternatives, including the liquidation of the
Company's remaining assets and the payment of its liabilities and commitments.
Management's plans in regard to these matters are described in Note 1. The
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
/s/ ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 3, 1997
F-1
<PAGE> 2
PHARMAGENICS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------
ASSETS 1995 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................ $ 1,639,182 $ 486,109
Accounts receivable .............................. -- 185,972
Prepaid expenses ................................. 22,970 38,183
------------ ------------
Total current assets ............................. 1,662,152 710,264
Property and equipment, net of
$1,705,980 and $2,073,642 of
accumulated depreciation ...................... 996,048 782,638
Other assets ..................................... 35,425 40,425
------------ ------------
Total assets ..................................... $ 2,693,625 $ 1,533,327
============ ============
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses ............ $ 942,736 $ 1,599,987
Deferred revenue ................................. 1,038,400 315,200
Current obligations under capital
leases ......................................... 321,650 147,102
------------ ------------
Total current liabilities ........................ 2,302,786 2,062,289
Long-term obligations under capital
leases ........................................ 39,280 25,177
------------ ------------
Total liabilities ................................ 2,342,066 2,087,466
------------ ------------
Commitments and contingencies
(Notes 3, 7, 8, 9 and 11)
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock - $.01 par value,
10,000,000 shares authorized:
Series A convertible preferred
stock, 2,500,000 shares designated,
2,160,000 shares issued and
outstanding at December 31, 1995
and 1996, liquidation preference
$4,017,600..................................... 21,600 21,600
Series B convertible preferred stock,
2,500,000 shares designated,
2,138,399 shares issued and
outstanding at December 31, 1995 and 1996,
liquidation preference $16,038,000 ............ 21,384 21,384
Series C convertible preferred stock,
4,717,700 shares designated, 1,356,592
and 3,076,556 shares issued and outstanding at
December 31, 1995 and 1996, respectively,
liquidation preference $2,916,673 and
$6,614,595 at December 31, 1995 and 1996,
respectively .................................. 13,566 30,765
Common stock - $.01 par value, 15,000,000
shares authorized, 451,608 and 455,108
shares issued and outstanding at
December 31, 1995 and 1996, respectively ....... 4,516 4,551
Additional paid-in capital ....................... 22,394,917 26,066,218
Accumulated deficit .............................. (21,939,837) (26,692,470)
Deferred compensation ............................ (164,587) (6,187)
------------ ------------
Total stockholders' equity (deficit) ........... 351,559 (554,139)
------------ ------------
Total liabilities and stockholders'
equity (deficit) ............................ $ 2,693,625 $ 1,533,327
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 3
PHARMAGENICS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Research contracts ............................... $ 1,529,595 $ 2,783,233 $ 1,137,671
License fees and royalties ....................... 250,614 766 4,553
Grants ........................................... 38,000 136,672 276,221
----------- ----------- -----------
Total revenues ................................... 1,818,209 2,920,671 1,418,445
----------- ----------- -----------
Costs and expenses:
Research and development ......................... 5,821,540 4,608,271 4,498,839
General and administrative ....................... 1,447,501 1,388,095 1,756,164
----------- ----------- -----------
Total costs and expenses ......................... 7,269,041 5,996,366 6,255,003
----------- ----------- -----------
Loss from operations ............................. (5,450,832) (3,075,695) (4,836,558)
Interest expense ................................. (125,801) (347,897) (36,349)
Interest income .................................. 88,817 44,045 120,274
----------- ----------- -----------
NET LOSS ......................................... $(5,487,816) $(3,379,547) $(4,752,633)
=========== =========== ===========
Net loss per common share ........................ $ (12.28) $ (7.49) $ (10.49)
=========== =========== ===========
Weighted average common shares outstanding ....... 446,933 451,406 452,970
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 4
PHARMAGENICS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Series A Series B Series C
Convertible Convertible Convertible Additional
Preferred Preferred Preferred Common Paid-in
Stock Stock Stock Stock Capital
------- ------- ------- ------ ------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994 $21,600 $21,384 $ -- $4,338 $ 18,278,515
Issuance of warrants and shares
of common stock to acquire
technology rights -- -- -- 167 716,833
Issuance of shares of common
stock upon exercise of stock
options -- -- -- 7 510
Issuance of stock options at
below fair market value -- -- -- -- 394,500
Net loss -- -- -- -- --
------- ------- ------- ------ ------------
Balance, December 31, 1994 21,600 21,384 -- 4,512 19,390,358
Conversion of debt into Series C
Convertible Preferred Stock -- -- 9,770 -- 2,090,853
Issuance of Series C
Convertible Preferred Stock -- -- 3,796 -- 812,254
Issuance of warrants at below
fair market value -- -- -- -- 165,000
Issuance of shares of common
stock upon exercise of stock
options -- -- -- 4 334
Issuance of stock options at
below fair market value -- -- -- -- 33,000
Cancellation of stock options
upon employment termination -- -- -- -- (96,882)
Amortization of deferred
compensation -- -- -- -- --
Net loss -- -- -- -- --
------- ------- ------- ------ ------------
Balance, December 31, 1995 21,600 21,384 13,566 4,516 22,394,917
Issuance of Series C
Convertible Preferred Stock -- -- 17,199 -- 3,680,723
Issuance of shares of common
stock upon exercise of stock
options -- -- -- 35 1,715
Cancellation of stock options
upon employment termination -- -- -- -- (11,137)
Amortization of deferred
compensation -- -- -- -- --
Net loss -- -- -- -- --
------- ------- ------- ------ ------------
Balance, December 31, 1996 $21,600 $21,384 $30,765 $4,551 $ 26,066,218
======= ======= ======= ====== ============
</TABLE>
<TABLE>
<CAPTION>
Accumulated Deferred Stockholders'
Deficit Compensation Equity (Deficit)
------------ ------------ ----------------
<S> <C> <C> <C>
Balance, January 1, 1994 $(13,072,474) $ -- $ 5,253,363
Issuance of warrants and shares
of common stock to acquire
technology rights -- -- 717,000
Issuance of shares of common
stock upon exercise of stock
options -- -- 517
Issuance of stock options at
below fair market value -- (394,500) --
Net loss (5,487,816) -- (5,487,816)
------------ --------- -----------
Balance, December 31, 1994 (18,560,290) (394,500) 483,064
Conversion of debt into Series C
Convertible Preferred Stock -- -- 2,100,623
Issuance of Series C
Convertible Preferred Stock -- -- 816,050
Issuance of warrants at below
fair market value -- -- 165,000
Issuance of shares of common
stock upon exercise of stock
options -- -- 338
Issuance of stock options at
below fair market value -- (33,000) --
Cancellation of stock options
upon employment termination -- 96,882 --
Amortization of deferred
compensation -- 166,031 166,031
Net loss (3,379,547) -- (3,379,547)
------------ --------- -----------
Balance, December 31, 1995 (21,939,837) (164,587) 351,559
Issuance of Series C
Convertible Preferred Stock -- -- 3,697,922
Issuance of shares of common
stock upon exercise of stock
options -- -- 1,750
Cancellation of stock options
upon employment termination -- 11,137 --
Amortization of deferred
compensation -- 147,263 147,263
Net loss (4,752,633) -- (4,752,633)
------------ --------- -----------
Balance, December 31, 1996 $(26,692,470) $ (6,187) $ (554,139)
============ ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 5
PHARMAGENICS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1994 1995 1996
-------------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (5,487,816) $(3,379,547) $(4,752,633)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 698,757 365,305 368,762
Technology rights acquired for common stock and warrants 717,000 -- --
Amortization of deferred compensation expense -- 166,031 147,263
Expense incurred with the issuance of warrants below fair market value -- 165,000 --
Interest on loans converted into Series C Convertible Preferred Stock -- 100,623 --
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable -- -- (185,972)
(Increase) decrease in prepaid expenses 30,403 26,007 (15,213)
(Increase) decrease in other assets 2,758 15,841 (5,000)
Increase (decrease) in accounts payable
and accrued expenses 57,543 543,848 657,251
Increase (decrease) in deferred revenue 701,633 336,767 (723,200)
----------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (3,279,722) (1,660,125) (4,508,742)
----------- ----------- -----------
INVESTING ACTIVITIES:
(Increase) decrease in investments 2,041,875 -- --
Capital expenditures (129,026) (34,290) (155,352)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,912,849 (34,290) (155,352)
----------- ----------- -----------
FINANCING ACTIVITIES:
Payments on capital lease obligations (381,039) (235,829) (188,651)
Proceeds from issuance of common stock 517 338 1,750
Proceeds from loans converted into Series C Convertible Preferred Stock -- 2,000,000 --
Proceeds from the issuance of Series C Convertible Preferred Stock -- 816,050 3,697,922
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (380,522) 2,580,559 3,511,021
----------- ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,747,395) 886,144 (1,153,073)
Cash and cash equivalents at beginning of year 2,500,433 753,038 1,639,182
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 753,038 $ 1,639,182 $ 486,109
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 125,801 $ 82,274 $ 36,349
=========== =========== ===========
Property and equipment acquired under capital lease agreements $ 70,000 $ -- $ --
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 6
PHARMAGENICS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - Summary of Significant Accounting Policies
Background
PharmaGenics, Inc. (the "Company"), a Delaware corporation, was incorporated on
August 11, 1989. The Company is an integrated drug discovery company
principally engaged in the research and development of pharmaceuticals for the
treatment of cancer. The Company's research programs in cancer center upon
certain key genes, called "tumor suppressor genes," that are responsible for
the production of proteins that generally function to prevent the unregulated
growth of cells. The Company targets tumor suppressor genes and other
cancer-related genes in search of desirable therapeutics against cancer.
The Company is subject to a number of risks at this stage of development,
including, but not limited to, uncertainties relating to whether patents will
issue and whether patents that issue will provide the Company with adequate
protection from other products or competitors; dependence on key individuals
for achievement of the Company's expectations which the Company believes are
based on reasonable assumptions within the bounds of its knowledge of its
business and operations; continued collaboration between the Company and its
corporate, governmental and academic collaborators; establishment of additional
collaborations with academia or corporations; uncertainty whether the Company's
research and development activities will result in the development of
commercially usable products and processes; competition from alternative
products or processes; uncertainties related to technological improvements and
advances; the impact of research and product development activities of
competitors of the Company, many of whom have more substantial financial or
other resources than those of the Company; the need and ability to obtain
adequate additional financing necessary to fund continuing operations and
product development and the terms on which such financing might be available;
the ability to obtain lease financing for capital equipment; uncertainties
related to clinical trials; uncertainties of obtaining required regulatory
approvals; and uncertainties of future profitability. The Company expects to
incur substantial additional costs before it can begin to generate revenue from
product sales sufficient to fund its operations, including costs related to
ongoing research and development activities, preclinical studies and regulatory
compliance, and for hiring additional management, scientific, manufacturing,
sales and administrative personnel.
The Company sold additional shares of Series C convertible preferred stock in
the first quarter of 1996 (Note 9) and, in connection with entering into an
Agreement and Plan of Merger as of January 31, 1997 (the "Merger Agreement")
with Genzyme Corporation ("Genzyme") (see below and Note 14), received a
stand-by credit facility (the "Credit Facility") (Note 8) under which the
Company made an initial draw of $1 million in February 1997. The Company
expects to make additional draws under the Credit Facility and believes that
the Credit Facility is sufficient to fund operations until the expected closing
of the proposed merger with Genzyme in May 1997. The Company will require
substantial additional funds should the proposed merger with Genzyme not be
consummated. Uncertainties relating to the proposed merger with Genzyme and the
Credit Facility are additional meaningful factors that could cause actual
results to differ from the Company's expectations.
Pursuant to the Merger Agreement and on the terms and conditions set forth
therein, subject to approval by the Company's stockholders and Genzyme's
stockholders and subject to certain other conditions, the Company is to be
merged with and into Genzyme (the "Proposed Merger") with Genzyme being the
surviving corporation. The business of the Company is to be combined with
several of Genzyme's oncology programs to form a new division of Genzyme to be
known as the Genzyme Molecular Oncology division (Note 14).
F-6
<PAGE> 7
PHARMAGENICS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - Summary of Significant Accounting Policies (continued)
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect 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 reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid investments which when
purchased have a maturity of less than three months.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets which range
from five to seven years. Leasehold improvements and equipment under capital
leases are amortized using the straight-line method over the shorter of the
lease term or the useful lives of the assets.
Long-Lived Assets
During 1996, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets" ("SFAS 121"). SFAS 121 requires, among other things, that an entity
review its long-lived assets and certain related intangibles for impairment
whenever changes in circumstances indicate that the carrying amount of an asset
may not be fully recoverable. As a result of its review, the Company does not
believe that any impairment currently exists related to its long-lived assets.
Revenue Recognition
License fees and royalties are recognized as revenue when earned. Revenues
under collaborative research and development agreements and grants are
recognized as earned over the term of the contracts and grants. Payments
received in advance under these agreements are recorded as deferred revenue
until earned.
Research and Development
Research and development costs are charged to expense as incurred.
Stock-Based Compensation
The Company adopted the disclosure requirement of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123") for the year ended December 31, 1996 (Note 9). The Company accounts for
its stock options under Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees."
F-7
<PAGE> 8
PHARMAGENICS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - Summary of Significant Accounting Policies (continued)
Net Loss Per Common Share
Net loss per common share was computed based on the weighted average number of
common shares outstanding during the year. Shares issuable upon conversion of
preferred stock or exercise of options and warrants were not considered, as the
effect would be antidilutive.
NOTE 2 - Collaborative Research and Development Agreements
Agreements with PaineWebber R&D Partners III, L.P.
In May 1994, the Company entered into a series of agreements (the "R&D
Agreements") with PaineWebber R&D Partners III, L.P. (the "Partnership"),
pursuant to which the Partnership paid a $250,000 license fee and agreed to pay
the Company up to $5,750,000 to conduct research and development on behalf of
the Partnership on targets identified by the Company pursuant to a development
plan originally projected to extend through March 1996, but which continued
through January, 1997. In consideration of such payments, the Partnership
obtained rights to the results of such research, and the Company granted the
Partnership an exclusive, royalty-free license to use certain patent rights,
know-how and technical information owned or licensed by the Company. Under the
R&D Agreements, upon the occurrence of certain events of default (such as
failure to perform its obligations, default on indebtedness, insolvency,
cessation of operations and others), the Company would be obligated to make
certain payments to the Partnership. In March 1995, the R&D Agreements were
modified to expand the area of research under the development plan and to
accelerate $750,000 of research funding under the R&D Agreements into 1995.
Under the R&D Agreements, the Company also received an option (the "Purchase
Option") to purchase at any time certain or all of the rights owned by the
Partnership as a result of the R&D Agreements (the "Partnership Rights") at an
option price ranging from $9.4 million up to $19.2 million, depending upon the
date of the purchase and the rights purchased. The R&D Agreements provided that
in the event the Company commenced Phase II clinical trials on an agent
developed under the R&D Agreements, the Company would be obligated to exercise
the purchase option. To date, the Company has not commenced any Phase II
clinical trials. In consideration for the Purchase Option, the Company issued
to the Partnership warrants to purchase up to 1,000,000 shares of the Company's
common stock (the "Core Warrant") and up to 666,667 shares of the Company's
common stock (the "Purchase Option Warrant"). The Core Warrant is exercisable
for a period of five years which commenced July 1, 1996, and the Purchase
Option Warrant would have been exercisable for a period of four years following
termination of the Purchase Option. The estimated fair value of $580,000
attributed to these warrants upon issuance was charged to research and
development expense in 1994. With the modification of the R&D Agreements in
March 1995, the exercise price on the Core Warrant and the Purchase Option
Warrant was fixed at $2.15 per share, subject to antidilution provisions and
other adjustments. In June 1995, the Company executed and delivered a
convertible note (the "Note") to the Partnership under which the Company
borrowed $1,000,000 at an interest rate of prime plus two percentage points
(Note 8). In lieu of repayment in cash, the Note and accrued interest were
converted into 480,242 shares of Series C convertible preferred stock of the
Company as of September 30, 1995, which thereby reduced by $1,000,000 research
funding from the Partnership under the R&D Agreements.
In January 1997, in connection with the Proposed Merger (Note 14), the
Partnership exercised its option under the R&D Agreements to exchange the
Partnership Rights for additional shares of the Company's preferred stock. This
option became exercisable upon the signing of the Merger Agreement and as a
result of such exercise, the Company issued to the Partnership in February 1997
298,420 shares of Series A convertible preferred stock, 88,864 shares of Series
B convertible preferred stock and 1,641,144 shares of Series C convertible
preferred stock. The liquidation preference amount of these preferred shares,
$4,750,000, was charged to research and development expense in the first
quarter of 1997 because the acquired technology and other rights relate to
in-process research and development projects that have not yet reached
technological feasibility and the technology currently has no alternative
future uses. Upon the exercise of the exchange option by
F-8
<PAGE> 9
PHARMAGENICS,INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - Collaborative Research and Development Agreements (continued)
the Partnership, the Purchase Option Warrant and the R&D Agreements terminated.
In addition, upon the completion of the Proposed Merger, the Core Warrant will
be cancelled.
The Company recognized $1,650,000, $2,311,600 and $723,200 of revenues under
the R&D Agreements in 1994, 1995 and 1996, respectively. In addition, as of
December 31, 1995 and 1996, the Company had received $1,038,400 and $315,200,
respectively, of deferred revenue under the R&D Agreements, which relate to
research activities yet to be completed as of such dates. All funding pursuant
to the R&D Agreements had been received as of December 31, 1995.
Other Agreements
The Company has entered into other collaborative research and development
agreements, some of which provide for payments to the Company. The Company
earned $129,595 in 1994, $471,633 in 1995 and $414,471 in 1996 under these
agreements. (Note 10)
NOTE 3 - Research and License Agreements
Agreements with The Johns Hopkins University
In March 1991, the Company entered into a Research Agreement (the "Research
Agreement") with The Johns Hopkins University School of Medicine ("JHU") and
Hoffmann-La Roche Inc. ("Roche"), and in February 1992, the Company entered
into a License Agreement (the "License Agreement") with JHU and Roche
(collectively, the "JHU Agreements"), pursuant to which the Company made
unrestricted research grants to the Basic Cancer Research Foundation and JHU of
approximately $818,000 to fund research conducted at JHU by Dr. Bert
Vogelstein. Dr. Vogelstein has had the sole discretion to determine research
activities within the specified research areas, which include cancer and
virology. In return for these payments, JHU granted to the Company and Roche a
worldwide, exclusive, royalty-bearing license to all technology developed
within the specified research area pursuant to the JHU Agreements. In February
1995, the Research Agreement terminated, with certain provisions remaining in
effect through August 1995. Certain rights granted to Roche and the Company by
JHU, and certain of the obligations of Roche and the Company to JHU (such as
maintaining confidentiality of information, not using JHU's name without their
consent, not bringing suit against JHU as a result of any dispute which arises
between Roche and the Company and to reimburse JHU for their costs in the event
they are involved in such dispute), survived the termination of the Research
Agreement. The License Agreement continues, subject to scheduled royalty
payments, until the expiration of the patents licensed thereunder.
The Company and Roche also entered into supplementary agreements (the "Roche
Agreements") regarding the development and commercialization of any technology
developed by Dr. Vogelstein in the research areas specified in the JHU
Agreements. Pursuant to an initial agreement with Roche, Roche obtained the
first option to license from JHU any diagnostic applications, the Company
obtained a license from JHU to any oligonucleotide-based therapeutic
applications and the Company and Roche jointly obtained a license from JHU to
any therapeutic applications that are not oligonucleotide-based. Roche has
agreed to pay the Company royalties at varying rates on sales of any products
developed by Roche stemming from Dr. Vogelstein's research. Additionally, Roche
obtained first option rights (the "First Option Rights") to act as the
Company's partner for research and development programs relating to Dr.
Vogelstein's technology. At Roche's option, Roche could choose to pay the
Company to provide mutually agreed upon research and development services for
diagnostic products. In May 1996, Roche decided not to develop certain
inventions licensed from JHU and the Company exercised its option, which did
not require any additional payment, to assume the rights to all of those
inventions. In October 1996, Roche and the Company signed a term sheet under
which the Company will be provided a sublicense to any and all diagnostic
products and
F-9
<PAGE> 10
PHARMAGENICS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - Research and License Agreements (continued)
applications to which Roche retains rights under the License Agreement, and the
Company is granted the exclusive right to sublicense to third parties Roche's
rights to diagnostic products and applications under the License Agreement,
exclusive of those rights to certain antibody-based diagnostics that Roche has
assigned to a third party. The term sheet also provides for royalties to Roche
and sharing of revenues between the Company and Roche.
In March 1994, in consideration of 16,666 shares of the Company's common stock
and warrants to acquire 50,000 shares (of which one-third at an exercise price
of $10.50 per share expired in March 1995 and the second third at an exercise
price of $15.00 per share expired in March 1996 and the final third at an
exercise price of $24.00 per share expire in March 1997) of common stock, Roche
waived the First Option Rights so that the Company may freely seek partners for
its Vogelstein-related research and development programs. The estimated fair
value attributable to these shares and warrants of $137,000 was charged to
research and development expense in 1994.
Effective September 1995, the Company entered into a license agreement (the
"SAGE Agreement") with JHU and Drs. Bert Vogelstein and Kenneth Kinzler, both
of JHU, relating to the SAGE technology. In addition to substantial license
fees paid and milestone payments to be made by the Company to retain an
exclusive license, the agreement provides for certain additional payments to be
made by the Company to JHU in the event the Company sublicenses SAGE technology
to third parties or performs SAGE-related services on behalf of third parties.
In January 1997, in contemplation of the Proposed Merger (Note 14), the SAGE
Agreement was amended to waive any possible right JHU may have to a potential
payment of $5 million resulting from the change of control which would arise
from the Proposed Merger in exchange for 43,200 shares of the Company's Series
B convertible preferred stock to be issued to JHU. If the Proposed Merger is
not consummated, the amendment to the SAGE Agreement shall become null and void
and the 43,200 shares of the Company's Series B convertible preferred stock
will not be issued to JHU. The Company is currently in discussions with JHU
regarding a license to other present and future discoveries of Dr. Kinzler,
some of which were, or may be, created in collaboration with Dr. Vogelstein.
NOTE 4 - Accounts Receivable
In the fourth quarter of 1996, the Company recognized $185,972 of revenue
earned under an award by the U.S. National Cancer Institute ("NCI") in the form
of a Cooperative Grant. The Company has received notice from NCI that funding
is authorized for the second budget year, which had begun in September of 1996,
of the grant but the Company has not yet obtained funds available under the
grant to settle this receivable.
NOTE 5 - Property and Equipment
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1995 1996
--------------------- ---------------------
<S> <C> <C>
Laboratory and office $ 1,980,378 $ 2,134,630
Leasehold improvements 721,650 721,650
----------- -----------
2,702,028 2,856,280
Less: Accumulated depreciation (1,705,980) (2,073,642)
----------- -----------
$ 996,048 $ 782,638
=========== ===========
</TABLE>
F-10
<PAGE> 11
PHARMAGENICS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - Accounts Payable and Accrued Expenses
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1996
---------- ----------
<S> <C> <C>
Accounts payable $ 94,912 $ 152,216
Vacation and other employee benefits 84,379 95,139
Legal and professional fees 129,850 342,254
Collaborative arrangements 550,000 845,870
Other accrued expenses 83,595 164,508
---------- ----------
$ 942,736 $1,599,987
========== ==========
</TABLE>
The accrual for collaborative arrangements relates primarily to JHU for 1996
and solely to JHU for 1995 (Note 3). Other accrued expenses for 1996 includes
an accrual for settlement of a lawsuit (Note 14).
NOTE 7 - Leases
Capital Lease Obligations
In April 1991, the Company entered into a master lease agreement and granted
the lessor a warrant to purchase 41,580 shares of the Company's Series A
convertible preferred stock at $1.85 per share for a term of ten years. In
September 1993, the Company entered into a master lease agreement and granted
the lessor a warrant to purchase 10,000 shares of the Company's common stock at
$7.50 per share for a term of up to ten years. These warrants contain certain
anti-dilution and/or registration rights.
The master lease agreement entered into in September 1993 provides the Company
the option, effective as of the expiration of the initial lease term, to
purchase the equipment at fair market value or to renew the lease at market
value for a minimum of twelve months and a maximum of thirty-six months,
whereby at the end of such renewal period the Company is obligated to purchase
the equipment at fair market value. The Company has not exercised either of the
foregoing options and, in accordance with the terms of the lease, the lease has
been renewed on a month-to-month basis at the monthly payment in effect
immediately prior to the expiration of the initial lease term. The initial
lease term expired in September 1996 on certain equipment and in December 1996
on the remaining equipment. The Company has classified approximately $133,000
as a current lease obligation reflecting the Company's obligation to purchase
the equipment and its current intention to exercise its purchase option in
1997.
Leased equipment with a cost of $820,000 as of December 31, 1995 and 1996 is
included in property and equipment. Future minimum payments under capital lease
obligations are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------------
<S> <C>
1997 $ 150,160
1998 17,160
1999 10,010
--------------
177,330
Less amount representing interest 5,051
---------------
172,279
Less current portion 147,102
---------------
Long-term portion $ 25,177
===============
</TABLE>
F-11
<PAGE> 12
PHARMAGENICS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - Leases (continued)
Operating Lease
The lease on the Company's office and research facilities expires on December
31, 1999 and contains two three-year renewal options. Monthly rent for the
remainder of the original lease term is approximately $17,600 basic rent plus
maintenance and other costs. Accordingly, as of December 31, 1996, the minimum
basic rent commitment for the remainder of the original lease term is $633,600.
Rent expense was approximately $297,768, $268,162 and $274,105 in 1994, 1995
and 1996, respectively.
NOTE 8 - Loan Agreements
In February 1995, the Company entered into a loan agreement (the "Loan") with
certain lenders, who were existing stockholders or affiliates of existing
stockholders at the time of entering into the Loan, under which the Company
borrowed an aggregate of $1 million at an interest rate of prime plus two
percentage points. In connection with the Loan, the Company granted the lenders
warrants to purchase an aggregate of 100,000 shares of common stock at an
exercise price of $0.50 per share for a term of up to ten years and recorded an
expense of $165,000 in 1995 relating to the warrants. The Loan and accrued
interest, totalling approximately $1,068,100 were converted into 496,792 shares
of Series C convertible preferred stock of the Company as of September 30,
1995.
In June 1995, the Company executed and delivered a convertible note (the
"Note") to the Partnership under which the Company borrowed $1 million at an
interest rate of prime plus two percentage points. In lieu of repayment in
cash, the Note and accrued interest, totalling approximately $1,032,500, were
converted into 480,242 shares of Series C convertible preferred stock of the
Company as of September 30, 1995 (Note 9), and thereby reduced by $1 million
research funding from the Partnership under the R&D Agreements (Note 2).
In October 1996, in anticipation of entering into the Merger Agreement, Genzyme
made available to the Company the Credit Facility under which the Company may
draw monthly an amount equal to its documented operating costs, up to a
specified maximum amount each month. Amounts not drawn by the Company in a
designated month are available to cover documented operating costs in a later
month, subject to certain limitations based on revenues. Amounts drawn by the
Company under the Credit Facility are evidenced by a Subordinated Convertible
Promissory Note (the "Promissory Note"). The Promissory Note bears interest
from the date of each draw at a rate of 8.25% per annum and matures on February
10, 2002. The Company made an initial draw of $1 million in February 1997,
after the signing of the Merger Agreement. (Note 14)
NOTE 9 - Stockholders' Equity
Convertible Preferred Stock
During 1991, the Company issued 2,160,000 shares of Series A convertible
preferred stock ("Series A Stock") and warrants to purchase 486,000 shares of
common stock at $0.462 per share expiring in September 2001 for net proceeds of
approximately $3,958,000.
In November 1991, the Company issued 1,944,000 shares of Series B convertible
preferred stock ("Series B Stock") and warrants to purchase 121,285 shares of
common stock pursuant to a private placement (the "Offering"). The warrants,
which were exercisable at $7.50 per share commencing 180 days after the
effective date of an initial public offering of the Company's common stock,
expired on November 14, 1996. The selling agent for the Offering received
warrants, which also expired on November 14, 1996, to purchase 194,400 shares
of common stock at $7.50 per share. Additionally,
F-12
<PAGE> 13
PHARMAGENICS,INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - Stockholders' Equity (continued)
the Company issued 194,399 shares of Series B Stock and warrants, which expired
on November 14, 1996, to purchase 13,500 shares of common stock at $7.50 per
share to an investor group consisting of HealthCare Ventures II, L.P. ("HCV
II"), the Company's principal stockholder, and limited partners of HCV II. The
net proceeds from these sales of Series B Stock and warrants were approximately
$14,356,000.
As of September 30, 1995, the Company converted the Loan (Note 8) and the Note
(Note 8) together with accrued interest into 977,034 shares of Series C
convertible preferred stock ("Series C Stock"). In December 1995, the Company
commenced a private placement offering of Series C Stock and held an initial
closing on 379,558 shares of Series C Stock for proceeds to the Company of
approximately $816,000 from this initial closing. In February 1996, the Company
held a final closing on the sale of 1,719,964 additional shares of Series C
Stock for proceeds to the Company of approximately $3,698,000. The offering was
made directly by the Company to the holders of the Company's other preferred
stock and to new investors. Total shares of Series C Stock sold in the private
placement were 2,099,522 and proceeds to the Company were approximately
$4,514,000.
The Series A Stock, Series B Stock and Series C Stock are convertible into
common shares on a one-to-one basis, subject to certain adjustments. The
holders of the Series A Stock, Series B Stock and Series C Stock have certain
dividend, liquidation and registration rights, as defined, and voting rights
equivalent to the voting rights of common stockholders based on the number of
common shares they would own pursuant to the conversion calculation. In the
event of a public offering of the Company's common stock at a price per share
of at least $7.50 and proceeds to the Company of at least $10 million, each
share of Series A Stock, Series B Stock and Series C Stock will be
automatically converted into one share of common stock, subject to adjustment
for stock dividends and splits.
For the effect of the Proposed Merger on the Company's preferred stock, see
Note 14.
Common Stock
438,442 shares of common stock currently issued are subject to repurchase
and/or first refusal rights. For the effect of the Proposed Merger on the
Company's common stock, see Note 14.
Warrants
Warrants outstanding at December 31, 1996 include the following:
<TABLE>
<CAPTION>
Number of
Underlying Stock Warrant Shares Reference
--------------------------------------- ------------------ ------------------
<S> <C> <C>
Series A Convertible Preferred 41,580 Note 7
=================
Common 1,000,000 Note 2
Common 666,667 Note 2
Common 486,000 Note 9
Common 100,000 Note 8
Common 16,666 Note 3
Common 10,000 Note 7
-----------------
2,279,333
=================
</TABLE>
For the effect of the Proposed Merger on the warrants and underlying stock, see
Note 14.
F-13
<PAGE> 14
PHARMAGENICS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - Stockholders' Equity (continued)
Stock Options
The Company has reserved 455,283, 483,333 and 133,333 shares of common stock
under the 1991 Stock Option Plan, as amended, the 1993 Stock Option Plan, as
amended, and the 1994 Independent Directors Stock Option Plan, as amended,
respectively, for the granting of either incentive stock options or
nonqualified stock options. In addition, the Board of Directors approved,
subject to stockholder approval, an increase of 416,667 shares authorized under
the 1993 Stock Option Plan. The exercise price of all incentive stock options
must be at least equal to the fair market value of such shares on the date of
the grant. The exercise price of the nonqualified stock options is to be
determined by the Board of Directors. Options vest over various periods not
exceeding four years and expire no later than ten years from grant date.
Option activity for the above plans is summarized as follows:
<TABLE>
<CAPTION>
Weighted-Average
Options Exercise Price Exercise Price
----------------- -------------- ---------------
<S> <C> <C> <C>
Balance, January 1, 1994 247,024
Granted 601,013 $0.50 - $8.10
Exercised (694) $0.093 - $6.75
Cancelled (249,291) $0.093 - $8.10
------------------
Balance, December 31, 1994 598,052 $0.093 - $8.10 $1.37
Granted 141,896 $0.50 - $2.15 $1.92
Exercised (400) $0.50 - $1.875 $0.84
Cancelled (137,158) $0.462 - $2.15 $1.20
------------------
Balance, December 31, 1995 602,390 $0.093 - $8.10 $1.55
Granted 249,890 $2.15 - $2.30 $2.29
Exercised (3,500) $0.50 $0.50
Cancelled (88,501) $0.462 - $2.30 $1.98
-------------------
Balance, December 31, 1996 760,279 $0.093 - $8.10 $1.75
</TABLE>
At December 31, 1996, options were exercisable for the purchase of 405,849
shares of common stock at a weighted-average exercise price of $1.23. Options
to purchase 33,747 shares of common stock were available for future grants
under the 1991 and 1993 stock option plans at December 31, 1996. Options to
purchase 93,333 shares of common stock were available for future grants under
the 1994 Independent Directors Stock Option Plan at December 31, 1996.
In September 1994, the Compensation Committee of the Board of Directors
approved the granting of new options with an exercise price of $2.15 per share
under the 1991 and 1993 Stock Option Plans in exchange for the cancellation of
certain older options at exercise prices ranging from $6.75 to $8.10 per share.
Under this offer, the Company has exchanged options to acquire 179,277 shares,
including options to acquire 48,502 shares granted to officers and directors of
the Company.
The Company has recorded deferred compensation of $394,500 in 1994 and $33,000
in 1995 for the deemed accounting value of certain nonqualified stock option
grants made to employees in December 1994 and to certain new employees in 1995,
respectively. No deferred compensation was recorded in 1996. Deferred
compensation is being amortized to compensation expense ratably over the
vesting period of the options. In 1995 and 1996, $166,031 and $147,263,
respectively, of deferred compensation was amortized to compensation expense.
F-14
<PAGE> 15
PHARMAGENICS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - Stockholders' Equity (continued)
The Company accounts for its stock options under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," under which no
compensation expense (except for those options granted at an excercise price
below the fair market value of the underlying stock on the date of grant) has
been recognized. Pro forma information regarding net loss and net loss per
share is required by SFAS 123 and has been determined as if the Company had
accounted for its stock options under the fair value method of SFAS 123. The
fair value of the stock options was estimated at the date of grant using the
Black-Scholes option pricing model with the following assumptions for 1995 and
1996, respectively: risk-free interest rates ranging from 5.84% to 6.12% and
6.27% to 6.65%; dividend yield and common stock price volatility of zero; and
an expected life of the option of 6 years. The weighted-average fair value of
the options granted during 1995 and 1996 was $0.86 and $0.75, respectively. For
purposes of pro forma disclosures, the estimated fair value of stock options is
amortized to expense over the vesting period of the options. The Company's pro
forma net loss and net loss per share for 1995 do not differ materially from
the amounts reported. For 1996, the Company's pro forma net loss and net loss
per share was $4,775,933 and $10.54, respectively. Because SFAS 123 has not
been applied to stock options granted prior to January 1, 1995, the resulting
pro forma compensation cost may not be representative of the possible
compensation cost in future years.
For the effect of the Proposed Merger on the stock options and underlying
stock, see Note 14.
NOTE 10 - Related Party Transactions
Research and development contract revenue earned under an agreement with
Genetic Therapy, Inc. ("GTI") was $100,000 in each of 1994 and 1995 and $25,000
in 1996. HCV II, a principal stockholder of the Company, was a principal
stockholder of GTI prior to the acquisition of GTI by Novartis (formerly
Sandoz, Inc.). See Note 2 for additional related party activity.
NOTE 11 - Employment and Consulting Agreements
In June 1993, the Company entered into an employment agreement with Dr.
Sherman, its president and chief executive officer, for a term of three years,
providing for an annual base salary of $230,000, subject to adjustment on an
annual basis, and an annual bonus of at least $20,000. In June 1996, the
Company and Dr. Sherman entered into a new employment agreement with an initial
term of three years ending on June 30, 1999, with automatic one-year renewals
thereafter, unless earlier terminated by either party upon 60 days notice prior
to the end of the then current term. The new agreement provides for an annual
base salary of $242,650, subject to adjustment on an annual basis, and an
annual bonus of at least $20,000. The new agreement further provides that in
the event that prior to March 31, 1997 the Company had a change in control or
received commitments for additional financing of at least $3,000,000 in the
aggregate, Dr. Sherman's annual base salary would be increased from $242,650 to
$260,000, retroactive to July 1, 1996. The Company believes that the Credit
Facility (Note 8) satisfied this requirement, and accordingly, effective
February 1997, Dr. Sherman's annual base salary was raised to $260,000,
retroactive to July 1, 1996. If Dr. Sherman's employment is terminated, other
than for cause, he will be entitled to salary continuation for a period of
twelve months.
The Company has also entered into various other employment and consulting
agreements. In connection with certain of the agreements, the Company issued
restricted common stock and granted options to purchase shares of common stock
(Note 9). Each executive officer (other than Dr. Sherman) is entitled to a
severance payment equal to 3 months salary if his employment is terminated
without cause.
F-15
<PAGE> 16
PHARMAGENICS,INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 12 - Savings Plan
The Company maintains a savings plan under Section 401(k) of the Internal
Revenue Code which allows eligible employees to contribute a portion of their
annual salary to the savings plan. The Company may make discretionary
contributions. Through December 31, 1996, the Company has not made any
contributions to this plan.
NOTE 13 - Income Taxes
At December 31, 1996, the Company had net operating loss ("NOL") tax
carryforwards aggregating approximately $23.1 million. The NOL carryforwards
expire in various years from 2005 through 2011. Pursuant to Federal income tax
regulations, the annual use of the Company's NOL carryforwards may be limited
if a cumulative change in ownership of more than fifty percent occurs in a
three year period. The Proposed Merger (Note 14) is expected to result in a
limit on the annual use of the Company's NOL carryforwards by Genzyme.
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." A valuation
allowance was established as realization of the tax assets is uncertain. The
components of the deferred tax amounts, carryforwards and the valuation
allowance are as follows:
<TABLE>
<CAPTION>
1995 1996
----------- ------------
<S> <C> <C>
Start-up costs $ 800,000 $ 535,000
Other temporary differences 900,000 695,000
NOL carryforwards 6,950,000 9,250,000
----------- ------------
Total gross deferred tax assets 8,650,000 10,480,000
Valuation allowance (8,650,000) (10,480,000)
----------- ------------
Net deferred tax assets $ -- $ --
=========== ============
</TABLE>
NOTE 14 - Events Subsequent to December 31, 1996
On January 24, 1997, the Company and LBC Captial Resources, Inc. ("LBC")
executed an agreement which settled an action brought by LBC on July 19, 1996
against the Company in the Superior Court of New Jersey in Bergen County
alleging breach of contract and related causes of action arising out of an
agreement between the Company and LBC that obligated LBC to assist the Company
in finding new sources of capital. LBC asserted in such action that the Company
improperly declined to pay LBC a commission in accordance with the agreement
and sought damages in excess of $150,000. The Company made a settlement payment
of $62,000 to LBC in January 1997. This amount was accrued as a charge to
general and administrative expense in 1996.
As of January 31, 1997, the Company and Genzyme entered into the Merger
Agreement pursuant to which the Company, on the terms and conditions set forth
in the Merger Agreement, is to be merged with and into Genzyme with Genzyme
being the surviving corporation. This Proposed Merger is intended to be a
tax-free reorganization within the meaning of the Internal Revenue Code. As
consideration for the Proposed Merger, the Company's stockholders are to
receive approximately 4 million shares (subject to certain adjustments set
forth in the Merger Agreement) of a new Genzyme security (the "GMO Stock"),
representing 40% of the initial equity interest in a new division of Genzyme,
to be known as the Genzyme Molecular Oncology division (the "GMO Division"), to
be formed within Genzyme through the combination of the business of the Company
with several of Genzyme's oncology programs. Because the Company's Certificate
of Incorporation requires that, in a transaction such as the Proposed Merger,
an aggregate merger preference be provided to holders
F-16
<PAGE> 17
PHARMAGENICS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 14 - Events Subsequent to December 31, 1996 (continued)
of the outstanding shares of the Company's preferred stock before any amounts
can be provided to holders of outstanding shares of the Company's common stock,
and because such aggregate merger preference exceeds the aggregate value of the
4 million shares of GMO Stock to be received in the Proposed Merger (based on
the valuation given the GMO Stock under the Merger Agreement), no shares of GMO
Stock are available for allocation to holders of the outstanding shares of the
Company's common stock (including stock options and warrants for common stock).
The Proposed Merger currently is expected to be completed in May 1997, subject
to approval by the Company's stockholders and Genzyme's stockholders and
subject to certain other conditions. As required by the Merger Agreement,
directors, officers and certain other stockholders of the Company have entered
into stockholder agreements with Genzyme pursuant to which they have agreed to
vote in favor of the Proposed Merger. The number of shares subject to such
agreements is sufficient to approve the Proposed Merger.
In January 1997, in contemplation of the Proposed Merger, the Company agreed to
issue to JHU 43,200 shares of the Company's Series B Stock immediately prior to
the consummation of the Proposed Merger in consideration of an amendment dated
as of January 31, 1997 (the "SAGE Amendment") to the SAGE Agreement (Note 3).
If the Proposed Merger is not consummated, the SAGE Amendment shall become null
and void and the foregoing 43,200 shares of the Company's Series B Stock will
not be issued to JHU.
In February 1997, in connection with the Proposed Merger, the Company issued to
the Partnership 298,420 shares of the Company's Series A Stock, 88,864 shares
of the Company's Series B Stock and 1,641,144 shares of the Company's Series C
Stock pursuant to the Partnership's exercise of its option to exchange all of
its Partnership Rights for shares of the Company's preferred stock. (Note 2)
In February 1997, the Company made an initial draw of $1 million under the
Credit Facility (Note 8).
F-17
<PAGE> 18
PHARMAGENICS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS March 31, 1997 December 31, 1996
-------------- -----------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 359,982 $ 486,109
Accounts receivable 329,598 185,972
Prepaid expenses 64,349 38,183
------------------- ---------------
Total current assets 753,929 710,264
Property and equipment, net of $2,163,596 and
$2,073,642 of accumulated depreciation 701,962 782,638
Other assets 40,425 40,425
------------------- ---------------
TOTAL ASSETS $ 1,496,316 $ 1,533,327
=================== ===============
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 1,241,556 $ 1,599,987
Deferred revenue -- 315,200
Current obligations under capital leases 147,432 147,102
------------------- ---------------
Total current liabilities 1,388,988 2,062,289
Long-term obligations under capital leases 21,443 25,177
Note Payable 1,662,272 --
------------------- ---------------
TOTAL LIABILITIES 3,072,703 2,087,466
------------------- ---------------
Commitments and contingencies
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock - $.01 par value, 10,000,000 shares authorized:
Series A convertible preferred stock, 2,500,000 shares designated,
2,458,420 and 2,160,000 shares issued and outstanding at March 31, 1997
and December 31, 1996, respectively, liquidation preference $4,572,661 and
$4,017,600 at March 31, 1997 and December 31, 1996, respectively 24,584 21,600
Series B convertible preferred stock, 2,500,000 shares designated,
2,227,263 and 2,138,399 shares issued and outstanding at March 31, 1997
and December 31,1996, respectively, liquidation preference $16,704,473 and
$16,038,000 at March 31, 1997 and December 31, 1996, respectively 22,273 21,384
Series C convertible preferred stock, 4,717,700 shares designated,
4,717,700 and 3,076,556 shares issued and outstanding at March 31, 1997
and December 31,1996, respectively, liquidation preference $10,143,055 and
$6,614,595 at March 31, 1997 and December 31,1996, respectively 47,177 30,765
Common stock - $.01 par value, 15,000,000 shares authorized, 455,108 shares
issued and outstanding at March 31, 1997 and December 31, 1996, respectively 4,551 4,551
Additional paid-in capital 30,795,934 26,066,218
Accumulated deficit (32,464,719) (26,692,470)
Deferred compensation (6,187) (6,187)
------------------- ---------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (1,576,387) (554,139)
------------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 1,496,316 $ 1,533,327
=================== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE> 19
PHARMAGENICS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Grants $ 23,419 $ --
Research contracts -- 498,470
Other 51,425 --
----------- -----------
Total revenues 74,844 498,470
----------- -----------
Costs and expenses:
Research and development 1,062,649 1,090,645
In-process technology 4,434,800 --
General and administrative 340,287 330,708
----------- -----------
Total costs and expenses 5,837,736 1,421,353
----------- -----------
Loss from operations (5,762,892) (922,883)
Interest expense (13,188) (14,488)
Interest income 3,831 42,161
----------- -----------
NET LOSS $(5,772,249) $ (895,210)
=========== ===========
Net loss per common share $ (12.68) $ (1.98)
=========== ===========
Weighted average common
shares outstanding 455,108 451,608
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE> 20
PHARMAGENICS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
---------------------------------
1997 1996
------------ -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (5,772,249) $ (895,210)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 89,955 87,715
Technology rights acquired for shares of preferred stock 4,750,000 --
Interest accrued on Note Payable 12,272 --
Amortization of deferred compensation expense -- 2,063
Changes in operating assets and liabilities:
(Increase) in accounts receivable (143,626) (106,842)
(Increase) in prepaid expenses (26,166) (18,220)
(Decrease) in accounts payable and accrued expenses (358,431) (13,823)
(Decrease) in deferred revenue (315,200) (184,000)
--------------- ---------------
Net cash used in operating activities (1,763,445) (1,128,317)
--------------- ---------------
INVESTING ACTIVITIES:
Capital expenditures (9,278) (8,816)
--------------- ---------------
Net cash used in investing activities (9,278) (8,816)
--------------- ---------------
FINANCING ACTIVITIES:
Payments on capital lease obligations (3,404) (62,108)
Proceeds from Note Payable 1,650,000 --
Issuance of Series C convertible preferred stock -- 3,697,922
--------------- ---------------
Net cash provided by financing activities 1,646,596 3,635,814
--------------- ---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS (126,127) 2,498,681
Cash and cash equivalents at beginning of period 486,109 1,639,182
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 359,982 $ 4,137,863
=============== ===============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 916 $ 14,488
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-20
<PAGE> 21
PHARMAGENICS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - The Company
PharmaGenics, Inc. (the "Company"), a Delaware corporation,
was incorporated on August 11, 1989. The Company is an integrated drug
discovery company principally engaged in the research and development of
pharmaceuticals for the treatment of cancer. The Company's research programs
in cancer center upon certain key genes, called "tumor suppressor genes," that
are responsible for the production of proteins that generally function to
prevent the unregulated growth of cells. The Company targets tumor suppressor
genes and other cancer-related genes in search of desirable therapeutics
against cancer.
The Company is subject to a number of risks at this stage of
development, including, but not limited to, uncertainties relating to whether
patents will issue and whether patents that issue will provide the Company with
adequate protection from other products or competitors; dependence on key
individuals for achievement of the Company's expectations which the Company
believes are based on reasonable assumptions within the bounds of its knowledge
of its business and operations; continued collaboration between the Company and
its corporate, governmental and academic collaborators; establishment of
additional collaborations with academia or corporations; uncertainty whether
the Company's research and development activities will result in the
development of commercially usable products and processes; competition from
alternative products or processes; uncertainties related to technological
improvements and advances; the impact of research and product development
activities of competitors of the Company, many of whom have more substantial
financial or other resources than those of the Company; the need and ability to
obtain adequate additional financing necessary to fund continuing operations
and product development and the terms on which such financing might be
available; the ability to obtain lease financing for capital equipment;
uncertainties related to clinical trials; uncertainties of obtaining required
regulatory approvals; uncertainties related to whether legal proceedings will
be initiated against the Company, including in connection with the proposed
merger of the Company with Genzyme Corporation ("Genzyme"), and the outcome of
any such proceedings; and uncertainties of future profitability. The Company
expects that it would, as an independent company, have to incur substantial
additional costs before it could begin to generate revenue from product sales
sufficient to fund its operations, including costs related to ongoing research
and development activities, preclinical studies and regulatory compliance, and
for hiring additional management, scientific, manufacturing, sales and
administrative personnel.
The Company received a stand-by credit facility (the "Credit
Facility") in connection with entering into an Agreement and Plan of Merger as
of January 31, 1997 (the "Merger Agreement") with Genzyme. The Company made an
initial draw of $1,000,000 in February, 1997 and additional draws of $650,000
in March, 1997 and $800,000 in May, 1997, for total draws, to date, of
$2,450,000 under the Credit Facility. The Company believes that amounts drawn
and available under the Credit Facility are sufficient to fund operations until
the expected closing of the proposed merger with Genzyme in mid-June, 1997.
The proposed merger with Genzyme is subject to the approval of the Company's
stockholders and Genzyme's stockholders and certain other conditions. The
Company will require substantial additional funds should the proposed merger
with Genzyme not be consummated. Uncertainties relating to the proposed merger
with Genzyme and the Credit Facility are additional meaningful factors that
could cause actual results to differ materially and adversely from the
Company's expectations.
NOTE 2 - Proposed Merger with Genzyme
As of January 31, 1997, the Company and Genzyme entered into
the Merger Agreement pursuant to which the Company, on the terms and conditions
set forth in the Merger Agreement, is to be merged with and into Genzyme with
Genzyme being the surviving corporation (the "Proposed Merger").
F-21
<PAGE> 22
PHARMAGENICS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - Proposed Merger with Genzyme (continued)
This Proposed Merger is intended to be a tax-free reorganization within the
meaning of the Internal Revenue Code. As consideration for the Proposed
Merger, the Company's stockholders are to receive approximately 4 million
shares (subject to certain adjustments set forth in the Merger Agreement) of a
new Genzyme security (the "GMO Stock"), representing 40% of the initial equity
interest in a new division of Genzyme, to be known as the Genzyme Molecular
Oncology division (the "GMO Division"), to be formed within Genzyme through the
combination of the business of the Company with several of Genzyme's oncology
programs. Because the Company's Certificate of Incorporation requires that, in
a transaction such as the Proposed Merger, an aggregate merger preference be
provided to holders of the outstanding shares of the Company's preferred stock
before any amounts can be provided to holders of outstanding shares of the
Company's common stock, and because such aggregate merger preference exceeds
the aggregate value of the 4 million shares of GMO Stock to be received in the
Proposed Merger (based on the valuation given the GMO Stock under the Merger
Agreement), no shares of GMO Stock are available for allocation to holders of
outstanding shares of the Company's common stock (including stock options and
warrants for common stock). The Proposed Merger currently is expected to be
completed in mid-June, subject to approval by the Company's stockholders and
Genzyme's stockholders and subject to certain other conditions. As required by
the Merger Agreement, directors, officers and certain other stockholders of the
Company have entered into stockholder agreements with Genzyme pursuant to which
they have agreed to vote in favor of the Proposed Merger. The number of shares
subject to such agreements is sufficient for approval of the Proposed Merger by
the stockholders of the Company.
NOTE 3 - Basis of Preparation
The information presented at March 31, 1997 and for the three
month period then ended is unaudited, but includes all adjustments (consisting
only of normal recurring adjustments) that the Company's management believes to
be necessary for the fair presentation of results for the periods presented.
These financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not contain certain of the information and footnotes required by generally
accepted accounting principles for annual financial statements. These
financial statements should, therefore, be read in conjunction with the
Company's audited financial statements for the year ended December 31, 1996,
which were included as part of the Company's Annual Report on Form 10-K. The
December 31, 1996 balance sheet was derived from audited financial statements.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect 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
reporting period. Actual results could differ from those estimates.
NOTE 4 - Accounts Receivable
In the first quarter of 1997, the Company recognized
approximately $23,400 of revenue earned under an award by the U.S. National
Cancer Institute ("NCI") in the form of a Cooperative Grant, bringing the
receivable for revenue earned by the Company under this Cooperative Grant to
nearly $209,400 at March 31, 1997. The balance of the receivable,
approximately $120,200, relates to funds available under the Cooperative Grant
that will be provided to a collaborator under the Cooperative Grant once such
funds are received by the Company. The Company has recorded a corresponding
liability to the collaborator.
F-22
<PAGE> 23
PHARMAGENICS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 - Note Payable
In October 1996, in anticipation of entering into the Merger
Agreement, Genzyme made available to the Company the Credit Facility. Under
the Credit Facility, the Company may draw monthly an amount equal to its
documented operating costs, up to a maximum amount each month as set forth
below:
<TABLE>
<S> <C>
Month Maximum Draw
----- ------------
December, 1996 $250,000
January, 1997 $750,000
February, 1997 $650,000
March, 1997 $450,000
April, 1997 $550,000
May, 1997 $550,000
</TABLE>
Amounts not drawn by the Company in a designated month are
available to cover documented expenses in any later month (subject to the
limitations described below), provided, however, that if such draws involve
individual expenditures in excess of $25,000, such expenditures require
Genzyme's consent. The maximum amount of monthly draws will be reduced by 60%
of gross revenues received by the Company in the prior month. If the Company's
gross revenues in any month beginning with November, 1996 exceed the product of
1.6667 and the maximum draw for the succeeding month, the amount of such excess
will be applied first against the maximum amount which may be drawn that may be
carried forward from previous months and then any remaining excess will be
carried forward and reduce the maximum amount available in subsequent months.
An additional draw of $250,000 may be made under the Credit Facility if the
SAGE patent licensed by the Company from JHU issues while the Credit Facility
is in effect, provided that such draw must be utilized by the Company to
fulfill its obligations to JHU. If Genzyme terminates the Merger Agreement
under certain circumstances, Genzyme will adjust the amount that may be drawn
under the Credit Facility to an additional $1,500,000 over amounts previously
drawn and expended, with draws to occur over a period of three months. Amounts
advanced under the Credit Facility are evidenced by a Subordinated Convertible
Promissory Note (the "Promissory Note"). The Promissory Note bears interest
from the date of each advance at a rate of 8.25% per annum and matures on
February 10, 2002.
The Company made an initial draw of $1,000,000 in February 1997, after
the signing of the Merger Agreement, and made additional draws of $650,000 in
March, 1997 and $800,000 in May, 1997, for total draws, to date, of $2,450,000
under the Credit Facility. Interest in the amount of $12,272 has accrued on
these draws as of March 31, 1997 and is recorded in Note Payable.
NOTE 6 - Agreements with PaineWebber R&D Partners III, L.P.; In-Process
Technology
In May 1994, the Company entered into a series of agreements
(the "R&D Agreements") with PaineWebber R&D Partners III, L.P. (the
"Partnership"), pursuant to which the Partnership paid a $250,000 license fee
and agreed, subject to certain conditions, to pay the Company up to $5,750,000
to conduct research and development on behalf of the Partnership on targets
previously identified by the Company pursuant to a development plan originally
projected to extend through March 31, 1996, but which continued through
January, 1997. In consideration of such payments, the Partnership obtained
rights to the results of such research, and the Company granted the Partnership
an exclusive, royalty-free license to use certain patent rights, know-how and
technical information owned or licensed by the Company. Under the R&D
Agreements, the Company also received an option (the "Purchase Option") to
purchase at any time certain or all of the rights owned by the Partnership as a
result of the R&D Agreements (the "Partnership Rights") at an option price
ranging from $9.4 million up to $19.2 million, depending upon the date of the
purchase and the rights purchased. In consideration for the Purchase Option,
the Company issued to the Partnership warrants to purchase up to 1,000,000
shares of the Company's common stock (the "Core Warrant") and up to 666,667
shares of the Company's common
F-23
<PAGE> 24
PHARMAGENICS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - Agreements with PaineWebber R&D Partners III, L.P.; In-Process
Technology (continued)
stock (the "Purchase Option Warrant"). The Core Warrant is exercisable for a
period of five years which commenced July 1, 1996, and the Purchase Option
Warrant would have been exercisable for a period of four years following
termination of the Purchase Option. The estimated fair value of $580,000
attributed to these warrants upon issuance was charged to research and
development expense in 1994. With the modification of the R&D Agreements in
March 1995, the exercise price on the Core Warrant and the Purchase Option
Warrant was fixed at $2.15 per share, subject to antidilution provisions and
other adjustments. In June 1995, the Company executed and delivered a
convertible note (the "Note") to the Partnership under which the Company
borrowed $1 million at an interest rate of prime plus two percentage points.
In lieu of repayment in cash, the Note and accrued interest were converted into
480,242 shares of Series C convertible preferred stock of the Company as of
September 30, 1995, which thereby reduced by $1 million research funding from
the Partnership under the R&D Agreements. As of December 31, 1995, all funding
pursuant to the R&D Agreements had been received by the Company.
In January 1997, in connection with the Proposed Merger, the
Partnership exercised its option under the R&D Agreements to exchange the
Parthership Rights for additional shares of the Company's preferred stock.
This option became exercisable upon the signing of the Merger Agreement and as
a result of such exercise, the Company issued to the Partnership in February
1997, 298,420 shares of Series A convertible preferred stock, 88,864 shares of
Series B convertible preferred stock and 1,641,144 shares of Series C
convertible preferred stock. The liquidation preference amount of these
preferred shares, $4,750,000, was charged to research and development expense
in the first quarter of 1997 because the acquired technology and other rights
relate to in-process research and development projects that have not yet
reached technological feasibility and the technology currently has no
alternative future uses. Upon the exercise of the exchange option by the
Partnership, the Purchase Option Warrant and the R&D Agreements terminated, and
$315,200 of funding that had been received pursuant to the R&D Agreements and
recorded as deferred revenue was offset against research and development
expense (in-process technology cost) in the first quarter of 1997. In
addition, upon the completion of the Proposed Merger, the Core Warrant will be
cancelled.
NOTE 7 - Amendment to SAGE License Agreement
Effective September 1995, the Company entered into a license
agreement (the "SAGE Agreement") with The Johns Hopkins University School of
Medicine ("JHU") and Drs. Bert Vogelstein and Kenneth Kinzler, both of JHU,
relating to the SAGE (Serial Analysis of Gene Expression) technology. In
addition to substantial license fees paid and milestone payments to be made by
the Company to retain an exclusive license, the agreement provides for certain
additional payments to be made by the Company to JHU in the event the Company
sublicenses SAGE technology to third parties or performs SAGE-related services
on behalf of third parties.
In January 1997, in contemplation of the Proposed Merger, the
SAGE Agreement was amended to waive any possible right JHU may have to a
potential payment of $5 million resulting from the change of control which
would arise from the Proposed Merger in exchange for 43,200 shares of the
Company's Series B convertible preferred stock to be issued to JHU. If the
Proposed Merger is not consummated, the amendment to the SAGE Agreement shall
become null and void and the 43,200 shares of the Company's Series B
convertibvle preferred stock will not be issued to JHU. The Company is
currently in discussions with JHU regarding a license to other present and
future discoveries of Dr. Kinzler.
NOTE 8 - New Accounting Pronouncement
Statement of Financial Accounting Standards No. 128,"Earnings
per Share" ("SFAS 128"), which supersedes Accountng Principles Board Opinion
No. 15, "Earnings per Share" ("APB No. 15"), was issued in February, 1997.
SFAS 128 requires dual presentation of basic and diluted earnings
F-24
<PAGE> 25
PHARMAGENICS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8 - New Accounting Pronouncement (continued)
per share ("EPS") for complex capital structures on the face of the income
statement. Basic EPS is computed by dividing income by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution from the exercise or conversion of securities into common
stock, such as stock options. SFAS 128 is required to be adopted for year-end
1997; earlier application is not permitted. The Company does not expect the
basic or diluted EPS measured under SFAS 128 to be materially different than
the Company's primary or fully-diluted EPS measured under APB No. 15.
F-25
<PAGE> 1
EXHIBIT 99.2
GENZYME MOLECULAR ONCOLOGY
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
I. COMBINED FINANCIAL STATEMENTS:
Report of Independent Accountants.................................................................. F-2
Combined Statements of Operations for the Period from December 1, 1994 (Date of Inception)
to December 31, 1994, for the Years Ended December 31, 1995 and 1996, Cumulative from
December 1, 1994, (Date of Inception) to December 31, 1996, for the Three Months Ended
March 31, 1996 and 1997 (unaudited) and Cumulative from December 1, 1994 (Date of Inception)
to March 31, 1997 (unaudited) ................................................................... F-3
Combined Balance Sheets as of December 31, 1995 and 1996 and March 31, 1997 (unaudited)............ F-4
Combined Statements of Cash Flows for the Period from December 1, 1994 (Date of Inception)
to December 31, 1994, for the Years Ended December 31, 1995 and 1996, Cumulative from
December 1, 1994 (Date of Inception) to December 31, 1996, for the Three Months Ended
March 31, 1996 and 1997 (uaudited), Cumulative from December 1, 1994 (Date of Inception)
to March 31, 1997 (unaudited).................................................................... F-5
Combined Statements of Division Equity for the Period from December 1, 1994 (Date of Inception)
to December 31, 1994, for the Years Ended December 31, 1995 and 1996 and for the Three Months
Ended March 31, 1997 (unaudited) ................................................................. F-6
Notes to Combined Financial Statements............................................................. F-7
II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS F-17
III. UNAUDITED PRO FORMA FINANCIAL STATEMENTS:
INTRODUCTION....................................................................................... F-20
Pro Forma Combined Balance Sheets as of March 31, 1997............................................. F-21
Pro Forma Combined Statements of Operations for the Three Months Ended March 31, 1997.............. F-22
Pro Forma Combined Statements of Operations for the Year Ended December 31, 1996................... F-23
Notes to Unaudited Pro Forma Financial Statements.................................................. F-24
</TABLE>
F-1
<PAGE> 2
GENZYME MOLECULAR ONCOLOGY
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of GENZYME CORPORATION:
We have audited the accompanying combined balance sheets of Genzyme
Molecular Oncology (a development stage enterprise, as described in Note 1) as
of December 31, 1995 and 1996 and the related combined statements of operations,
cash flows and division equity for the period from December 1, 1994 (Date of
Inception) through December 31, 1994, for the years ended December 31, 1995 and
1996 and cumulative for the period from December 1, 1994 (Date of Inception)
through December 31, 1996. The combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Genzyme
Molecular Oncology (a development stage enterprise) as of December 31, 1995 and
1996 and the combined results of its operations and its cash flows for the
period December 1, 1994 (Date of Inception) through December 31, 1994, for the
years ended December 31, 1995 and 1996 and cumulative for the period from
December 1, 1994 (Date of Inception) through December 31, 1996, in conformity
with generally accepted accounting principles.
As more fully described in Note 1 to these financial statements, Genzyme
Molecular Oncology (a development stage enterprise) is a business group of
Genzyme Corporation; accordingly, the combined financial statements of Genzyme
Molecular Oncology should be read in connection with the audited consolidated
financial statements of Genzyme Corporation and subsidiaries, which are
included in the Genzyme Corporation 1996 Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
April 7, 1997
Except for Note 7
as to which the date
is June 18, 1997
F-2
<PAGE> 3
GENZYME MOLECULAR ONCOLOGY
COMBINED STATEMENTS OF OPERATIONS
(A DEVELOPMENT STAGE ENTERPRISE)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE CUMULATIVE
PERIOD FROM
DECEMBER 1, DECEMBER 1,
1994 (DATE OF FOR THE FOR THE 1994 (DATE OF
INCEPTION) YEAR YEAR INCEPTION)
THROUGH ENDED ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996 1996
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Operating Expenses:
General and administrative........... $ 8 $ 87 $ 185 $ 280
Research and development............. 29 377 818 1,224
---- ----- ------- -------
Total operating expenses............. 37 464 1,003 1,504
---- ----- ------- -------
Net loss............................... $(37) $(464) $(1,003) $(1,504)
==== ===== ======= =======
<CAPTION>
CUMULATIVE FROM
FOR THE THREE FOR THE THREE DECEMBER 1, 1994
MONTHS ENDED MONTHS ENDED (DATE OF INCEPTION)
MARCH 31, 1996 MARCH 31, 1997 THROUGH MARCH 31, 1997
--------------- -------------- ----------------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Operating Expenses:
General and administrative........... $ 40 $ 109 $ 389
Research and development............. 189 518 1,742
----- ----- -------
Total operating expenses............. 229 627 2,131
----- ----- -------
Net loss............................... $(229) $(627) $(2,131)
===== ===== =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-3
<PAGE> 4
GENZYME MOLECULAR ONCOLOGY
COMBINED BALANCE SHEETS
(A DEVELOPMENT STAGE ENTERPRISE)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION> DECEMBER 31,
---------------- MARCH 31,
1996 1995 1997
---- ---- ------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Other assets................................................ $ -- $ -- $ 363
------- ----- ------
Total assets.............................................. $ -- $ -- $ 363
======= ===== ======
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Due to Genzyme General...................................... $ -- $ -- $ 363
------- ----- ------
Total current liabilities................................. -- -- 363
COMMITMENTS AND CONTINGENCIES (See notes 1, 3, 4 and 6)
DIVISION EQUITY
Parent Company investment................................. 1,504 501 2,131
Deficit accumulated during the development stage.......... (1,504) (501) (2,131)
------- ----- ------
Total division equity....................................... 0 0 0
------- ----- ------
Total liabilities and division equity....................... $ -- $ -- $ 363
======= ===== ======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-4
<PAGE> 5
GENZYME MOLECULAR ONCOLOGY
COMBINED STATEMENTS OF CASH FLOWS
(A DEVELOPMENT STAGE ENTERPRISE)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD CUMULATIVE FROM
DECEMBER 1, DECEMBER 1,
1994 1994
(DATE OF (DATE OF
INCEPTION) FOR THE FOR THE INCEPTION)
THROUGH YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996 1996
-------------- ------------ ------------ ---------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................... $(37) $(464) $(1,003) $(1,504)
---- ----- ------- -------
Net cash used by operating activities...... (37) (464) (1,003) (1,504)
FINANCING ACTIVITIES
Parent Company investment.................. 37 464 1,003 1,504
---- ----- ------- -------
CHANGE IN CASH............................. $ 0 $ 0 $ 0 $ 0
==== ===== ======= =======
<CAPTION>
CUMULATIVE FROM
FOR THE THREE FOR THE THREE DECEMBER 1, 1994
MONTHS ENDED MONTHS ENDED (DATE OF INCEPTION)
MARCH 31, MARCH 31, THROUGH MARCH 31,
1996 1997 1997
------------- ------------- -----------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................... $(229) $(627) $(2,131)
----- ----- -------
Net cash used by operating activities...... (229) (627) (2,131)
FINANCING ACTIVITIES
Parent Company investment.................. 229 627 2,131
----- ----- -------
CHANGE IN CASH............................. $ 0 $ 0 $ 0
===== ===== =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F- 5
<PAGE> 6
GENZYME MOLECULAR ONCOLOGY
COMBINED STATEMENTS OF DIVISION EQUITY
(A DEVELOPMENT STAGE ENTERPRISE)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
PARENT DURING THE TOTAL
COMPANY DEVELOPMENT DIVISION
INVESTMENT STAGE EQUITY
---------- ----------- --------
<S> <C> <C> <C>
BALANCE AT DECEMBER 1, 1994
(DATE OF INCEPTION)..................................... $ 0 $ 0 $ 0
Net loss.................................................. -- (37) (37)
Parent Company Investment................................. 37 -- 37
------ ------- -------
BALANCE AT DECEMBER 31, 1994.............................. 37 (37) 0
Net loss.................................................. -- (464) (464)
Parent Company Investment................................. 464 -- 464
------ ------- -------
BALANCE AT DECEMBER 31, 1995.............................. 501 (501) 0
Net loss.................................................. -- (1,003) (1,003)
Parent Company Investment................................. 1,003 -- 1,003
------ ------- -------
BALANCE AT DECEMBER 31, 1996.............................. 1,504 (1,504) 0
Net loss.................................................. -- (627) (627)
Parent Company Investment................................. 627 -- 627
------ ------- -------
BALANCE AT MARCH 31, 1997 (UNAUDITED)..................... $2,131 $(2,131) $ 0
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-6
<PAGE> 7
GENZYME MOLECULAR ONCOLOGY DIVISION
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO COMBINED FINANCIAL STATEMENTS
INFORMATION AS OF MARCH 31, 1997 AND FOR THE
THREE MONTH PERIODS ENDED MARCH 31, 1997 AND 1996 IS UNAUDITED
NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
BUSINESS
Genzyme Molecular Oncology ("GMO"), a division of Genzyme Corporation (the
"Company" or "Genzyme"), conducts research and development programs in the areas
of molecular oncology and gene therapy for the treatment of cancer. Through GMO,
Genzyme seeks to create a focused, integrated oncology business that will
develop and commercialize novel diagnostic and therapeutic products and services
based on molecular tools and genomics information. GMO on its own, and in
combination with partners, will develop, manufacture and market technologically
advanced products and services for the diagnosis, treatment and prevention of
cancer. GMO operations under the existing Genzyme programs being combined to
form GMO commenced December 1, 1994 (the "Date of Inception"). Since that date
GMO's principal activity has been to perform research and development and no
revenues have been earned.
BASIS OF PRESENTATION
The combined financial statements of GMO include the balance sheets,
results of operations, cash flows and division equity of Genzyme's molecular
oncology operations, which were part of Genzyme General Division ("Genzyme
General") during the periods presented. GMO's financial statements are prepared
using the amounts included in Genzyme's consolidated financial statements.
Corporate allocations reflected in these financial statements are determined
based upon methods which management believes to be reasonable (see Note 2).
The financial statements for three months ended March 31, 1997 and 1996 are
unaudited but include, in management's opinion, all adjustments (consisting of
only normally recurring accruals) necessary for a fair presentation of the
results for the periods presented.
The stockholders of Genzyme and PharmaGenics, Inc. ("PharmaGenics") are
being asked to approve a merger agreement between Genzyme and PharmaGenics (the
"Merger Proposal", see also Note 7 "PharmaGenics Merger"). The merger agreement
provides for the merger of PharmaGenics into Genzyme ("the Merger") in exchange
for shares of a new Genzyme security to be designated Genzyme Molecular Oncology
Division Common Stock ("GMO Stock"). The GMO Stock is intended to reflect the
value and track the performance of GMO.
The stockholders of Genzyme are also being asked to approve the amendment
and restatement of Genzyme's Restated Articles of Organization (the "Genzyme
Charter") to (i) redesignate each of Genzyme's existing classes of common stock
as a series of a single class of common stock and (ii) authorize 150,000,000
shares of undesignated common stock which may be issued from time to time by the
Genzyme Board of Directors (the "Genzyme Board") in one or more additional
series (the "Genzyme Charter Proposal").
If the Genzyme Charter Proposal is approved and the Merger is completed,
the Genzyme Board will designate the GMO Stock as a new series of authorized
common stock of Genzyme. If the Genzyme stockholders do not approve the Genzyme
Charter Proposal, but approve the Merger Proposal and the Merger is completed,
the Merger Proposal authorizes an amendment to the Genzyme Charter that would
create the GMO Stock as a separate class of Genzyme common stock. This capital
structure has not been reflected in these financial statements because its
creation is contingent upon approval by Genzyme's stockholders.
If the Merger is completed, Genzyme will provide to holders of GMO Stock
separate financial statements, management's discussion and analysis,
descriptions of business and other relevant information for GMO. Notwithstanding
the attribution of assets and liabilities, including contingent liabilities,
between Genzyme General, Genzyme Tissue Repair Division ("GTR") and GMO for the
purposes of preparing their respective financial statements, this attribution
and the change in the capital structure of Genzyme contemplated by the Genzyme
Charter Proposal will not affect legal title to such assets or responsibility
for such liabilities of Genzyme or any of its subsidiaries. Holders of GMO Stock
will be common stockholders of
F-7
<PAGE> 8
GENZYME MOLECULAR ONCOLOGY DIVISION
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF MARCH 31, 1997 AND FOR THE
THREE MONTH PERIODS ENDED MARCH 31, 1997 AND 1996 IS UNAUDITED
Genzyme, which will continue to be responsible for all of its liabilities.
Liabilities or contingencies of Genzyme General, GTR or of GMO could affect the
financial condition or results of operations of the other Divisions.
Accordingly, the GMO combined financial statements should be read in connection
with Genzyme's consolidated financial statements.
Under the terms of the Genzyme Charter, dividends to be paid to the holders
of GMO Stock will be limited to the lesser of funds of Genzyme legally available
for the payment of dividends and the Available GMO Dividend Amount, as defined
in the Genzyme Charter. Although there is no requirement to do so, the Genzyme
Board would declare and pay cash dividends on GMO Stock, if any, based primarily
on earnings, financial condition, cash flow and business requirements of GMO.
There is currently no intention of paying cash dividends.
Except as otherwise provided in such policies, the management and
accounting policies applicable to the presentation of the financial statements
of GMO may be modified or rescinded at the sole discretion of the Genzyme Board
without approval of the stockholders, subject only to the Genzyme Board's
fiduciary duty to Genzyme's stockholders.
PRINCIPLES OF COMBINATION
The accompanying combined financial statements reflect the combined
accounts of all of Genzyme's programs in the area of molecular oncology and
Genzyme's rights under its agreements with third parties relating to gene
therapies for the treatment of cancer. All material intercompany items and
transactions have been eliminated in combination.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions. These estimates and assumptions affect the reporting of assets,
liabilities, revenues, expenses and contingencies reported. Actual results could
differ from these estimates.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
INCOME TAXES
GMO uses the asset and liability method of accounting for income taxes. The
provision for income taxes includes income taxes currently payable and those
deferred because of temporary differences between the financial statement and
the tax basis of assets and liabilities (see Note 2).
NET LOSS PER SHARE
Historical loss per share information is omitted from the statements of
operations as the GMO Stock was not part of the capital structure of Genzyme for
the periods presented. Following issuance of the GMO Stock, the method of
calculating earnings per share for GMO would reflect the terms of the Restated
Articles of Organization, which provide that dividends may be declared and paid
out of the lesser of funds of Genzyme legally available for the payment of
dividends and the Available GMO Dividend Amount, as defined. GMO would compute
earnings (loss) per share by dividing the earnings attributable to GMO by the
weighted average number of shares of GMO Stock and dilutive common stock
equivalents outstanding during the applicable period. Earnings (loss)
attributable to GMO would generally equal GMO's net income or (loss) for the
relevant period determined in accordance with generally accepted accounting
principles in effect at such time, adjusted by the amount of tax benefits
allocated to or from GMO pursuant to the management and
F-8
<PAGE> 9
GENZYME MOLECULAR ONCOLOGY DIVISION
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF MARCH 31, 1997 AND FOR THE
THREE MONTH PERIODS ENDED MARCH 31,1997 AND 1996 IS UNAUDITED
accounting policies adopted by the Genzyme Board. The policies provide that, as
of the end of any fiscal quarter of Genzyme, any projected annual tax benefit
attributable to any division that cannot be utilized by such division to offset
or reduce its current or deferred income tax expense may be allocated to the
other divisions without any compensating payment or allocation.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS No.
128 establishes a different method of computing net income per share than is
currently required under the provisions of the Accounting Principles Board
Opinion No. 15 ("APB 15"). Under SFAS No. 128, Genzyme will be required to
present both basic net income (loss) per share and diluted net income (loss) per
share attributable to GGD Stock, GTR Stock and GMO Stock (the principal
difference being that common stock equivalents would not be considered in the
computation of basic EPS). GMO Stock was not part of the capital structure of
Genzyme for any of the periods presented in the financial statements to which
these notes relate, therefore, when Genzyme adopted SFAS No. 128 in its
fiscal quarter ending December 31, 1997 there will be no impact on the
historical per share data.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Genzyme stockholders are being asked to approve amendments to the
existing Genzyme 1990 Equity Incentive Plan (the "Equity Plan") and the 1988
Director Stock Option Plan (the "Director Stock Option Plan") that would allow
for the issuance of shares of GMO Stock under such plans, in addition to the GGD
Stock and GTR Stock already included in such plans. If the amendments are
approved by the Genzyme stockholders and the Merger is completed, the Plan will
permit the granting of options to purchase GMO Stock to employees. No options to
purchase GMO Stock have been granted under the Plan (see Note 3, Division
Equity, "Stock Options"). GMO has adopted the disclosure-only alternative for
accounting for stock-based employee compensation as required by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") and GMO will disclose pro forma net income and pro
forma earnings per share information in the footnotes to the combined financial
statements using the fair value based method when employee stock options are
granted.
UNCERTAINTIES
GMO is subject to risks common to companies in the biotechnology industry,
including but not limited to, development by GMO or its competitors of new
technological innovations, dependence on key personnel, protection of
proprietary technology, health care cost containment initiatives, product
liability and compliance with the government regulations, including those of the
U.S. Department of Health and Human Services and the U.S. Food and Drug
Administration.
NOTE 2. RELATED PARTY TRANSACTIONS
Genzyme allocates certain corporate general and administrative expenses,
research and development expenses and income taxes in accordance with the
policies described below. Effective upon completion of the Merger, the Genzyme
Board will amend the policies which govern the management of Genzyme General
and GTR to include the management of GMO and to add certain new policies
governing interdivision transactions. The following policies, with the exception
of Interdivision Asset Transfers, may be further modified or rescinded by action
of the Genzyme Board, or the Genzyme Board may adopt additional policies,
without approval of the stockholders of Genzyme, subject only to the Genzyme
Board's fiduciary duty to the Genzyme stockholders, although the Genzyme Board
has no present intention to do so.
FINANCIAL MATTERS
As a matter of policy, the Company manages the financial activities of
Genzyme General, GTR and GMO on a centralized basis. These financial activities
include the investment of surplus cash, the issuance, repayment and repurchase
of short-term and long-term debt and the issuance and repurchase of common
stock. During the period December 1, 1994 (Date of Inception) to March 31,
1997, the Company attributed none of its short-term and long-term debt to GMO
based upon the specific purpose for which the debt was incurred and the cash
flow requirements of GMO. Accordingly, none of the Company's interest expense
has been allocated to GMO. The Company believes this method of allocation to be
equitable and a reasonable estimate of such costs as if GMO operated on a
stand-alone basis.
Loans may be made from time to time between divisions. Any such loan of $1
million or less will mature within 18 months and interest will accrue at the
lowest borrowing rate available to Genzyme for a loan with similar terms and
duration. Amounts borrowed in excess of $1 million will require approval of the
Genzyme
F-9
<PAGE> 10
GENZYME MOLECULAR ONCOLOGY DIVISION
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF MARCH 31, 1997 AND FOR THE
THREE MONTH PERIODS ENDED MARCH 31, 1997 AND 1996 IS UNAUDITED
Board, which approval shall include a determination by the Genzyme Board that
the material terms of such loan, including the interest rate and maturity date,
are fair and reasonable to each participating division and to holders of the
common stock representing such division. To date no such borrowings have
occurred.
SHARED SERVICES
GMO will operate as a division of Genzyme with its own personnel and
financial resources, however, GMO will have access to Genzyme's extensive
research and development capabilities, manufacturing facilities, and worldwide
clinical development the costs of which are allocated to each division in a
reasonable and consistent manner based on utilization by the division of the
services to which such costs relate. Genzyme's corporate general and
administrative functions are performed primarily by Genzyme General. General and
administrative expenses and research and development expenses have been
allocated to GMO as if GMO operated on a stand-alone basis. Management believes
that such allocation is a reasonable estimate of such expenses.
INCOME TAXES
GMO is included in the consolidated U.S. federal income tax return filed by
Genzyme. Genzyme allocates current and deferred taxes to the Divisions using the
asset and liability method of accounting for income taxes and as if the
Divisions were separate taxpayers. Accordingly, the realizability of deferred
tax assets is assessed at the division level. The sum of the amounts calculated
for individual divisions of Genzyme may not equal the consolidated amount under
this approach.
Pursuant to the management and accounting policies adopted by the Genzyme
Board, as of the end of any fiscal quarter of Genzyme, any projected tax benefit
attributable to any division that cannot be utilized by such division to offset
or reduce its current or deferred income tax expense may be allocated to any
other division without any compensating payment or allocation. The treatment of
such allocation for purposes of earnings per share computation is discussed in
Note 1, "Net Loss Per Share".
ACCESS TO TECHNOLOGY AND KNOW-HOW
GMO has free access to all technology and know-how of Genzyme that may
prove useful in GMO's business, subject to any obligations or limitations
applicable to Genzyme. The costs of developing this technology remain in the
business unit responsible for its development.
INTERDIVISION ASSET TRANSFERS
The following policy regarding the transfer of assets between divisions may
not be changed by the Genzyme Board without the approval of the holders of
Genzyme Tissue Repair Common Stock ("GTR Stock") and the GMO Stock, each voting
as a separate class; provided, however, that if a policy change affects GTR or
GMO alone, only holders of shares representing the affected division will be
entitled to a class vote on such matter.
The Genzyme Board may at any time and from time to time reallocate any
program, product or other asset from one division to any other division. All
such reallocations will be done at fair market value, determined by the Genzyme
Board, taking into account, in the case of a program under development, the
commercial potential of the program, the phase of clinical development of the
program, the expenses associated with realizing any income from the program, the
likelihood and timing of any such realization and other matters that the Genzyme
Board and its financial advisors deem relevant. The consideration for such
reallocation may be paid by one division to another in cash or other
consideration, in lieu of cash, with a value equal to the fair market value of
the assets being reallocated or, in the case of a reallocation of assets from
Genzyme General to GTR or GMO, the Genzyme Board may elect to account for such
reallocation of assets
F-10
<PAGE> 11
GENZYME MOLECULAR ONCOLOGY DIVISION
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF MARCH 31, 1997 AND FOR THE
THREE MONTH PERIODS ENDED MARCH 31, 1997 AND 1996 IS UNAUDITED
as an increase in Designated Shares representing the division to which such
assets are reallocated. Notwithstanding the foregoing, no Key GMO Program, as
defined in the management and accounting policies, may be transferred out of GMO
without a class vote of the holders of GMO Stock and no Key GTR Program, as
defined in the management and accounting policies, may be transferred out of GTR
without a class vote of the holders of GTR Stock.
OTHER INTERDIVISION TRANSACTIONS
From time to time, a division may engage in transactions with one or more
other divisions or jointly with one or more other divisions and one or more
third parties. Such transactions may include agreements by one division to
provide products and services for use by another division and joint ventures or
other collaborative arrangements involving more than one division to develop new
products and services jointly and with third parties. Research and development
performed by one division for the benefit of another division will be charged to
the division for which work is performed on a cost basis. The division
performing the research will not recognize revenue as a result of performing
such research. Corporate general and administrative services will be provided by
each division to any other division requesting such services on a cost basis.
Other interdivisional transactions shall be on terms and conditions that would
be obtainable in transactions negotiated at arm's length with unaffiliated third
parties. Any interdivisional transaction to be performed on terms and conditions
other than those previously set forth and that is material to one or more of the
participating divisions will require the approval of the Genzyme Board, which
approval shall include a determination by the Genzyme Board that the transaction
is fair and reasonable to each participating division and to holders of the
common stock representing each division.
If a division (the "Purchasing Division") requires any product or service
from which another division (the "Selling Division") derives revenues from sales
to third parties (a "Commercial Product or Service"), the Purchasing Division
may solicit from the Selling Division a bid to provide such Commercial Product
or Service in addition to any bids solicited by the Purchasing Division from
third parties. Subject to determination by the Genzyme Board that the bid of the
Selling Division is fair and reasonable to each division and to their respective
stockholders and that the Purchasing Division is willing to accept the Selling
Division's bid, the Purchasing Division may accept any bid deemed to offer the
most favorable terms and conditions for providing the Commercial Product or
Service sought by the Purchasing Division.
NOTE 3. DIVISION EQUITY
The presentation of Division Equity reflects the amounts expended by
Genzyme on programs being attributed to GMO and, accordingly, such amounts are
reflected as a parent company investment.
As described in Note 1, "Basis of Presentation", GMO Stock will be created
as either a separate class or a separate series of Genzyme Common Stock
depending upon whether both the Merger Proposal and the Genzyme Charter Proposal
are approved. If the Genzyme stockholders approve the Genzyme Charter Proposal
and the Merger is completed, the Genzyme Board will designate the GMO Stock as a
new series of authorized common stock of Genzyme. If the Genzyme stockholders do
not approve the Genzyme Charter Proposal but approve the Merger Proposal and the
Merger is completed, the Merger Agreement authorizes an amendment to the Genzyme
Charter that would create the GMO Stock as a new class of authorized common
stock of Genzyme. In either event, 40 million shares of GMO Stock will be
authorized and will have the same voting rights and privileges described below.
Of the authorized shares, 4 million will be issued to effect the Merger (see
Note 7, "PharmaGenics Merger"). In addition, 6 million GMO Designated Shares
will be created as a result of the Merger.
F-11
<PAGE> 12
GENZYME MOLECULAR ONCOLOGY DIVISION
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF MARCH 31, 1997 AND FOR THE
THREE MONTH PERIODS ENDED MARCH 31, 1997 AND 1996 IS UNAUDITED
GMO DESIGNATED SHARES
Pursuant to the Genzyme Charter, if the Charter Proposal or Merger Proposal
is approved, GMO Designated Shares are authorized shares of GMO stock which are
not issued or outstanding, but which the Genzyme Board may from time to time
issue, sell or otherwise distribute without allocating the proceeds or other
benefits of such issuance, sale or distribution to GMO. Designated shares are
not eligible to receive any GMO dividends, have no liquidation rights and cannot
be voted until they are sold, dividended to Genzyme General stockholders or
otherwise distributed. GMO Designated Shares may be (i) issued upon the exercise
or conversion of outstanding stock options, warrants or securities allocated to
Genzyme General as a result of antidilution adjustments required by the terms of
such instruments or approved by the Genzyme Board, (ii) distributed as a
dividend to the holders of shares of Genzyme General Division Common Stock ("GGD
Stock"), or (iii) sold for any valid business purpose, subject to certain
restrictions, subject to the following policies regarding annual distributions
determined at the sole discretion of the Genzyme Board. An Equity Line providing
for the allocation of up to $25 million of cash from Genzyme General to GMO in
exchange for GMO Designated Shares was approved by the Board (see "GMO Equity
Line").
If, as of November 30 of each year starting November 30, 1998, the number
of GMO Designated Shares on such date (not including those reserved for issuance
with respect to Genzyme General Convertible Securities as a result of
anti-dilution adjustments required by the terms of such instruments or approved
by the Genzyme Board) exceeds ten percent (10%) of the number of shares of GMO
Stock then issued and outstanding, then substantially all GMO Designated Shares
will be distributed to holders of record of GGD Stock, subject to reservation of
a number of such shares equal to the sum of (a) the number of GMO Designated
Shares reserved for issuance upon the exercise or conversion of Genzyme General
Convertible Securities and (b) the number of GMO Designated Shares reserved by
the Genzyme Board as of such date for sale not later than six months after such
date, the proceeds of which sale will be allocated to Genzyme General; provided,
however, that if prior to November 30, 1998, Genzyme has completed an initial
public offering of GMO Stock (the "GMO IPO"), Genzyme may defer the distribution
of GMO Designated Shares provided in this policy until the later of November 30,
1998 or 360 days after the date the GMO IPO was completed.
EXCHANGE OF GMO STOCK
Genzyme, subject to certain conditions, will have the right to exchange
each outstanding share of GMO Stock for cash or shares of GGD Stock at a 30%
premium over fair market value, as defined. Following a disposition of all or
substantially all assets of GMO, GMO Stock will be subject to mandatory exchange
by Genzyme for cash or shares of GGD Stock at a 30% premium over fair market
value, as defined. GGD Stock is not subject to exchange.
VOTING RIGHTS
Holders of GMO Stock will be entitled to 0.25 vote (equal to the ratio of
$7.00 to the closing price of one share of GGD Stock as of the date of the
Merger Agreement) per share through December 31, 1998. Immediately following
consummation of the Merger, holders of GMO Stock will have approximately 1.2% of
the voting power of Genzyme. The number of votes to which holders of GMO Stock
will be entitled will be adjusted to equal the quotient obtained by dividing (i)
the fair market value of one share of GMO Stock by (ii) the fair market value of
one share of GGD Stock, on and as of January 1, 1999 and on and as of each
January 1 every two years thereafter. If no shares of GGD Stock are outstanding
on such date, or if shares of GMO Stock are entitled to vote separately as a
series, each share of GMO Stock shall have one vote. Holders of shares of GGD
Stock, GTR Stock and GMO Stock vote together as a single series on all matters
as to which common stockholders are generally entitled to vote. Except in
limited circumstances provided under Massachusetts law and in Genzyme's Restated
Articles of Organization, and in the management and
F-12
<PAGE> 13
GENZYME MOLECULAR ONCOLOGY DIVISION
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF MARCH 31, 1997 AND FOR THE
THREE MONTH PERIODS ENDED MARCH 31, 1997 AND 1996 IS UNAUDITED
accounting policies adopted by the Genzyme Board, holders of common stock of
each of the Divisions will have no rights to vote on matters as a separate
series. If, when a stockholder vote is taken on any matter as to which a
separate vote by either series is not required and the holders of either series
of common stock would have more than the number of votes required to approve any
such matter, the holders of that series will control the outcome of the vote on
that matter.
STOCK OPTIONS
If the proposed amendments to the Equity Plan are approved and the Merger
is completed, 1,500,000 shares of GMO Stock will be authorized for issuance
under the Equity Plan. Subsequent to the completion of the PharmaGenics Merger
(see Note 7), options under the Equity Plan to purchase GMO Stock will be
granted to employees of GMO, to employees of other divisions of Genzyme who will
devote a substantial portion of their efforts to GMO and to officers of Genzyme.
These options will: (i) have an exercise price equal to the fair market value of
GMO Stock on the date of grant, (ii) become exercisable 20% on the Effective
Date and 20% on each of the next four anniversaries thereof and (iii) have a
term of ten years.
If the proposed amendments to the Director Stock Option Plan are approved
and the Merger is completed, 70,000 shares of GMO Stock will be authorized for
issuance under the Director Stock Option Plan. These options, which may be
granted to all directors of Genzyme who are not employees of Genzyme, will: (i)
have an exercise price of equal to the fair market value of GMO Stock on the
date of grant, (ii) be exercisable in full on the date of the grant and (iii)
have a term of ten years.
EMPLOYEE STOCK PURCHASE PLAN
The Genzyme stockholders are being asked to approve an amendments to the
existing Genzyme 1990 Employee Stock Purchase Plan that would allow for the
issuance of shares of GMO Stock under such plan, in addition to the GGD Stock
and GTR Stock already included in such plan. If the amendment is approved,
employees will be permitted to purchase GMO shares at 85% the lower of its fair
market value on the first day of an offering period or the applicable exercise
date. Under this plan 500,000 shares of GMO Stock are authorized, none are
issued.
PREFERRED STOCK
Shares of Preferred Stock may be issued from time to time in one or more
series. The Genzyme Board may determine, in whole or in part, the preferences,
voting powers, qualifications and special or relative rights and privileges of
any such series before the issuance of any shares of that series. The Genzyme
Board shall determine the number of shares constituting each series of Preferred
Stock and each series shall have a distinguishing designation.
GMO EQUITY LINE
To assist GMO in financing its operations prior to the consummation of the
private placement (see Note 7) or GMO IPO, the Genzyme Board approved the
allocation of up to $25 million in cash from Genzyme General to GMO, subject to
reduction by the proceeds of outside financing received by GMO. Amounts drawn
under the Equity Line prior to the GMO IPO automatically convert into GMO
Designated Shares upon the closing of the GMO IPO at a price that will be
between $7.00 and the price to the public in the GMO IPO, with the exact price
to be dependent upon the date of each advance and the assumed appreciation or
depreciation in the value of the GMO Stock as of such date, assuming straight
line appreciation or depreciation over the period from the closing date of the
Merger to the closing date of the GMO IPO. Advances made after the GMO IPO will
convert upon the date of each advance into such number of GMO Designated Shares
determined by dividing the amount of such advance by the Fair Market Value of
GMO Stock on such date. The Equity Line will terminate on the third anniversary
of the Closing Date. If the
F-13
<PAGE> 14
GENZYME MOLECULAR ONCOLOGY DIVISION
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF MARCH 31, 1997 AND FOR THE
THREE MONTH PERIODS ENDED MARCH 31, 1997 AND 1996 IS UNAUDITED
GMO IPO has not been completed as of such date, all amounts drawn under the
Equity Line as of such date will be repaid in cash or, at the option of the
Genzyme Board, may be exchanged for the number of GMO Designated Shares
determined by dividing the aggregate of such amounts by the Fair Market Value of
GMO Stock on such date. The amount available under the Equity Line will be
reduced by the proceeds of any public or private sale by Genzyme of shares of
GMO Stock or securities convertible into shares of GMO Stock or otherwise
allocable to the Molecular Oncology Division, other than sales pursuant to
Genzyme's employee benefit and stock option plans.
NOTE 4. LICENSE AND DEVELOPMENT AGREEMENTS
The following rights under Genzyme's agreements with third parties relating
to gene therapies for the treatment of cancer are considered research and
development programs of GMO.
IMPERIAL CANCER RESEARCH TECHNOLOGY LIMITED
Genzyme entered into a broad based collaboration with the Imperial Cancer
Research Technology Limited ("ICRT"), a wholly-owned subsidiary of the Imperial
Cancer Research Fund ("ICRF"), in January 1996 for the purpose of developing
cancer gene therapies. Genzyme has committed to provide at total of (pound
sterling) 100,000 to ICRF over a two year period under this agreement. Under the
agreement, Genzyme also funds a technology manager at the ICRT to identify ICRF
gene therapy projects with commercial potential. Genzyme will select specific
research projects proposed by ICRF and will receive commercial development
rights for these projects in exchange for financial consideration, including
research funding and royalties. In conjunction with this Agreement, Genzyme also
provides the ICRF with viral and non-viral gene therapy vectors for research
use.
NATIONAL CANCER INSTITUTE
In September 1996, Genzyme entered into a three year Collaborative
Research and Development Agreement ("CRADA") with the National Cancer Institute
("NCI") to develop treatments for metastatic melanoma. The CRADA covers the use
of adenoviral vectors that incorporate the genes for the proprietary melanoma
tumor antigen genes, MART-1 and gp100. Under the agreement, Genzyme provides
clinical grade adenoviral vectors and research and development funding to
support clinical trials at NCI in exchange for an option to an exclusive
license to technology developed under the CRADA. Genzyme has committed to
provide a total of $300,000 to NCI over a three year period under the CRADA.
Funding provided by Genzyme to NCI under these collaborations was allocated to
GMO, and was $25,000 during the year ended December 31, 1996 and $50,000 for
the three months ended March 31, 1997.
NOTE 5. INCOME TAXES
There was no provision for income taxes due to GMO's operating losses.
The components of net deferred tax assets were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995 1996
---- ----- -------
<S> <C> <C> <C>
DEFERRED TAX ASSETS:
Net operating loss carryforwards............................ $ 37 $ 501 $ 1,504
Valuation Allowance......................................... (37) (501) (1,504)
---- ----- -------
Net deferred tax assets..................................... $ 0 $ 0 $ 0
==== ===== =======
</TABLE>
At the time GMO recognizes these tax assets for generally accepted
accounting principles purposes, the resulting deferred tax benefits will be
reflected in the tax provision for GMO, however, the benefit of these
F-14
<PAGE> 15
GENZYME MOLECULAR ONCOLOGY DIVISION
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF MARCH 31, 1997 AND FOR THE
THREE MONTH PERIODS ENDED MARCH 31, 1997 AND 1996 IS UNAUDITED
deferred tax assets has been previously allocated to Genzyme General and will be
reflected as a reduction of net income to determine net income attributable to
GMO Stock.
NOTE 6. BENEFIT PLANS
Genzyme has a domestic employee savings plan under Section 401(k) of the
Internal Revenue Code covering substantially all of its domestic employees. The
plan allows employees to make contributions up to a specified percentage of
their compensation, a portion of which are matched by Genzyme. Genzyme's
contributions are allocated to GMO as a component of general and administrative
expenses.
NOTE 7. PHARMAGENICS MERGER
On June 18, 1997, Genzyme amended its articles of organization to (i)
redesignate each of Genzyme's then existing classes of common stock as a
separate series of a single class of common stock with substantially the same
features as the shares of each of Genzyme's then existing classes of common
stock and (ii) authorize 150,000,000 shares of undesignated common stock that
may be issued from time to time by the Board of Directors of Genzyme ("the
Genzyme Board") in one or more series.
On June 18, 1997, pursuant to an Agreement and Plan of Merger (the "Merger
Agreement") between Genzyme and PharmaGenics, PharmaGenics merged with and into
Genzyme ("the Merger"). The Merger was approved by the stockholders of Genzyme
at a Special Meeting of Stockholders held on June 12, 1997 and was approved by
the stockholders of PharmaGenics at a Special Meeting of Stockholders held June
12, 1997.
Upon completion of the Merger, 40,000,000 shares of common stock were
designated as GMO Stock, par value $0.01, leaving 110,000,000 shares available
for future designation by the Genzyme Board.
As consideration for the Merger, the stockholders of PharmaGenics received
3,928,572 shares of GMO Stock representing the initial equity interest in GMO.
Such number of shares of GMO Stock is subject to reduction prior to delivery of
the GMO Stock certificates to such stockholders by (i) the amount that
PharmaGenics's expenses in connection with the Merger exceed $1,000,000 and
(ii) payments made or reasonably expected to be made by Genzyme, as of the date
the GMO Stock certificates are delivered, to holders of PharmaGenics common
stock who have exercised appraisal rights under Delaware law and to holders of
PharmaGenics stock who have commenced or threatened (in writing) to commence
any action, suit or legal, administrative or arbitration proceeding against
either Genzyme or PharmaGenics challenging the Merger or seeking damages in
connection with the Merger, as well as any expenses incurred by Genzyme in
connection with any such action suit or proceeding, in each case divided by
$7.00, the agreed upon value of the GMO Stock. As compensation to Genzyme
General for the assets it contributed to GMO, 6,000,000 shares of GMO Stock
have been reserved for issuance for the benefit of Genzyme General or its
stockholders ("GMO Designated Shares"). The Genzyme Board may issue the GMO
Designated Shares as a stock dividend to the holders of Genzyme General
Division Common Stock ("GGD Stock") or it may sell such shares in a public or
private sale and allocate all of the proceeds to Genzyme General. (See Note 3,
Division Equity, "GMO Designated Shares").
ACCOUNTING
The GMO Stock issued, excluding the effects, if any, of downward
adjustments, will be valued at approximately $28.0 million, based on an
independent valuation, and the transaction will be accounted for as a purchase.
It is anticipated that the purchase price of $27.5 million (net of a downward
adjustment of $0.5 million which represents the estimated fees payable by
PharmaGenics to PaineWebber in connection with the Merger), plus estimated
acquisition costs of $2.9 million and assumed liabilities of $3.1 million will
be allocated as $1.5 million to the acquired tangible and intangible assets of
PharmaGenics based on their respective fair values, $20 million to acquired
completed technology rights (to be amortized over 5 years), $7 million to
incomplete technology rights acquired, and $4.9 million to Goodwill (to be
amortized over 5 years). The nonrecurring charge for in-process technology in
the amount of $7 million will be charged to operations in the second quarter of
1997, in the period in which the Merger was consummated.
BEST EFFORTS PRIVATE PLACEMENT
As a condition to the consummation of the Merger, waivable at Genzyme's
discretion, PaineWebber must deliver to Genzyme a commitment letter stating that
it will use its best efforts to raise no less than $20
F-15
<PAGE> 16
GENZYME MOLECULAR ONCOLOGY DIVISION
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF MARCH 31, 1997 AND FOR THE
THREE MONTH PERIODS ENDED MARCH 31, 1997 AND 1996 IS UNAUDITED
million for GMO in a private placement of GMO Stock or securities convertible
into GMO Stock or otherwise allocable to GMO to be commenced within 45 days of
the effective time of the Merger on terms mutually agreeable to Genzyme and
PaineWebber.
COMDISCO WARRANT
In connection with the Merger, a warrant to purchase certain shares of
PharmaGenics Series A Stock has been converted to a warrant to purchase
approximately 9,563 shares of GMO Stock (the "Comdisco Warrant") at $8.04 per
share expiring in April 2001.
CREDIT FACILITY
Prior to the Merger, Genzyme made a credit facility (the "Credit
Facility") available to PharmaGenics to fund PharmaGenics documented operating
costs. Monthly draws against the Credit Facility could be made monthly, up to a
maximum amount during December 1996, January 1997, February 1997, March 1997,
April 1997 and May 1997 of $250,000, $750,000, $650,000, $450,000, $550,000 and
$550,000, respectively. Amounts not drawn by PharmaGenics in a designated month
were available to cover documented expenses in any later month (subject to
limitations described below). The maximum amount of monthly draws were subject
to downward adjustment based on the amount of the gross revenues received by
PharmaGenics in the prior month. An additional draw of $250,000 could be made
under the Credit Facility if the SAGE patent licensed by PharmaGenics to Johns
Hopkins University ("JHU") issued while the Credit Facility was in effect,
provided, however, that such draw would be used by PharmaGenics to fulfill its
obligation to JHU. In February, March, and May 1997, PharmaGenics borrowed
$1,000,000, $650,000 and $800,000 respectively, under the Credit Facility
having provided Genzyme with a projected cash disbursements list of operating
costs for the months of February, March, April, and May.
Amounts advanced under the Credit Facility are evidenced by a Subordinated
Convertible Promissory Note which bears interest from the date of each advance
at the rate of 8 1/4% per annum and matures on February 10, 2002 (the "Maturity
Date"). The Maturity Date could have been accelerated upon the closing of one
or more financing transactions resulting in aggregate gross proceeds to
PharmaGenics of $10 million, however, as of June 16, 1997, no such transaction
had occured. Upon consummation of the Merger, the Note became a liability
allocated to GMO, and the outstanding principal amount will be treated as an
intracompany loan by Genzyme General to GMO, due on the Maturity Date and
convertible at any time prior thereto, at the Genzyme Board's option, into GMO
Designated Shares.
F-16
<PAGE> 17
GENZYME MOLECULAR ONCOLOGY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The purpose of GMO, a division of Genzyme, is to develop and commercialize novel
therapeutics and diagnostics for cancer based on molecular tools and genomics
information. GMO seeks to establish collaborations and licensing arrangements
where appropriate in order to generate research funding, access complementary
technologies, and expand and accelerate development of its product and service
portfolio. GMO operates as a division of Genzyme with its own personnel and
financial resources and has access to Genzyme's extensive research and
development capabilities, manufacturing facilities, worldwide clinical
development and regulatory affairs staff and marketing structure on the bases
and subject to the conditions set forth in the management and accounting
policies governing the operations of and relationships among Genzyme's
Divisions. Operations under the existing Genzyme programs that are being
combined to form GMO commenced December 1, 1994 (date of inception).
This discussion contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements represent the expectations of GMO's management as of
the filing date of this Form 8-K. GMO's actual results could differ materially
from those anticipated by the forward-looking statements due to the risks and
uncertainties described under the caption "Factors Affecting Future Operating
Results". Stockholders and potential investors should consider carefully these
risks and uncertainties in evaluating GMO's financial condition and results of
operations.
RESULTS OF OPERATIONS
Since the date of inception, research and development functions with respect to
development programs which have been attributed to GMO have been provided
solely by Genzyme General. In accordance with Genzyme's management and
accounting policies, expenses for research and development performed by Genzyme
General for GMO are charged to GMO on a cost basis. Genzyme's corporate and
general and administrative expenses or other indirect costs are allocated to
GMO in a reasonable and consistent manner based on utilization by GMO of the
services to which such costs relate. Management believes that such allocation
is a reasonable estimate of such expenses.
THREE MONTHS ENDED MARCH 31, 1997 AS COMPARED TO THREE MONTHS ENDED MARCH 31,
1996
No revenues have been earned by GMO since the date of inception. Research and
development expenses for the three months ended March 31, 1997
increased 375% to $518,000 from $109,000 in the three months ended March 31,
1996, due primarily to increased cancer research efforts with respect to GMO's
drug discovery programs, GMO's internal gene therapy programs and activities
related to GMO's collaboration with the Imperial Cancer Research Technology
Limited to develop cancer gene therapies and GMO's Collaborative Research and
Development Agreement ("CRADA") with the National Cancer Institute ("NCI") to
develop treatments for metastatic melanoma.
General and administrative expenses increased $69,000 to $ 89,000 or 173%
primarily due to increased administrative support corresponding to growth in
GMO's programs.
1996 AS COMPARED TO 1995
Research and development expenses for the year ended December 31, 1996
increased $441,000 to $818,000 or 117% in comparison to the corresponding
period in 1995 due primarily to increased cancer research activities with
respect to GMO's drug discovery and internal gene therapy programs, GMO's
collaboration with the Imperial Cancer Research Technology Limited, which
commenced in January 1996, and GMO's CRADA with the NCI.
General and administrative expenses increased 113% to $98,000 in 1996 from
$185,000 in 1995 due primarily to the additional administrative services
required to support the growth in GMO's research and development programs.
YEAR ENDED DECEMBER 31, 1995 AS COMPARED TO THE PERIOD DECEMBER 1, 1994 (DATE OF
INCEPTION) TO DECEMBER 31, 1994
Research and development expenses and general and administrative expenses were
$377,000 and $87,000, respectively, for the year ended December 31, 1995 as
compared to $29,000 and $8,000, respectively, for the period from the date of
inception to December 31, 1994. The increases are due primarily to a full year
of operations in 1995 as compared to only one month of operations in 1994.
F-17
<PAGE> 18
LIQUIDITY AND FINANCIAL RESOURCES
GMO has historically financed its operations and capital requirements through
funding from Genzyme and has not maintained cash or investment balances. Since
the date of inception, GMO's principal activity has been to engage in research
and development as a development stage enterprise and as such has generated no
revenues. GMO has incurred cumulative net losses of $2,131,000 in the period
from the date of inception to March 31, 1997. GMO is expected to experience
significant operating losses at least through fiscal 2001 as its research and
development and clinical trial programs expand. There can be no assurance that
GMO will ever achieve a profitable level of operations or that profitability,
if achieved, can be sustained on an ongoing basis. In addition, Genzyme's
management and accounting policies provide that to the extent GMO is unable to
utilize its operating losses or other projected tax benefits to reduce its
current or deferred income tax expense, such losses or benefits may be
reallocated to another division on a quarterly basis. Accordingly, although the
actual payment of taxes is a corporate liability of Genzyme as a whole,
separate financial statements will be prepared for each division and any losses
that cannot be utilized by GMO will not be carried forward to reduce the taxes
allocable to GMO's earnings in the future. This could result in GMO being
charged a greater portion of the total corporate tax liability and reporting
lower earnings available to GMO stockholders in the future than would have been
the case if GMO had retained its losses or other benefits in the form of a net
operating loss carryforward.
To assist GMO in financing its operations prior to the consummation of the
private placement or GMO IPO, the Genzyme Board approved the allocation of up
to $25 million in cash from Genzyme General to GMO, subject to
dollar-for-dollar reduction as described below by the proceeds of outside
financing received by GMO. Amounts drawn under the Equity Line prior to the GMO
IPO automatically convert into GMO Designated Shares upon the closing of the
GMO IPO at a price that will be between $7.00 and the price to the public in
the GMO IPO, with the exact price to be dependent upon the date of each advance
and the assumed appreciation or depreciation in the value of the GMO Stock as
of such date, assuming straight line appreciation or depreciation on a daily
basis over the period from the closing date of the Merger to the closing date
of the GMO IPO. Advances made after the GMO IPO will convert upon the date of
each advance into such number of GMO Designated Shares determined by dividing
the amount of such advance by the Fair Market Value of GMO Stock on such date.
The Equity Line will terminate on the third anniversary of the Closing Date. If
the GMO IPO has not been completed as of such date, all amounts drawn under the
Equity Line as of such date will be repaid in cash or, at the option of the
Genzyme Board, may be exchanged for the number of GMO Designated Shares
determined by dividing the aggregate of such amounts by the Fair Market Value
of GMO Stock on such date. The amount available under the Equity Line will be
reduced dollar for dollar by the proceeds of any public or private sale by
Genzyme of shares of GMO Stock or securities convertible into shares of GMO
Stock or otherwise allocable to the Molecular Oncology Division, other than
sales pursuant to Genzyme's employee benefit and stock option plans.
Genzyme anticipates that revenues generated from the sale of SAGE services, a
high-speed, differential gene identification technology which was acquired in
connection with the acquisition of PharmaGenics, SAGE license fees and cash
available from Genzyme General pursuant to the Equity Line will be sufficient
to fund GMO's operations through April 1998. Significant additional funds will
be required to complete the clinical testing and commercialization of GMO's
products and services. In this regard, Genzyme has filed a registration
statement relating to the GMO IPO with the Securities and Exchange Commission
and subject to market conditions, expects to commence the offering as soon as
practicable after effectiveness of the registration statement. There can be no
assurance, however, that the GMO IPO or any private sale of GMO securities in
lieu of the GMO IPO will be completed on favorable terms to GMO or to the
existing holders of GMO Stock, if at all.
In addition, GMO's cash requirements may vary materially from those now planned
as a result of including progress of GMO's research and development programs,
achievement of milestones under strategic alliance arrangements, the ability of
GMO to establish and maintain additional strategic alliances and licensing
arrangements, the progress of development efforts of GMO's strategic partners,
competing technological and marketing developments, the costs involved in
enforcing patent claims and other intellectual property rights and the cost and
timing of regulatory approvals. Insufficient funds may require GMO to delay,
scale back or eliminate certain of its programs or to license to third parties
to commercialize technologies or products that GMO would otherwise undertake
itself. Such actions may adversely affect the value of the GMO Stock.
FACTORS AFFECTING FUTURE OPERATING RESULTS
GMO's future success will be largely dependent upon its ability to develop,
manufacture and market its products under development, in addition to continuing
to provide SAGE services which will be acquired upon consummation of the Merger.
The majority of the products and services to be included in GMO are in the early
stage of development. GMO is subject to risks common to companies in the
biotechnology industry, including but not limited to, development by GMO or its
competitors of new technological innovations, dependence on key
F-18
<PAGE> 19
personnel, protection of proprietary technology, health care cost containment
initiatives, product liability and compliance with the government regulations of
the U.S. Department of Health and Human Services and the U.S. Food and Drug
Administration.
SUBSEQUENT EVENT
On June 18, 1997, pursuant to the Merger Agreement, PharmaGenics merged with
and into Genzyme. The Merger was approved by the stockholders of Genzyme
at a Special Meeting of Stockholders held on June 12, 1997 and was appoved by
the stockholders of PharmaGenics at a Special Meeting of Stockholders held June
12, 1997. (See Note 7 "PharmaGenics Merger" to the historical GMO financial
statements.)
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<PAGE> 20
GENZYME MOLECULAR ONCOLOGY
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
INTRODUCTION:
These unaudited pro forma financial statements and the related notes are
presented to give effect to the acquisition of PharmaGenics by Genzyme through
the Merger of PharmaGenics with and into Genzyme using shares of GMO Stock (as
described in Note 1). Pro forma statements of operations have been presented
for GMO assuming that the Merger occurred as of January 1, 1996, using the
purchase accounting method. A pro forma balance sheet has been presented for
GMO assuming that the Merger occurred as of March 31, 1997. Pro forma
financial statements for Genzyme have not been included because the Merger is
not considered to have a significant impact on the financial conditions or
results of operations of Genzyme. Pro forma financial statements for Genzyme
General and GTR have not been included because with respect to Genzyme General,
the creation of GMO is not considered to have a material effect and the Merger
will have no effect on the financial condition or results of operations of
Genzyme General and with respect to GTR, both the creation of GMO and the
Merger have no impact on the financial condition and results of operations of
GTR.
F-20
<PAGE> 21
GENZYME MOLECULAR ONCOLOGY
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS
AS OF MARCH 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Historical Pro Forma
Genzyme Historical Pro Foot- Genzyme
Molecular PharmaGenics, Forma note Molecular
Oncology Inc. Adjs. Ref. Oncology
--------- ----------- -------- ------ --------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . $ - $ 360 $ - $ 360
Accounts receivable . . . . . . . . . . . . . - 330 - 330
Prepaid expenses and other current assets . . - 64 - 64
--------- ------------ -------- --------
Total current assets . . . . . . . . . . . . - 754 - 754
Property, plant & equipment, net . . . . . . - 702 - 702
Intangibles, net . . . . . . . . . . . . . . - - 20,000 [A] 20,000
Goodwill . . . . . . . . . . . . . . . . . . - - 4,903 [A]
7,600 [A] 12,503
Other assets . . . . . . . . . . . . . . . . 363 [B] 40 (363) [A] 40
--------- ------------ -------- --------
Total assets . . . . . . . . . . . . . . . $ 363 $ 1,496 $ 32,140 $ 33,999
========= ============ ======== ========
LIABILITIES AND
DIVISION/STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses . . . . $ - $ 1,242 $ 2,464 [B] $ 3,706
Due to Genzyme General . . . . . . . . . . . 363 [B] - - 363
Current portion of capital lease obligations - 147 - 147
--------- ------------ -------- --------
Total current liabilities . . . . . . . . . . 363 1,389 2,464 4,216
Long-term capital lease obligations . . . . . - 21 - 21
Note payable to Genzyme General . . . . . . . - 1,662 - 1,662
Deferred tax liability . . . . . . . . . . . - - 7,600 [A] 7,600
--------- ------------ -------- --------
- 1,683 7,600 9,283
Division equity . . . . . . . . . . . . . . . - - 27,500 [A]
(7,000) [A]
2,131 [D]
(2,131) [D] 20,500
PharmaGenics, Inc. convertible preferred stock - 94 (94) [C] -
PharmaGenics, Inc. common stock . . . . . . . - 5 (5) [C] -
Parent Company investment . . . . . . . . . . 2,131 - (2,131) [D] -
Additional paid-in capital . . . . . . . . . - 30,796 (30,796) [C] -
Accumulated deficit . . . . . . . . . . . . . (2,131) (32,465) 2,131 [D]
32,465 [C]
Deferred Compensation . . . . . . . . . . . . - (6) 6 [C] -
--------- ------------ -------- --------
Total division/stockholders' equity . . . . . - (1,576) 22,076 20,500
--------- ------------ -------- --------
Total liabilities and division/stockholders'
equity. . . . . . . . . . . . . . . . . . . $ 363 $ 1,496 $ 32,140 $ 33,999
========= ============ ======== ========
</TABLE>
See notes to unaudited pro forma financial statements.
F-21
<PAGE> 22
GENZYME MOLECULAR ONCOLOGY
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Historical Pro Forma
Genzyme Historical Pro Foot- Genzyme
Molecular PharmaGenics, Forma note Molecular
Oncology Inc. Adjs. Ref. Oncology
-------- -------------- ----- ---- ----------
<S> <C> <C> <C> <C> <C>
Revenue:
Research and development revenue ............ $ - $ 75 $ - - $ 75
Operating costs and expenses
General and administrative expenses .......... 109 340 - 449
Research and development expenses ........... 518 1,063 - 1,581
Charge for in-process technology ............ - 4,435 - 4,435
Amortization of intangibles ................. - - 1,625 [E] 1,625
------- ------- ------- -------
Total operating expenses .................. 627 5,838 1,625 8,090
------- ------- ------- -------
Operating loss ................................ (627) (5,763) (1,625) (8,015)
Other income (expenses):
Interest income ............................. - 4 - 4
Interest expense ............................ - (13) - (13)
------- ------- ------- --------
Net loss ...................................... $ (627) $(5,772) $(1,625) $ (8,024)
======= ======= ======= =========
Per PharmaGenics common share:
Net loss .................................... $(12.68)
=======
Weighted average shares outstanding ........... 455 (455) [F]
======= =======
Per Pro Forma Molecular Oncology Division
common share:
Pro forma net loss .......................... $ (2.04)
========
Pro forma average shares outstanding ........ 3,929 [G] 3,929
======= ========
</TABLE>
See notes to unaudited pro forma financial statements.
F-22
<PAGE> 23
GENZYME MOLECULAR ONCOLOGY
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Historical Pro Forma
Genzyme Historical Pro Foot- Genzyme
Molecular PharmaGenics, Forma note Molecular
Oncology Inc. Adjs. Ref. Oncology
-------- ------------- ----- ---- --------
<S> <C> <C> <C> <C> <C>
Revenue:
Research and development revenue ............ $ - $ 1,418 $ - - $ 1,418
Operating costs and expenses
General and administrative expenses .......... 185 1,756 - 1,941
Research and development expenses ........... 818 4,499 - 5,317
Amortization of intangibles ................. - - 6,501 [E] 6,501
------- ------- ------- -------
Total operating expenses .................. 1,003 6,255 6,501 13,759
------- ------- ------- -------
Operating loss ................................ (1,003) (4,837) (6,501) (12,341)
Other income (expenses):
Interest income ............................. - 120 - 120
Interest expense ............................ - (36) - (36)
------- ------- ------- --------
Net loss ...................................... $(1,003) $(4,753) $(6,501) $(12,257)
======= ======= ======= ========
Per PharmaGenics common share:
Net loss .................................... $(10.49)
=======
Weighted average shares outstanding ........... 453 (453) [F]
======= =======
Per Pro Forma Molecular Oncology Division
common share:
Pro forma net loss .......................... $ (3.12)
========
Pro forma average shares outstanding ........ 3,929 [G] 3,929
======= ========
</TABLE>
See notes to unaudited pro forma financial statements.
F-23
<PAGE> 24
GENZYME MOLECULAR ONCOLOGY
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(1) COMMENCEMENT OF GMO OPERATIONS AND CREATION OF GMO STOCK
GMO operations under the existing Genzyme General programs being
combined to form GMO commenced December 1, 1994 (the "Date of
Inception"). Since that date GMO's principal activity has been to
perform research and development and no revenues have been earned.
On June 18, 1997, Genzyme amended its articles of organization to (i)
redesignate each of Genzyme's then existing classes of common stock as a
separate series of a single class of common stock with substantially the
same features as the shares of each of Genzyme's then existing classes
of common stock and (ii) authorize 150,000,000 shares of undesignated
common stock that may be issued from time to time by the Genzyme Board
in one or more series.
On June 18, 1997, pursuant to an Agreement and Plan of Merger (the
"Merger Agreement") between Genzyme and PharmaGenics, PharmaGenics
merged with and into Genzyme. The Merger was approved by the
stockholders of Genzyme at a Special Meeting of Stockholders held on
June 12, 1997 and was approved by the stockholders of PharmaGenics at a
Special Meeting of Stockholders held June 12, 1997.
Upon completion of the Merger, 40,000,000 shares of Genzyme's
undesignated common stock were designated as GMO Stock, leaving
110,000,000 shares available for future designation by the Genzyme
Board.
(2) MERGER CONSIDERATION
As consideration for the Merger, the stockholders of PharmaGenics
received 3,928,572 shares of GMO Stock. Such number of shares is subject
to reduction prior to delivery of the GMO Stock certificates to such
stockholders by (i) the amount that PharmaGenics's expenses in
connection with the Merger exceed $1,000,000 and (ii) payments made or
reasonably expected to be made by Genzyme, as of the date the GMO Stock
certificates are delivered, to holders of PharmaGenics common stock who
have exercised appraisal rights under Delaware law and to holders of
PharmaGenics stock who have commenced or threatened (in writing) to
commence any action, suit or legal, administrative or arbitration
proceeding against either Genzyme or PharmaGenics challenging the Merger
or seeking damages in connection with the Merger, as well as any
expenses incurred by Genzyme in connection with any such action suit or
proceeding, in each case divided by $7.00, the agreed upon value of the
GMO Stock. As compensation to the Genzyme General for the assets it
contributed to GMO, 6,000,000 shares of GMO Stock have been reserved for
issuance for the benefit of Genzyme General or its stockholders ("GMO
Designated Shares"). The Genzyme Board may issue the GMO Designated
Shares as a stock dividend to the holders of Genzyme General Devision
Common Stock ("GGD Stock") or it may sell such shares in a public or
private sale and allocate all of the proceeds to Genzyme General.
The pro forma GMO balance sheet as of March 31, 1997 gives effect to the
Merger as of March 31, 1997, using the purchase accounting method and
assumes that the GMO Stock issued will be valued at approximately $28
million which was determined through a combination of an independent
valuation of the business of PharmaGenics, an internal review of the
future market potential for the PharmaGenics programs and a similar
review of the programs allocated from Genzyme General to GMO. The
allocation of the purchase price is discussed in Note 3A.
F-24
<PAGE> 25
GENZYME MOLECULAR ONCOLOGY
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(3) PRO FORMA ADJUSTMENTS RELATED TO THE ACQUISITION
(A) Purchase Price Allocation
The aggregate purchase price of $27.5 million (net of a downward
adjustment of $0.5 million which represents the estimated fees payable by
PharmaGenics to PaineWebber in connection with the Merger), plus
estimated acquisition costs of $2.8 million and assumed liabilities of
$3.1 million will be allocated to the acquired tangible and intangible
assets based on their estimated respective fair values (amounts in
thousands):
<TABLE>
<S> <C>
Cash ............................................. $ 360
Accounts receivable-U.S. National Cancer Institute 330
Prepaid expenses ................................. 64
Property, plant & equipment ...................... 702
Other assets ..................................... 40
Completed technology rights ...................... 20,000
Goodwill (to be amortized over 5 years) .......... 12,503
Deferred tax liability ........................... (7,600)
Charge for incomplete technology ................. 7,000
---------
$ 33,399
=========
</TABLE>
The portion of the purchase price to be allocated to technology rights
will be allocated as $20 million to completed technology rights and $7
million to in-process technology rights. The charge for in-process
technology of $7 million represents the value assigned to PharmaGenics's
programs which are still in the development stage and for which there is
no alternative use. The value assigned to these programs has been
determined by selecting the maximum anticipated value of these programs,
as provided by an independent valuation of the PharmaGenics business,
based on comparable technologies. The pro forma adjustments to the pro
forma statements of operations for the three months ended March 31, 1997
and for the year ended December 31, 1996 do not give effect to the charge
for in-process technology in the amount of $7 million which will be
charged to operations in June 1997, the period in which the Merger was
consummated.
The deferred tax liability of $7.6 million results from the temporary
difference between the book and tax basis of the Completed Technology
computed at a 38% incremental tax rate.
(B) The historical GMO other assets balance as of March 31, 1997, consists
of approximately $0.4 million of acquisition costs which were paid by
Genzyme General on behalf of GMO. The pro forma adjustment in the amount
of $2.5 million to accrued expenses reflects the accrual of additional
estimated acquisition costs which have not been reflected in the
historical balances as of March 31, 1997.
(C) To eliminate PharmaGenics's historical stockholders' deficit amounts
totaling $(1.6) million.
<TABLE>
<CAPTION>
(in thousands)
-------------
<S> <C>
Convertible preferred stock $ 94
Common stock 5
Additional paid-in capital 30,796
Accumulated deficit (32,465)
Deferred compensation (6)
--------
PharmaGenics's historical stockholders' deficit: $ (1,576)
========
</TABLE>
(D) Reclassify GMO's historical Parent Company Investment of $2.1 million and
accumulated deficit of $2.1 million to Division equity.
F-25
<PAGE> 26
GENZYME MOLECULAR ONCOLOGY
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(E) To record the amortization of acquired intangible assets and goodwill
(amounts in thousands):
<TABLE>
<CAPTION>
Full Three
Assigned Year Months
Value Amortization Amortization
------- ------------ ------------
<S> <C> <C> <C>
Completed Technology (5 year life) $20,000 $4,000 $1,000
Goodwill (5 year life) 12,503 2,501 625
------ ------
Pro forma adjustment for amortization of intangibles . $6,501 $1,625
====== ======
</TABLE>
(F) To eliminate PharmaGenics's weighted average shares outstanding.
(G) The pro forma statements of operations for the three months ended March
31, 1997 and the year ended December 31, 1996 reflect the number of
shares issued to effect the acquisition. The number of shares of GMO
Stock that the stockholders of PharmaGenics received as merger
consideration is subject to reduction prior to delivery of the GMO Stock
Certificates to such stockholders by (i) the amount that PharmaGenics's
expenses in connection with the Merger exceed $1,000,000 and (ii)
payments made or reasonably expected to be made by Genzyme, as of the
date the GMO Stock Certificates are delivered, to holders of
PharmaGenics common stock who have commenced or threatened (in writing)
to commence any action, suit or legal, administrative or arbitration
proceeding against either Genzyme or PharmaGenics challenging the Merger
or seeking damages in connection with any such action, suit or
proceeding, in each case divided by $7.00, the agreed upon value of the
GMO Stock.
F-26
