<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
---------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ________________
Commission file number 0-14680
-------
GENZYME CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 06-1047163
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Kendall Square, Cambridge, Massachusetts 02139
- --------------------------------------------------------------------------------
(Address of principal executive offices) (zip code)
(617) 252-7500
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
The number of shares outstanding of each of the issuer's classes of common stock
as of July 31, 1998:
Series
------
Genzyme General Division Common Stock
("GGD Stock") 78,948,594
Genzyme Tissue Repair Division Common Stock
("GTR Stock") 20,278,552
Genzyme Molecular Oncology Division Common Stock
("GMO Stock") 3,928,572
<PAGE> 2
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, JUNE 30, 1998
NOTE REGARDING FORWARD-LOOKING STATEMENTS:
This report on Form 10-Q for Genzyme Corporation ("Genzyme" or the "Company")
contains forward-looking statements concerning, among other things, the
Company's future revenues, operations and expenditures. All such forward-looking
statements are necessarily only estimates of future results and the actual
results may differ materially from these projections due to a number of factors,
including (i) the Company's ability to successfully complete preclinical and
clinical development and obtain timely regulatory approval and patent and other
proprietary rights protection of its products and services, (ii) the content and
timing of decisions made by the U.S. Food and Drug Administration (the "FDA")
regarding the indications for which the Company's products may be approved,
(iii) the accuracy of the Company's estimates of the size and characteristics of
markets to be addressed by the Company's products and services, (iv) market
acceptance of the Company's products and services, (v) the Company's ability to
obtain reimbursement for its products from third-party payers, where
appropriate, (vi) the accuracy of the Company's information concerning the
products and resources of competitors and potential competitors and (vii) the
risks and uncertainties described under the heading "Factors Affecting Future
Operating Results" in the sections entitled (a) "Management's Discussion and
Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and
Results of Operations" and "Management's Discussion and Analysis of Genzyme
General's Financial Condition and Results of Operations" in the Genzyme General
Annual Report for the fiscal year ended December 31, 1997 (the "1997 Genzyme
General Annual Report"), (b) "Management's Discussion and Analysis of Genzyme
Tissue Repair's Financial Condition and Results of Operations" in the Genzyme
Tissue Repair Annual Report for the fiscal year ended December 31, 1997 (the
"1997 GTR Annual Report") and (c) "Management's Discussion and Analysis of
Genzyme Molecular Oncology's Financial Condition and Results of Operations" in
the Genzyme Molecular Oncology Annual Report for the fiscal year ended December
31, 1997 (the "1997 GMO Annual Report"). The 1997 Genzyme General Annual Report,
the 1997 GTR Annual Report and the 1997 GMO Annual Report were filed as Exhibits
13.1, 13.2 and 13.3, respectively, to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997, as amended on Form 10-K/A (the
"1997 Genzyme 10-K/A").
-2-
<PAGE> 3
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, JUNE 30, 1998
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
ITEM 1. Financial Statements
GENZYME GENERAL
Unaudited, Combined Balance Sheets as of June 30, 1998 and December 31, 1997.................................. 4
Unaudited, Combined Statements of Operations for the Three and Six Months Ended June 30, 1998 and 1997........ 5
Unaudited, Combined Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1997.................. 6
Notes to Unaudited, Combined Financial Statements............................................................. 7
GENZYME TISSUE REPAIR
Unaudited, Combined Balance Sheets as of June 30, 1998 and December 31, 1997.................................. 10
Unaudited, Combined Statements of Operations for the Three and Six Months Ended June 30, 1998 and 1997........ 11
Unaudited, Combined Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1997.................. 12
Notes to Unaudited, Combined Financial Statements............................................................. 13
GENZYME MOLECULAR ONCOLOGY
Unaudited, Combined Balance Sheets as of June 30, 1998 and December 31, 1997.................................. 15
Unaudited, Combined Statements of Operations for the Three and Six Months Ended June 30, 1998 and 1997........ 16
Unaudited, Combined Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1997.................. 17
Notes to Unaudited, Combined Financial Statements............................................................. 18
GENZYME CORPORATION AND SUBSIDIARIES
Unaudited, Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997.............................. 20
Unaudited, Consolidated Statements of Operations for the Three and Six Months Ended June 30, 1998 and 1997 ... 21
Unaudited, Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1997 ............. 23
Notes to Unaudited, Consolidated Financial Statements.......................................................... 24
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 28
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.......................................... 36
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds........................................................... 37
ITEM 4. Submission of Matters to a Vote of Security Holders................................................. 37
ITEM 6. Exhibits and Reports on Form 8-K ................................................................... 38
Signatures......................................................................................................... 39
</TABLE>
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<PAGE> 4
GENZYME GENERAL
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
(UNAUDITED, AMOUNTS IN THOUSANDS) 1998 1997
- ----------------------------------------------------------------------------------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 276,760 $ 66,276
Short-term investments .................................................. 34,938 35,294
Accounts receivable, net ................................................ 134,645 116,056
Inventories ............................................................. 133,489 137,708
Prepaid expenses and other current assets ............................... 17,779 15,941
Due from Genzyme Molecular Oncology ..................................... 5,540 5,434
Due from Genzyme Tissue Repair .......................................... 1,233 1,213
Deferred tax assets - current ........................................... 27,973 27,601
---------- ----------
Total current assets ................................................. 632,357 405,523
Property, plant and equipment, net ......................................... 381,788 365,337
Long-term investments ...................................................... 159,490 91,627
Intangibles, net ........................................................... 245,672 243,071
Deferred tax assets - noncurrent ........................................... 36,028 35,988
Investment in equity securities ............................................ 26,730 30,047
Other ...................................................................... 36,441 31,463
---------- ----------
Total assets ......................................................... $1,518,506 $1,203,056
========== ==========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable ........................................................ $ 16,882 $ 18,409
Accrued expenses ........................................................ 66,639 66,865
Income taxes payable .................................................... 21,718 11,157
Current portion of long-term debt and capital lease obligations ......... 20,796 887
---------- ----------
Total current liabilities ............................................. 126,035 97,318
Long-term debt and capital lease obligations ............................... 85,167 117,978
Convertible subordinated notes ............................................. 250,000 -
Other ...................................................................... 8,017 6,884
---------- ----------
Total liabilities ..................................................... 469,219 222,180
Division equity ............................................................ 1,049,287 980,876
---------- ----------
Total liabilities and division equity ................................. $1,518,506 $1,203,056
========== ==========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements
-4-
<PAGE> 5
GENZYME GENERAL
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------- ------------------------
<S> <C> <C> <C> <C>
Total revenues ................................................. $168,980 $147,614 $323,103 $292,220
Operating costs and expenses:
Cost of products and services sold ......................... 57,112 54,477 111,589 110,305
Selling, general and administrative ........................ 47,897 40,801 93,008 81,673
Research and development ................................... 21,104 18,976 39,522 36,300
Amortization of intangibles ................................ 3,300 3,164 6,499 6,360
-------- -------- -------- --------
Total operating costs and expenses ................... 129,413 117,418 250,618 234,638
-------- -------- -------- --------
Operating income ............................................... 39,567 30,196 72,485 57,582
Other income (expenses):
Equity in net loss of unconsolidated affiliates ............ (4,087) (783) (6,992) (853)
Gain on affiliate sale of stock ............................ 2,369 - 2,369 -
Minority interest .......................................... 860 - 1,724 -
Investment income .......................................... 4,856 2,594 7,776 4,912
Interest expense ........................................... (3,351) (1,719) (5,341) (4,000)
-------- -------- -------- --------
Total other income (expenses) ........................... 647 92 (464) 59
-------- -------- -------- --------
Income before income taxes ..................................... 40,214 30,288 72,021 57,641
Provision for income taxes ..................................... (15,254) (11,533) (27,764) (22,159)
-------- -------- -------- --------
Net income ..................................................... 24,960 18,755 44,257 35,482
Tax benefit allocated from Genzyme Tissue Repair ............... 3,390 4,327 7,796 8,838
Tax benefit allocated from Genzyme Molecular Oncology .......... 2,850 201 4,085 201
-------- -------- -------- --------
Net income ..................................................... $ 31,200 $ 23,283 $ 56,138 $ 44,521
======== ======== ======== ========
Per Genzyme General common share:
Net income per Genzyme General common share - basic .......... $ 0.40 $ 0.31 $ 0.72 $ 0.59
======== ======== ======== ========
Weighted average shares outstanding ............................ 78,524 76,065 78,223 75,856
======== ======== ======== ========
Net income per Genzyme General common and common
equivalent share - diluted ................................. $ 0.39 $ 0.30 $ 0.70 $ 0.57
======== ======== ======== ========
Adjusted weighted average shares outstanding ................... 80,679 78,130 80,520 78,184
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
-5-
<PAGE> 6
GENZYME GENERAL
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
(UNAUDITED, AMOUNTS IN THOUSANDS) JUNE 30,
- ---------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES: 1998 1997
--------- ---------
<S> <C> <C>
Net income .................................................................... $ 44,257 $ 35,482
Reconciliation of net income to net cash provided by operating activities:
Depreciation and amortization .............................................. 23,351 14,830
Non-cash compensation expense .............................................. 31 -
Accrued interest/amortization on bonds ..................................... (2,041) 578
Provision for bad debts and inventory ...................................... 3,136 2,260
Equity in net loss of unconsolidated affiliates, net ....................... 6,992 853
Gain on affiliate sale of stock ........................................... (2,369) -
Minority interest in net loss of subsidiaries .............................. (1,724) -
Other ...................................................................... 162 502
Increase (decrease) in cash from working capital changes:
Accounts receivable ..................................................... (22,280) (9,102)
Inventories ............................................................. 4,616 (13,194)
Prepaid expenses and other current assets ............................... (1,887) (2,547)
Accounts payable, accrued expenses, income taxes payable and
deferred revenue .................................................... 21,992 (634)
Due from Genzyme Tissue Repair .......................................... (20) 1,375
Due from Genzyme Molecular Oncology ..................................... (182) (430)
--------- ---------
Net cash provided by operating activities ............................... 74,034 29,973
INVESTING ACTIVITIES:
Purchases of investments ...................................................... (106,047) (25,424)
Sales and maturities of investments ........................................... 40,598 45,444
Acquisitions of property, plant and equipment ................................. (34,038) (15,891)
Sales of property, plant and equipment ........................................ 588 -
Acquisitions, net of acquired cash and assumed liabilities .................... (8,324) -
Investment in unconsolidated affiliates ....................................... (3,707) -
Repayment of loans by affiliates .............................................. 2,019 -
Other ......................................................................... (502) (9,495)
--------- ---------
Net cash used in investing activities ................................... (109,413) (5,366)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock ........................................ 16,656 100,792
Proceeds from issuance of debt, net ........................................... 243,676 -
Payments of debt and capital lease obligations ................................ (14,068) (102,798)
Net cash allocated to Genzyme Tissue Repair ................................... 84 (13,977)
Net cash allocated to Genzyme Molecular Oncology .............................. - (5,000)
Other ......................................................................... 1,370 -
--------- ---------
Net cash provided by (used in) financing activities ..................... 247,718 (20,983)
Effect of exchange rate changes on cash ........................................... (1,855) (1,657)
--------- ---------
Increase in cash and cash equivalents ............................................. 210,484 1,967
Cash and cash equivalents at beginning of period .................................. 66,276 77,220
--------- ---------
Cash and cash equivalents at end of period ........................................ $ 276,760 $ 79,187
========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
-6-
<PAGE> 7
GENZYME GENERAL
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
These unaudited, combined financial statements should be read in
conjunction with the 1997 Genzyme 10-K/A and the financial statements and
footnotes for both Genzyme General Division ("Genzyme General") and
Genzyme Corporation and Subsidiaries ("Genzyme" or the "Company")
included therein. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
the rules and regulations of the Securities and Exchange Commission.
Certain items in the 1997 financial statements have been reclassified to
conform with the 1998 presentation.
The financial statements for the three and six months ended June 30, 1998
and 1997 are unaudited but include, in management's opinion, all
adjustments (consisting only of normally recurring accruals) necessary
for a fair presentation of the results for the periods presented.
2. FINANCIAL INFORMATION
Financial information specific to Genzyme General is presented in these
Genzyme General unaudited, combined financial statements. Accounting
policies and financial information relevant to Genzyme, Genzyme General,
Genzyme Tissue Repair Division ("GTR" or "Genzyme Tissue Repair") and
Genzyme Molecular Oncology Division ("GMO" or "Genzyme Molecular
Oncology"), collectively, are presented in the unaudited, consolidated
financial statements of Genzyme.
3. NEW ACCOUNTING PRONOUNCEMENTS
For a discussion of new accounting pronouncements, see Note 2., "New
Accounting Pronouncements", to Genzyme Corporation and Subsidiaries'
Unaudited, Consolidated Financial Statements (the "Unaudited,
Consolidated Financial Statements"), which is incorporated herein by
reference.
4. INVENTORIES (IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
Raw materials.................. $ 49,258 $ 48,149
Work-in-process................ 28,566 30,264
Finished products.............. 55,665 59,295
-------- --------
Total ..................... $133,489 $137,708
======== ========
</TABLE>
5. EQUITY LINE OF CREDIT
In June 1998, the Board of Directors of Genzyme (the "Genzyme Board")
increased the amount of the equity line of credit available from Genzyme
General to GTR from $13.0 million to $50.0 million. Under the terms of
the equity line, GTR may draw down funds as needed on a quarterly basis
in exchange for shares of GTR Stock that are not outstanding but are
issuable from time to time for the benefit of Genzyme General or its
stockholders ("GTR Designated Shares").
6. 5.25% CONVERTIBLE SUBORDINATED NOTES
The disclosures related to Genzyme's private placement in May 1998 of
$250.0 million of 5.25% Convertible Subordinated Notes due June 1, 2005
(the "GGD Notes"), are included in Note 5., "5.25% Convertible
Subordinated Notes", to the Unaudited, Consolidated Financial Statements,
which is incorporated herein by reference.
7. MINORITY INTEREST
The minority interest of $860,000 and $1,724,000 for the three and six
months ended June 30, 1998, respectively, relate to the portion of the
results of operations of ATIII, LLC, the joint venture between Genzyme
and Genzyme Transgenics Corporation ("GTC"), that Genzyme does not
record. There were no corresponding amounts in the prior periods.
-7-
<PAGE> 8
GENZYME GENERAL
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
8. REVOLVING CREDIT FACILITY
In May 1998, Genzyme General repaid $13.0 million of borrowings
allocated to it under Genzyme's $225.0 million revolving credit
facility with a syndicate of commercial banks (the "Revolving Credit
Facility"). See Note 4., "Revolving Credit Facility", to the Unaudited,
Consolidated Financial Statements, which is incorporated herein by
reference.
9. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Genzyme General:
Net income attributable to GGD Stock-basic and diluted ... $31,200 $23,283 $56,138 $44,521
======= ======= ======= =======
Shares used in net income per common share-basic ......... 78,524 76,065 78,223 75,856
Effect of dilutive securities:
Employee and director stock options ................... 2,152 2,060 2,291 2,320
Warrants .............................................. 3 5 6 8
------- ------- ------- -------
Dilutive potential common shares ......................... 2,155 2,065 2,297 2,328
------- ------- ------- -------
Shares used in net income per common share-diluted ....... 80,679 78,130 80,520 78,184
======= ======= ======= =======
Net income per common share - basic ...................... $ 0.40 $ 0.31 $ 0.72 $ 0.59
======= ======= ======= =======
Net income per common share - diluted .................... $ 0.39 $ 0.30 $ 0.70 $ 0.57
======= ======= ======= =======
</TABLE>
Certain securities were not included in the computation of Genzyme
General's diluted earnings per share for the three and six months ended
June 30, 1998 and 1997. For the three months ended June 30, 1998 and
1997, such securities include options to purchase 3,829,926 and 5,173,854
shares of GGD Stock, respectively, outstanding during the periods then
ended but with exercise prices greater than the average market price of
GGD Stock during each respective period. For the three months ended June
30, 1998, such securities also include (i) warrants to purchase 80,000
shares of GGD Stock exercisable as of June 30, 1998 with an exercise
price greater than the average market price of GGD Stock during the three
months ended June 30, 1998; and (ii) 6,313,131 shares of GGD Stock
reserved in May 1998 for issuance upon conversion of the GGD Notes which
were not included in the computation because inclusion of such shares
would have an anti-dilutive effect on Genzyme General's net income per
share. For the six months ended June 30, 1998 and 1997, such securities
include options to purchase 3,844,830 and 4,633,768 shares of GGD Stock,
respectively, outstanding during the periods then ended but with exercise
prices greater than the average market price of GGD Stock during each
respective period. For the six months ended June 30, 1998, such
securities also include (i) warrants to purchase 80,000 shares of GGD
Stock exercisable as of June 30, 1998 with an exercise price greater
-8-
<PAGE> 9
GENZYME GENERAL
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
9. NET INCOME PER SHARE (CONTINUED)
than the average market price of GGD Stock during the six months ended
June 30, 1998; and (ii) 6,313,131 shares of GGD Stock reserved in May
1998 for issuance upon conversion of the GGD Notes which were not
included in the calculation because inclusion of such shares would have
an anti-dilutive effect on Genzyme General's net income per share.
10. COMPREHENSIVE INCOME
Effective January 1, 1998, Genzyme General adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes standards for reporting and displaying
comprehensive income and its components in a set of financial statements.
SFAS 130 requires that all items recognized under accounting standards as
components of comprehensive earnings be reported on one of the
following: a statement of income and comprehensive income or a statement
of stockholders' equity. Components of comprehensive income are net
income and all other non-owner changes in equity such as the change in
the cumulative translation adjustment. Presentation of comprehensive
income for earlier periods is provided for comparative purposes. Genzyme
presents such information related to Genzyme General in its statement of
stockholders' equity on an annual basis and in a footnote in its
quarterly reports. Comprehensive income for Genzyme General for the three
and six months ended June 30, 1998 and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ---------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Genzyme General:
Net income .............................. $31,200 $23,283 $56,138 $44,521
Cumulative translation adjustment ....... 542 117 (156) (8,753)
Unrealized gain (loss) on investments ... (4,971) (1,275) (3,644) (1,940)
------- ------- ------- -------
Comprehensive income..................... $26,771 $22,125 $52,338 $33,828
======= ======= ======= =======
</TABLE>
11. SUBSEQUENT EVENTS
On July 1, 1998, Genzyme General completed the sale of the primary assets
of its research products business to TECHNE Corp. and its wholly-owned
subsidiary, Research and Diagnostic Systems, Inc. (together, "TECHNE").
On July 17, 1998, Genzyme General made an equity investment of
approximately $14.0 million in Pharming Group N.V. ("Pharming") a Dutch
publicly traded company. The disclosures related to the sale of the
research product business assets and equity investment in Pharming are
included in Note 9., "Subsequent Events" to the Unaudited, Consolidated
Financial Statements, which is incorporated herein by reference.
-9-
<PAGE> 10
GENZYME TISSUE REPAIR
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED, AMOUNTS IN THOUSANDS) JUNE 30, DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------
1998 1997
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................... $25,404 $21,120
Short-term investments .............................................. 3,127 10,795
Accounts receivable, net ............................................ 2,929 2,221
Inventories ......................................................... 2,299 1,973
Prepaid expenses and other current assets ........................... 1,185 732
------- -------
Total current assets .............................................. 34,944 36,841
Property, plant and equipment, net (Note 5) ............................ 2,754 19,524
Other .................................................................. 230 453
------- -------
Total assets ...................................................... $37,928 $56,818
======= =======
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable .................................................... $ 1,130 $ 1,378
Accrued expenses .................................................... 2,992 2,816
Due to Genzyme General .............................................. 1,233 1,213
------- -------
Total current liabilities ......................................... 5,355 5,407
Long-term debt ......................................................... 18,000 18,000
Convertible debenture, net ............................................. 13,635 12,681
Other .................................................................. 452 527
------- -------
Total liabilities ................................................. 37,442 36,615
Division equity ........................................................ 486 20,203
------- -------
Total liabilities and division equity ............................. $37,928 $56,818
======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
-10-
<PAGE> 11
GENZYME TISSUE REPAIR
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) JUNE 30, JUNE 30,
- ------------------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Net service sales ....................................... $ 4,345 $ 2,654 $ 7,956 $ 4,641
Operating costs and expenses:
Cost of services sold ................................... 3,776 3,135 7,010 5,991
Selling, general and administrative ..................... 6,007 6,204 12,320 12,658
Research and development ................................ 2,832 2,228 5,918 4,996
-------- -------- -------- --------
Total operating costs and expenses .................... 12,615 11,567 25,248 23,645
-------- -------- -------- --------
Operating loss ............................................. (8,270) (8,913) (17,292) (19,004)
Other income (expenses):
Equity in loss of joint venture ......................... (1,697) (1,827) (3,628) (3,416)
Interest income ......................................... 227 212 674 398
Interest expense ........................................ (715) (861) (1,529) (1,238)
-------- -------- -------- --------
Other income (expenses) ............................... (2,185) (2,476) (4,483) (4,256)
-------- -------- -------- --------
Net loss ................................................... $(10,455) $(11,389) $(21,775) $(23,260)
======== ======== ======== ========
Basic and diluted net loss per Genzyme Tissue Repair
common share:
Net loss ................................................ $ (0.52) $ (0.86) $ (1.08) $ (1.76)
======== ======== ======== ========
Weighted average shares outstanding ........................ 20,159 13,238 20,080 13,208
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
-11-
<PAGE> 12
GENZYME TISSUE REPAIR
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
(UNAUDITED, AMOUNTS IN THOUSANDS) JUNE 30,
- ------------------------------------------------------------------------------------------------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss .................................................................... $(21,775) $(23,260)
Reconciliation of net loss to net cash used by operating activities:
Depreciation and amortization ............................................. 1,147 1,214
Non-cash compensation expense ............................................. 77 77
Provision for bad debts ................................................... 257 135
Accretion of debt discount ................................................ 536 407
Accrued interest/amortization on bonds .................................... 136 -
Equity in net loss of joint venture ....................................... 3,628 3,416
Increase (decrease) in cash from working capital:
Accounts receivable ..................................................... (965) (739)
Inventories ............................................................. (326) 366
Prepaid expenses and other .............................................. (453) 103
Accounts payable and accrued expenses ................................... 253 803
Due to Genzyme General .................................................. 20 (1,375)
-------- --------
Net cash used by operating activities ................................. (17,465) (18,853)
INVESTING ACTIVITIES:
Investment in joint venture ................................................. (3,417) (4,130)
Sales and maturities of investments ......................................... 7,539 -
Purchase of property, plant and equipment ................................... (108) (183)
Sale of property, plant and equipment ....................................... 16,535 202
Other ....................................................................... 12 (487)
-------- --------
Net cash provided (used) by investing activities ...................... 20,561 (4,598)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock ...................................... 1,347 1,144
Proceeds from issuance of convertible debenture ............................. - 13,000
Cash allocated (to) from Genzyme General .................................... (84) 13,977
Other ....................................................................... (75) -
-------- --------
Net cash provided by financing activities ............................. 1,188 28,121
-------- --------
Increase in cash and cash equivalents .......................................... 4,284 4,670
Cash and cash equivalents at beginning of period ............................... 21,120 16,230
-------- --------
Cash and cash equivalents at end of period ..................................... $ 25,404 $ 20,900
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
-12-
<PAGE> 13
GENZYME TISSUE REPAIR
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
These unaudited, combined financial statements should be read in
conjunction with the 1997 Genzyme 10-K/A and the financial statements and
footnotes for both GTR and Genzyme included therein. Certain information
and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission.
The financial statements for the three and six months ended June 30, 1998
and 1997 are unaudited but include, in management's opinion, all
adjustments (consisting only of normally recurring accruals) necessary
for a fair presentation of the results for the periods presented.
2. FINANCIAL INFORMATION
Financial information specific to GTR is presented in these GTR
unaudited, combined financial statements. Accounting policies and
financial information relevant to Genzyme, Genzyme General, GTR and GMO,
collectively, are presented in the Unaudited, Consolidated Financial
Statements of Genzyme.
3. NEW ACCOUNTING PRONOUNCEMENTS
For a discussion of new accounting pronouncements, see Note 2., "New
Accounting Pronouncements", to the Unaudited, Consolidated Financial
Statements, which is incorporated herein by reference.
4. INVENTORIES
(In thousands)
June 30, 1998 December 31, 1997
------------- -----------------
Raw materials...................... $ 308 $ 243
Work-in-process.................... 1,991 1,730
------ ------
Total ........................ $2,299 $1,973
====== ======
5. TRANSFER OF FACILITY
In June 1998, the Genzyme Board approved the transfer of one of GTR's
manufacturing facilities, including land, building and equipment, to
Genzyme General for cash of approximately $16.5 million. GTR recognized a
gain of approximately $0.7 million from this transfer, which was charged
to division equity in June 1998.
6. REVOLVING CREDIT FACILITY
The disclosures related to amounts borrowed by GTR under Genzyme's
Revolving Credit Facility are included in Note 4., "Revolving Credit
Facility", to the Unaudited, Consolidated Financial Statements, which is
incorporated herein by reference.
7. EQUITY LINE OF CREDIT
In June 1998, the Genzyme Board increased the amount of the equity line
of credit available from Genzyme General to GTR from $13.0 million to
$50.0 million. Under the terms of the equity line, GTR may draw down
funds as needed on a quarterly basis in exchange for GTR Designated
Shares.
8. NET INCOME (LOSS) PER SHARE
Note 6., "Net Income (Loss) per Share", to the Unaudited, Consolidated
Financial Statements is incorporated herein by reference.
-13-
<PAGE> 14
GENZYME TISSUE REPAIR
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
9. COMPREHENSIVE INCOME
Effective January 1, 1998, GTR adopted SFAS 130, which establishes
standards for reporting and displaying comprehensive income and its
components in a set of financial statements. SFAS 130 requires that all
items recognized under accounting standards as components of
comprehensive earnings be reported on one of the following: a statement
of income and comprehensive income or a statement of stockholders'
equity. Components of comprehensive income are net income and all other
non-owner changes in equity such as the change in the cumulative
translation adjustment. Presentation of comprehensive income for earlier
periods is provided for comparative purposes. Genzyme presents such
information related to GTR in its statement of stockholders' equity on
an annual basis and in a footnote in its quarterly reports.
Comprehensive loss for GTR for the three and six months ended June 30,
1998 and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Genzyme Tissue Repair:
Net loss ................................... $(10,455) $(11,389) $(21,775) $(23,260)
Unrealized gain (loss) on investments ...... 7 - 7 -
-------- -------- -------- --------
Comprehensive loss.......................... $(10,448) $(11,389) $(21,768) $(23,260)
======== ======== ======== ========
</TABLE>
-14-
<PAGE> 15
GENZYME MOLECULAR ONCOLOGY
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
(UNAUDITED, AMOUNTS IN THOUSANDS) 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................................................... $ 4,132 $15,010
Short-term investments ........................................................ 5,657 5,170
Other ......................................................................... 1,285 823
------- -------
Total current assets ......................................................... 11,074 21,003
Equipment, net .................................................................. 867 487
Long-term investments ........................................................... - 1,049
Intangibles, net ................................................................ 23,157 30,688
Investment in joint venture ..................................................... - 574
------- -------
Total assets ................................................................. $35,098 $53,801
======= =======
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accrued expenses .............................................................. $ 1,434 $ 2,015
Due to Genzyme General ........................................................ 5,540 5,434
Deferred revenue .............................................................. 1,103 1,583
Other ......................................................................... - 18
------- -------
Total current liabilities .................................................... 8,077 9,050
Long-term debt .................................................................. - 5,000
Convertible debentures, net ..................................................... 19,124 17,024
Note payable to Genzyme General ................................................. 2,658 2,582
Deferred tax liability .......................................................... 5,184 6,509
Other ........................................................................... 512 170
------- -------
Total liabilities ............................................................ 35,555 40,335
Division equity ................................................................. (457) 13,466
------- -------
Total liabilities and division equity ........................................ $35,098 $53,801
======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
-15-
<PAGE> 16
GENZYME MOLECULAR ONCOLOGY
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) JUNE 30, JUNE 30,
- ------------------------------------------------------------------------------------------------- -----------------------
1998 1997 1998 1997
------- ------- -------- -------
<S> <C> <C> <C> <C>
Total revenues ..................................................... $ 1,689 $ - $ 4,506 $ -
Operating costs and expenses:
Cost of revenues .................................................. 1,102 - 2,323 -
Selling, general and administrative ............................... 2,003 166 3,155 275
Research and development .......................................... 2,228 1,031 5,523 1,549
Amortization of intangibles ....................................... 3,045 228 6,070 228
Charge for in-process technology .................................. - 7,000 - 7,000
------- ------- -------- -------
Total operating costs and expenses ............................... 8,378 8,425 17,071 9,052
------- ------- -------- -------
Operating loss ..................................................... (6,689) (8,425) (12,565) (9,052)
Other income (expenses):
Equity in loss of joint venture ................................... (534) - (978) -
Interest income ................................................... 204 - 484 -
Interest expense .................................................. (1,090) (17) (2,252) (17)
------- ------- -------- -------
Total other income (expenses) .................................... (1,420) (17) (2,746) (17)
------- ------- -------- -------
Loss before income taxes ........................................... (8,109) (8,442) (15,311) (9,069)
Tax benefit ........................................................ 662 50 1,324 50
------- ------- -------- -------
Net loss ........................................................... $(7,447) $(8,392) $(13,987) $(9,019)
======= ======= ======== =======
Basic and diluted net loss per Genzyme Molecular
Oncology common share:
Net loss ......................................................... $ (1.90) $ (3.56)
======= ========
Weighted average shares outstanding ................................ 3,929 3,929
======= ========
Pro forma basic and diluted net loss per Genzyme Molecular
Oncology common share:
Pro forma net loss ............................................... $ (2.14) $ (2.30)
======= =======
Pro forma shares outstanding ....................................... 3,929 3,929
======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
-16-
<PAGE> 17
GENZYME MOLECULAR ONCOLOGY
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
(UNAUDITED, AMOUNTS IN THOUSANDS) JUNE 30,
- ------------------------------------------------------------------------------------------------------------
1998 1997
-------- -------
<S> <C> <C>
Operating Activities:
Net loss ....................................................................... $(13,987) $(9,019)
Reconciliation of net loss to net cash used by operating activities:
Depreciation and amortization ............................................ 6,280 228
Charge for in-process technology ......................................... - 7,000
Deferred tax benefit ..................................................... (1,324) -
Accretion of debt conversion feature ..................................... 1,412 -
Equity in loss of joint venture .......................................... 978 -
Accrued interest/amortization of marketable securities ................... 87 -
Non-cash compensation expense ............................................ 57 -
Non-cash purchase price adjustments ...................................... 747 -
Increase (decrease) in cash from working capital changes:
Other current assets .................................................. (61) -
Accrued expenses, deferred revenue and other liabilities .............. (309) (33)
Due to Genzyme General ................................................ 182 430
-------- -------
Net cash used by operating activities ................................. (5,938) (1,394)
INVESTING ACTIVITIES:
Acquisition of PharmaGenics, Inc. net of acquired cash ...................... - 9
Purchases of investments .................................................... (2,057) -
Maturities of investments ................................................... 2,539 -
Acquisitions of equipment ................................................... (502) -
-------- -------
Net cash provided (used) by investing activities ...................... (20) 9
FINANCING ACTIVITIES:
Allocation of debt from Genzyme General ..................................... - 5,000
Repayments of debt and leases ............................................... (5,018)
Parent company investment, Genzyme General .................................. - 1,394
Other ....................................................................... 98 -
-------- -------
Net cash provided (used) by financing activities ...................... (4,920) 6,394
-------- -------
Increase (decrease) in cash and cash equivalents ............................... (10,878) 5,009
Cash and cash equivalents at beginning of period ............................... 15,010 -
-------- -------
Cash and cash equivalents at end of period ..................................... $ 4,132 $ 5,009
======== =======
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
-17-
<PAGE> 18
GENZYME MOLECULAR ONCOLOGY
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
These unaudited, combined financial statements should be read in
conjunction with the 1997 Genzyme 10-K/A and the financial statements and
footnotes for both GMO and Genzyme included therein. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain items in the 1997 financial
statements have been reclassified to conform with the 1998 presentation.
The financial statements for the three and six months ended June 30, 1998
and 1997 are unaudited but include, in management's opinion, all
adjustments (consisting only of normally recurring accruals) necessary for
a fair presentation of the results for the periods presented.
2. FINANCIAL INFORMATION
Financial information specific to GMO is presented in these GMO unaudited,
combined financial statements. Accounting policies and financial
information relevant to Genzyme, Genzyme General, GTR and GMO,
collectively, are presented in the Unaudited, Consolidated Financial
Statements of Genzyme.
3. NEW ACCOUNTING PRONOUNCEMENTS
For a discussion of new accounting pronouncements, see Note 2., "New
Accounting Pronouncements," to the Unaudited, Consolidated Financial
Statements, which is incorporated herein by reference.
4. REVOLVING CREDIT FACILITY
In March 1998, GMO repaid the full $5.0 million allocated to it under the
Revolving Credit Facility. See Note 4., "Revolving Credit Facility," to the
Unaudited, Consolidated Financial Statements, which is incorporated herein
by reference.
5. DUE TO JOINT VENTURE
Pursuant to the funding commitment provided in the Collaboration Agreement
relating to StressGen/Genzyme LLC, the joint venture between GMO, StressGen
Biotechnologies Corporation ("StressGen") and the Canadian Medical
Discoveries Fund, Inc. ("CMDF"), Genzyme and StressGen are obligated to
fund the operations of StressGen/Genzyme LLC in equal portions after the
initial $10.0 million (Canadian) of funding of StressGen/Genzyme LLC has
been expended. As a result of this funding commitment, GMO records 50% of
the losses of StressGen/Genzyme LLC for financial statement purposes. As of
June 30, 1998, GMO's portion of the cumulative losses of StressGen/Genzyme
LLC exceeded its initial capital contribution of $0.7 million and GMO has
recorded $0.5 million as a noncurrent liability due to the joint venture.
6. REGISTRATION STATEMENT
In April 1998, GMO filed with the Securities and Exchange Commission an
amended registration statement on Form S-3 (which has not yet become
effective) covering the initial public offering of 3,450,000 shares of GMO
Stock (including 450,000 shares issuable upon exercise of the underwriters'
over-allotment option).
7. NET LOSS PER SHARE
Note 6., "Net Income (Loss) Per Share," to the Unaudited, Consolidated
Financial Statements is incorporated herein by reference.
-18-
<PAGE> 19
GENZYME MOLECULAR ONCOLOGY
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
8. COMPREHENSIVE INCOME
Effective January 1, 1998, GMO adopted SFAS 130, which establishes
standards for reporting and displaying comprehensive income and its
components in a set of financial statements. SFAS 130 requires that all
items recognized under accounting standards as components of comprehensive
earnings be reported on one of the following: a statement of income and
comprehensive income or a statement of stockholders' equity. Components of
comprehensive income are net income and all other non-owner changes in
equity such as the change in the cumulative translation adjustment.
Presentation of comprehensive income for earlier periods is provided for
comparative purposes. Genzyme presents such information related to GMO in
its statement of stockholders' equity on an annual basis and in a footnote
in its quarterly reports. Comprehensive loss for GMO for the three and six
months ended June 30, 1998 and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1998 1997 1998 1997
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net loss..................................... $(7,447) $(8,392) $(13,987) $(9,019)
Unrealized gain (loss) on investments........ 2 - 7 -
------- ------- -------- -------
Comprehensive loss........................... $(7,445) $(8,392) $(13,980) $(9,019)
======= ======= ======== =======
</TABLE>
-19-
<PAGE> 20
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED, AMOUNTS IN THOUSANDS) JUNE 30, DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................................................... $ 306,296 $ 102,406
Short-term investments ........................................................ 43,722 51,259
Accounts receivable, net....................................................... 137,749 118,277
Inventories ................................................................... 135,788 139,681
Prepaid expenses and other current assets ..................................... 20,074 17,361
Deferred tax assets - current ................................................. 27,973 27,601
---------- ----------
Total current assets ........................................................ 671,602 456,585
Property, plant and equipment, net ............................................... 385,409 385,348
Long-term investments ............................................................ 159,490 92,676
Intangibles, net of accumulated amortization ..................................... 266,849 271,275
Deferred tax assets - noncurrent ................................................. 30,844 29,479
Investment in equity securities .................................................. 26,730 30,047
Other ............................................................................ 34,013 30,043
---------- ----------
Total assets ................................................................ $1,574,937 $1,295,453
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................................. $ 18,012 $ 19,787
Accrued expenses .............................................................. 71,065 72,103
Income taxes payable .......................................................... 21,729 11,168
Deferred revenue .............................................................. 1,103 1,800
Current portion of long-term debt and capital lease obligations ............... 20,796 905
---------- ----------
Total current liabilities ................................................... 132,705 105,763
Long-term debt and capital lease obligations ..................................... 103,167 140,978
Convertible debentures ........................................................... 282,759 29,298
Other ............................................................................ 8,981 7,364
---------- ----------
Total liabilities ........................................................... 527,612 283,403
Stockholders' equity:
Preferred Stock................................................................ - -
Genzyme General Division Common Stock, $.01 par value ......................... 787 777
Genzyme Tissue Repair Division Common Stock, $.01 par value ................... 203 199
Genzyme Molecular Oncology Division Common Stock, $.01 par value .............. 39 39
Treasury Stock - at cost ...................................................... (901) (901)
Additional paid-in capital - Genzyme General .................................. 911,403 895,340
Additional paid-in capital - Genzyme Tissue Repair ............................ 172,477 170,430
Additional paid-in capital - Genzyme Molecular Oncology ....................... 34,573 34,517
Accumulated deficit ........................................................... (55,466) (76,346)
Foreign currency translation adjustments ...................................... (12,605) (12,449)
Unrealized net gains (losses) on investments .................................. (3,185) 444
---------- ----------
Total stockholders' equity .................................................. 1,047,325 1,012,050
---------- ----------
Total liabilities and stockholders' equity .................................. $1,574,937 $1,295,453
========== ==========
</TABLE>
The accompanying notes are an integral part of these unaudited, consolidated
financial statements.
-20-
<PAGE> 21
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Net product sales .......................................... $153,807 $131,636 $293,177 $259,792
Net service sales .......................................... 18,627 16,949 36,871 33,692
Revenue from research and development contracts ............ 2,440 1,683 5,377 3,377
-------- -------- -------- --------
Total revenues ......................................... 174,874 150,268 335,425 296,861
Operating costs and expenses:
Cost of products sold ...................................... 48,573 45,498 94,923 92,010
Cost of services sold ...................................... 12,425 12,114 24,255 24,286
Selling, general and administrative ........................ 55,907 47,047 108,483 94,373
Research and development ................................... 27,016 21,592 52,567 41,684
Amortization of intangibles ................................ 6,093 3,392 12,065 6,588
Charge for in-process technology ........................... - 7,000 - 7,000
-------- -------- -------- --------
Total operating costs and expenses ....................... 150,014 136,643 292,293 265,941
-------- -------- -------- --------
Operating income ............................................... 24,860 13,625 43,132 30,920
Other income (expenses):
Equity in net loss of unconsolidated affiliates ............ (6,318) (2,610) (11,598) (4,269)
Gain on affiliate sale of stock ............................ 2,369 - 2,369 -
Minority interest .......................................... 860 - 1,724 -
Investment income .......................................... 5,287 2,806 8,934 5,310
Interest expense ........................................... (5,156) (2,597) (9,122) (5,255)
-------- -------- -------- --------
Total other income (expenses) ........................... (2,958) (2,401) (7,693) (4,214)
-------- -------- -------- --------
Income before income taxes ..................................... 21,902 11,224 35,439 26,706
Provision for income taxes ..................................... (8,806) (6,955) (14,559) (13,070)
-------- -------- -------- --------
Net income ..................................................... $ 13,096 $ 4,269 $ 20,880 $ 13,636
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, consolidated
financial statements.
-21-
<PAGE> 22
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Attributable to Genzyme General:
Net income ................................................... 24,960 18,755 44,257 35,482
Tax benefit allocated from Genzyme Tissue Repair ............. 3,390 4,327 7,796 8,838
Tax benefit allocated from Genzyme Molecular Oncology ........ 2,850 201 4,085 201
-------- -------- -------- --------
Net income attributable to GGD Stock ......................... $ 31,200 $ 23,283 $ 56,138 $ 44,521
======== ======== ======== ========
Per Genzyme General common share - basic:
Net income ................................................. $ 0.40 $ 0.31 $ 0.72 $ 0.59
======== ======== ======== ========
Weighted average shares outstanding .......................... 78,524 76,065 78,223 75,856
======== ======== ======== ========
Per Genzyme General common and common equivalent share
- diluted:
Net income ................................................. $ 0.39 $ 0.30 $ 0.70 $ 0.57
======== ======== ======== ========
Adjusted weighted average shares outstanding ................. 80,679 78,130 80,520 78,184
======== ======== ======== ========
Attributable to Genzyme Tissue Repair:
Net loss ..................................................... $(10,455) $(11,389) $(21,775) $(23,260)
======== ======== ======== ========
Per GTR basic and diluted common share:
Net loss ................................................... $ (0.52) $ (0.86) $ (1.08) $ (1.76)
======== ======== ======== ========
Weighted average shares outstanding .......................... 20,159 13,238 20,080 13,208
======== ======== ======== ========
Attributable to Genzyme Molecular Oncology:
Net loss ..................................................... $ (7,447) $ (8,392) $(13,987) $ (9,019)
======== ======== ======== ========
Per GMO basic and diluted common share:
Net loss ................................................... $(1.90) $ (3.56)
====== ========
Weighted average shares outstanding .......................... 3,929 3,929
====== ========
Pro forma per GMO basic and diluted common share:
Pro forma net loss ......................................... $ (2.14) $ (2.30)
======== ========
Pro forma weighted average shares outstanding ................ 3,929 3,929
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, consolidated
financial statements.
-22-
<PAGE> 23
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
(UNAUDITED, AMOUNTS IN THOUSANDS) JUNE 30,
- --------------------------------------------------------------------------------------------
OPERATING ACTIVITIES: 1998 1997
--------- ---------
<S> <C> <C>
Net income ..................................................... $ 20,880 $ 13,636
Reconciliation of net income to net
cash provided by operating activities:
Depreciation and amortization ............................... 30,274 16,272
Non-cash compensation expense ............................... 165 -
Accrued interest/amortization on bonds ...................... (1,818) 578
Non-cash purchase price adjustments ......................... 747 -
Provision for bad debts and inventory ....................... 3,393 2,395
Deferred income tax benefit ................................. (1,324) -
Equity in net loss of unconsolidated affiliates ............. 11,598 4,269
Gain on affiliate sale of stock ............................. (2,369) -
Minority interest in net loss of affiliates ................. (1,724) -
Accretion of debt conversion feature ........................ 1,948 407
Purchase of in-process research and development ............. - 7,000
Other ....................................................... 162 579
Increase (decrease) in cash from working capital changes:
Accounts receivable ...................................... (23,245) (9,841)
Inventories .............................................. 4,290 (12,828)
Prepaid expenses and other current assets ................ (2,401) (2,444)
Accounts payable, accrued expenses and deferred revenue .. 10,055 (8,903)
--------- ---------
Net cash provided by operating activities ................ 50,631 11,120
INVESTING ACTIVITIES:
Purchases of investments ....................................... (108,104) (25,424)
Sales and maturities of investments ............................ 50,676 45,444
Acquisitions of property, plant and equipment .................. (18,148) (16,074)
Sale of property, plant and equipment .......................... 623 202
Acquisitions, net of acquired cash and assumed liabilities ..... (8,324) 9
Investment in joint ventures ................................... (7,124) (4,130)
Repayment of loans by affiliates ............................... 2,019 -
Other .......................................................... (490) (9,982)
--------- ---------
Net cash used by investing activities .................... (88,872) (9,955)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock ......................... 18,003 101,936
Proceeds from issuance of debt, net ............................ 243,676 13,000
Payments of debt and capital lease obligations ................. (19,086) (102,798)
Other .......................................................... 1,393 -
--------- ---------
Net cash provided by financing activities ................ 243,986 12,138
Effect of exchange rate changes on cash ............................ (1,855) (1,657)
--------- ---------
Increase in cash and cash equivalents .............................. 203,890 11,646
Cash and cash equivalents at beginning of period ................... 102,406 93,450
--------- ---------
Cash and cash equivalents at end of period ......................... $ 306,296 $ 105,096
========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited, consolidated
financial statements.
-23-
<PAGE> 24
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
These unaudited, combined financial statements should be read in
conjunction with the 1997 Genzyme 10-K/A and the financial statements
and footnotes for Genzyme included therein. Certain information and
footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain items in the 1997 financial
statements have been reclassified to conform to the 1998 presentation.
The financial statements for the three and six months ended June 30, 1998
and 1997 are unaudited but include, in management's opinion, all
adjustments (consisting only of normally recurring accruals) necessary
for a fair presentation of the results for the periods presented.
2. NEW ACCOUNTING PRONOUNCEMENTS
In April 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position 98-5, "Accounting for the Costs of Start-Up Activities"
("SOP 98-5"). SOP 98-5 requires all costs of start-up activities (as
defined by SOP 98-5) to be expensed as incurred. Genzyme has determined
that adoption of SOP 98-5 will not have a material impact on its
consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as "derivatives"), and for hedging activities. SFAS 133
requires companies to recognize all derivatives as either assets or
liabilities, with the instruments measured at fair value. The accounting
for changes in fair value, gains or losses, depends on the intended use
of the derivative and its resulting designation. The statement is
effective for all fiscal quarters of fiscal years beginning after June
15, 1999. Genzyme will adopt SFAS 133 by January 1, 2000. Genzyme is
evaluating SFAS 133 to determine its impact on its consolidated financial
statements.
3. INVENTORIES (IN THOUSANDS)
June 30, 1998 December 31, 1997
------------- -----------------
Raw materials.................. $ 49,566 $ 48,392
Work-in-process................ 30,557 31,994
Finished products.............. 55,665 59,295
-------- --------
Total............... $135,788 $139,681
======== ========
4. REVOLVING CREDIT FACILITY
Genzyme has a Revolving Credit Facility with a syndicate of commercial
banks administered by Fleet National Bank in the amount of $225.0
million. Amounts drawn under this facility may be allocated to either
Genzyme General, GTR or GMO. In March 1998, GMO repaid the full $5.0
million of borrowings allocated to it under the Revolving Credit Facility
and in June 1998, Genzyme General repaid $13.0 million of borrowings
allocated to it under this facility. As of June 30, 1998, the Company had
$100.0 million of debt outstanding under the Revolving Credit Facility,
$82.0 million of which was allocated to Genzyme General and $18.0 million
of which was allocated to GTR.
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<PAGE> 25
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS
5. 5.25% CONVERTIBLE SUBORDINATED NOTES
In May 1998, Genzyme completed the private placement of the GGD Notes.
The GGD Notes bear interest at 5.25% per annum and interest is payable
semi-annually on June 1 and December 1 of each year, commencing on
December 1, 1998. The GGD Notes are convertible, at any time at or before
maturity (unless previously redeemed), into shares of GGD Stock at a
conversion price of $39.60 per share, subject to adjustment in certain
events. The GGD Notes may not be redeemed prior to June 10, 2001 and are
redeemable, subject to certain subordination provisions, on such date and
thereafter at the option of Genzyme, as a whole or from time to time in
part, at the following prices (expressed as percentages of the principal
amount) plus accrued interest to, but not including, the redemption date:
102.63% if redeemed on or before May 31, 2002, 101.75% if redeemed
between June 1, 2002 and May 31, 2003; 100.88% if redeemed between
June 1, 2003 and May 31, 2004; and 100% if redeemed on or after
June 1, 2004.
6. NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
GENZYME GENERAL:
Net income attributable to GGD Stock-basic and diluted ...... $31,200 $23,283 $56,138 $44,521
======= ======= ======= =======
Shares used in net income per common share-basic ............ 78,524 76,065 78,223 75,856
Effect of dilutive securities:
Employee and director stock options ...................... 2,152 2,060 2,291 2,320
Warrants ................................................. 3 5 6 8
------- ------- ------- -------
Dilutive potential common shares ............................ 2,155 2,065 2,297 2,328
------- ------- ------- -------
Shares used in net income per common share-diluted .......... 80,679 78,130 80,520 78,184
======= ======= ======= =======
Net income per common share - basic ......................... $ 0.40 $ 0.31 $ 0.72 $ 0.59
======= ======= ======= =======
Net income per common share - diluted ....................... $ 0.39 $ 0.30 $ 0.70 $ 0.57
======= ======= ======= =======
</TABLE>
Certain securities were not included in the computation of Genzyme
General's diluted earnings per share for the three and six months ended
June 30, 1998 and 1997. For the three months ended June 30, 1998 and
1997, such securities include options to purchase 3,829,926 and 5,173,854
shares of GGD Stock, respectively, outstanding during the periods then
ended but with exercise prices greater than the average market price of
GGD Stock during each respective period. For the three months ended June
30, 1998 such securities also include (i) warrants to purchase 80,000
shares of GGD Stock exercisable as of June 30, 1998 with an exercise
price greater than the average market price of GGD Stock during the three
months ended June 30, 1998, and (ii) 6,313,131 shares of GGD
-25-
<PAGE> 26
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS
6. NET INCOME (LOSS) PER SHARE (CONTINUED)
Stock reserved in May 1998 for issuance upon conversion of the GGD Notes
which were not included in the computation because inclusion of such
shares would have an anti-dilutive effect on Genzyme General's net income
per share. For the six months ended June 30, 1998 and 1997, such
securities include options to purchase 3,844,830 and 4,633,768 shares of
GGD Stock, respectively, outstanding during the periods then ended but
with exercise prices greater than the average market price of GGD Stock
during each respective period. For the six months ended June 30, 1998,
such securities also include (i) warrants to purchase 80,000 shares of
GGD Stock exercisable as of June 30, 1998 with an exercise price greater
than the average market price of GGD Stock during the six months ended
June 30, 1998; and (ii) 6,313,131 shares of GGD Stock reserved in May
1998 for issuance upon conversion of the GGD Notes which were not
included in the calculation because inclusion of such shares would have
an anti-dilutive effect on Genzyme General's net income per share.
GTR:
Basic net loss per GTR common share is the same as diluted net loss per
GTR common share for each of the three and six months ended June 30,
1998 and 1997. Certain securities were not included in the computation
of GTR's diluted earnings per share for each of these periods because
they would have an anti-dilutive effect due to GTR's net loss for the
relevant period. For the three months ended June 30, 1998 and 1997,
these securities include: (i) options to purchase 3,244,098 and
2,382,203 shares, respectively, of GTR Stock; (ii) 822,508 and
3,142,921 GTR Designated Shares, respectively; and (iii) 2,577,245
shares of GTR Stock reserved for issuance upon conversion of a 5%
convertible note due February 27, 2000 (the "GTR Note"). For the six
months ended June 30, 1998 and 1997, these securities include: (i)
options to purchase 2,977,643 and 2,438,621 shares, respectively, of
GTR Stock; (ii) 828,141 and 2,550,611 GTR Designated Shares,
respectively; and (iii) 2,577,245 shares of GTR Stock reserved for
issuance upon conversion of the GTR Note.
GMO:
Historical loss per share information is presented for GMO for the
three and six months ended June 30, 1998 but is omitted for the three
and six months ended June 30, 1997 as there were no shares of GMO Stock
outstanding prior to June 18, 1997. Pro forma net loss per share is
disclosed for GMO for the three and six months ended June 30, 1997. The
pro forma shares outstanding represent the shares issued to effect the
merger of PharmaGenics, Inc. ("PharmaGenics") with and into Genzyme in
June 1997.
Basic net loss per GMO common share is the same as diluted net loss per
GMO common share for the three and six months ended June 30, 1998. Pro
forma basic net loss per Genzyme Molecular Oncology common share is the
same as pro forma diluted net loss per share for the three and six
months ended June 30, 1997. Certain securities were not included in the
computation of GMO's diluted or pro forma diluted earnings per share
for each of these periods because they would have an anti-dilutive
effect due to GMO's net loss for the relevant period. These securities
include for the three months ended June 30, 1998: (i) options to
purchase 1,176,749 shares of GMO Stock; (ii) warrants to purchase 9,563
shares of GMO Stock at $8.04 per share; (iii) 3,475,915 shares of GMO
Stock reserved for issuance upon conversion of a 6% convertible note
due August 28, 2002 (the "GMO Debentures"); and (iv) 6,000,000 shares
of GMO Stock which are not outstanding but are issuable for the benefit
of Genzyme General or its stockholders ("GMO Designated Shares"). For
the six months ended June 30, 1998 and 1997, these securities include:
(i) options to purchase 1,023,527 shares of GMO Stock; (ii) warrants to
purchase 9,563 shares of GMO Stock at $8.04 per share; (iii) 3,475,915
shares of GMO Stock reserved for issuance upon conversion of the GMO
Debentures; and (iv) 6,000,000 GMO Designated Shares.
-26-
<PAGE> 27
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS
7. COMPREHENSIVE INCOME
Effective January 1, 1998, Genzyme adopted SFAS 130, which establishes
standards for reporting and displaying comprehensive income and its
components in a set of financial statements. SFAS 130 requires that all
items recognized under accounting standards as components of
comprehensive earnings be reported on one of the following: a statement
of income and comprehensive income, a statement of comprehensive income
or a statement of stockholders' equity. Components of comprehensive
income are net income and all other non-owner changes in equity such as
the change in the cumulative translation adjustment. Presentation of
comprehensive income for earlier periods is provided for comparative
purposes. Genzyme presents such information in its statement of
stockholders' equity on an annual basis and in a footnote in its
quarterly reports. Comprehensive income for the three and six months
ended June 30, 1998 and 1997, is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Consolidated:
Net income ........................................ $ 13,096 $ 4,269 $ 20,880 $ 13,636
Cumulative translation adjustment ................. 542 117 (156) (8,753)
Unrealized gain (loss) on investments ............. (4,962) (1,275) (3,630) (1,940)
-------- -------- -------- --------
Comprehensive income (loss) ....................... $ 8,676 $ 3,111 $ 17,094 $ 2,943
======== ======== ======== ========
Genzyme General:
Net income ........................................ $ 31,200 $ 23,283 $ 56,138 $ 44,521
Cumulative translation adjustment ................. 542 117 (156) (8,753)
Unrealized gain (loss) on investments ............. (4,971) (1,275) (3,644) (1,940)
-------- -------- -------- --------
Comprehensive income .............................. $ 26,771 $ 22,125 $ 52,338 $ 33,828
======== ======== ======== ========
Genzyme Tissue Repair:
Net loss .......................................... $(10,455) $(11,389) $(21,775) $(23,260)
Unrealized gain (loss) on investments ............. 7 - 7 -
-------- -------- -------- --------
Comprehensive loss ................................ $(10,448) $(11,389) $(21,768) $(23,260)
======== ======== ======== ========
Genzyme Molecular Oncology:
Net loss .......................................... $ (7,447) $ (8,392) $(13,987) $ (9,019)
Unrealized gain (loss) on investments ............. 2 - 7 -
-------- -------- -------- --------
Comprehensive loss ................................ $ (7,445) $ (8,392) $(13,980) $ (9,019)
======== ======== ======== ========
</TABLE>
8. REGISTRATION STATEMENT
In April 1998, GMO filed with the Securities and Exchange Commission an
amended registration statement on Form S-3 (which has not yet become
effective) covering the initial public offering of 3,450,000 shares of
GMO Stock (including 450,000 shares issuable upon the exercise of the
underwriters' over-allotment option).
9. SUBSEQUENT EVENTS
On July 1, 1998, Genzyme completed the sale of the primary assets of its
research products business to TECHNE. The purchase price consisted of
$24.8 million in cash, approximately 987,000 shares of TECHNE common
stock, and royalties on TECHNE's biotechnology group sales for the next
five years. Royalty income will be recorded as earned.
On July 17, 1998, Genzyme made an equity investment in Pharming of
approximately $14.0 million at NLG 33.33 per share for a total of 852,307
shares of Pharming common stock. The investment will be accounted for
under the cost method of accounting.
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<PAGE> 28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998
The following discussion is a summary of the key factors management considers
necessary in reviewing the Company's results of operations, liquidity and
capital resources.
GENZYME CORPORATION AND SUBSIDIARIES
Since the operating results of Genzyme and its subsidiaries reflect the combined
operations of Genzyme General, GTR and GMO, this discussion summarizes the key
factors management considers necessary in reviewing Genzyme's consolidated
results of operations. Detailed discussion and analysis of each division's
results of operations are provided below under separate headings.
RESULTS OF OPERATIONS
GENZYME CORPORATION
REVENUES
Total revenues for the three and six months ended June 30, 1998 increased
16% and 13% to $174.9 million and $335.4 million, respectively, from $150.3
million and $296.9 million, respectively, in the corresponding periods of
1997.
Product revenues consist solely of sales by Genzyme General. Product
revenues for the three months ended June 30, 1998 increased 17% to $153.8
million from $131.6 million in the comparable period of 1997. For the six
months ended June 30, 1998, product revenues increased 13% to $293.2
million from $259.8 million in the same period of 1997. The increase during
both periods was primarily due to the increased sales of Cerezyme[R]
enzyme.
Service revenues consist primarily of genetic testing services performed by
Genzyme General, sales of GTR's Carticel[TM] autologous cultured
chondrocyte ("Carticel[TM] AuCC") and Epicel[SM] services as well as sales
of GMO's SAGE[TM] differential gene expression technology ("SAGE[TM]")
services. For the three months ended June 30, 1998, service revenues
increased 10% to $18.6 million from $16.9 million for the corresponding
period of 1997. Service revenues were $36.9 million for the six months
ended June 30, 1998, an increase of 9% over service revenues of $33.7
million for the six months ended June 30, 1997. Service sales increased for
the three and six months ended June 30, 1998 due primarily to increased
sales of both GTR's Carticel[TM] AuCC and Epicel[TM] services and the
addition of sales of GMO's SAGE[TM] services in each period, offset in
part by slight reductions in genetic testing service revenue in each
period. GMO added $0.3 million and $1.2 million of service revenue in the
three and six months ended June 30, 1998, respectively, for which there
were no comparable amounts in the same periods of 1997.
International sales as a percentage of total product and service sales for
the three and six months ended June 30, 1998 increased to 41% in each such
period from 37% for each of the corresponding periods of 1997. The
increases in international sales in these periods are due primarily to
increases in the combined international sales of Cerezyme[R] enzyme and
Ceredase[R] enzyme of 27% in the three months ended June 30, 1998 and 29%
in the six months ended June 30, 1998, as well as increased European sales
of Carticel[TM] AuCC.
MARGINS AND OPERATING EXPENSES
Gross margins for the quarters ended June 30, 1998 and 1997 were 65% and
61%, respectively, and 64% and 60% for the six months ended June 30, 1998
and 1997, respectively, primarily due to increased sales of Cerezyme[R]
enzyme. Genzyme provides a broad range of health care products and
services,
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<PAGE> 29
resulting in a range of gross margins depending on the particular market
conditions of each product or service. Product margins for both the three
and six months ended June 30, 1998 were 68% compared to 65% for each of the
same periods of 1997. The increase in product margins in both periods is
primarily due to increased sales volume of Cerezyme[R] enzyme. Service
margins for the three months ended June 30, 1998 were 33%, as compared to
29% for the three months ended June 30, 1997, and 34% for the six months
ended June 30, 1998 as compared to 28% for the corresponding period of
1997. The increase in service margins for the three and six month periods
ended June 30, 1998 resulted primarily from increased service margins for
GTR attributable to higher sales volume and related efficiencies in the
manufacturing process of Carticel[TM] AuCC, the continued consolidation of
facilities and services relating to Genzyme General's genetic testing
services and the addition of GMO's SAGE[TM] service sales for which there
were no comparable amounts in the corresponding periods of 1997.
Selling, general and administrative ("SG&A") expenses and amortization of
intangibles for the three months ended June 30, 1998 were $62.0 million as
compared to $50.4 million for the same period in 1997, an increase of 23%.
SG&A expenses and amortization of intangibles for the six months ended June
30, 1998 increased 19% to $120.5 million from $101.0 million in the
corresponding period of 1997. The increase for both periods was due
primarily to increased staffing in support of the growth in several product
lines, and GMO's amortization of intangibles in the three and six months
ended June 30, 1998 of $3.0 million and $6.1 million, respectively, for
which there were no comparable amounts in the same periods of last year.
Research and development expenses for the three months ended June 30, 1998
were $27.0 million compared to $21.6 million for the three months ended
June 30, 1997, an increase of 25%, due primarily to additional research and
development expenses resulting from (i) the consolidation of the results of
ATIII LLC, the joint venture between Genzyme and GTC for the development
and commercialization of transgenic recombinant human antithrombin III
("ATIII"), for which there were no comparable amounts in the corresponding
period of 1997, and (ii) increased spending on GMO's SAGE[TM] services,
gene therapy and drug discovery programs. For the six months ended June 30,
1998, research and development expenses were $52.6 million compared to
$41.7 million for the same period of 1997, an increase of 26%, due
primarily to additional research and development expenses from the
consolidation of the results of ATIII LLC for which there were no
comparable amounts in the same period of 1997, increased spending on GMO's
SAGE[TM] services, gene therapy and drug discovery programs and increases
in GTR's research and development spending.
OTHER INCOME AND EXPENSES
Other income and expenses for the three months ended June 30, 1998 was a
net expense of $3.0 million compared to a net expense of $2.4 million in
the three months ended June 30, 1997. The increase is primarily due to
increased losses from unconsolidated affiliates. Equity in net loss of
Genzyme's unconsolidated affiliates increased from $2.6 million for the
three months ended June 30, 1997 to $6.3 million for the three months ended
June 30, 1998. The change is primarily due to (i) increased losses from GTC
and (ii) Genzyme's portion of the losses resulting from Genzyme's joint
venture with GelTex Pharmaceuticals, Inc. ("GelTex") for the development
and commercialization of RenaGel[R] non-absorbed phosphate binder ("RenaGel
LLC") which was established on June 17, 1997. These losses were offset by a
gain of $2.4 million on Genzyme's investment in GTC, due to issuance of
GTC's Common Stock, which was recorded in the three months ended June 30,
1998. For the three months ended June 30, 1998, Genzyme recorded minority
interest of $0.9 million, representing GTC's portion of the results of
ATIII LLC for the period then ended.
Other income and expenses for the six months ended June 30, 1998 was a net
expense of $7.7 million compared to a net expense of $4.2 million in the
six months ended June 30, 1997. The increase is primarily due to increased
losses from unconsolidated affiliates. Equity in net loss of Genzyme's
unconsolidated affiliates increased from $4.3 million for the six months
ended June 30, 1997 to $11.6 million for the six months ended June 30,
1998. The change is primarily due to increased losses from GTC and
Genzyme's portion of the losses of RenaGel LLC. These losses were offset in
part by a gain of $2.4 million on Genzyme's investment in GTC, due to
issuance of GTC's Common Stock, which was recorded in June 1998. For the
six months ended June 30, 1998, Genzyme recorded minority interest in the
results of ATIII LLC of $1.7 million, representing GTC's portion of the
losses of the joint venture for the first six months of 1998.
The tax provisions for the three and six months ended June 30, 1998 and
1997 vary from the U.S. statutory tax rate because of the provision for
state income taxes, nondeductible interest, the use of a foreign sales
corporation to effect overseas sales, nondeductible amortization of
intangibles, tax credits and Genzyme's share of the losses of
unconsolidated subsidiaries. The effective tax rate increased slightly to
40.2% and 41.1% for the three and six months ended June 30, 1998,
respectively, from 38.4% and 38.9%, respectively, for the corresponding
period in 1997 due to higher nondeductible intangible amortization and
losses from unconsolidated subsidiaries.
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<PAGE> 30
GENZYME GENERAL
REVENUES
Total revenues for the three and six months ended June 30, 1998 increased
14% and 11% to $169.0 million and $323.1 million, respectively, from $147.6
million and $292.2 million, respectively, in the corresponding periods of
1997.
Product revenues for the three and six months ended June 30, 1998 increased
17% and 13% to $153.8 million and $293.2 million, respectively, from $131.6
million and $259.8 million, respectively, in the comparable periods of
1997.
Revenues for the Therapeutics business unit consisted primarily of sales of
Cerezyme[R] enzyme and Ceredase[R] enzyme and increased 25% and 24% to
$102.5 million and $198.1 million for the three and six months ended June
30, 1998, respectively, from $81.8 million and $160.4 million,
respectively, in the corresponding periods in 1997 due to strong
international sales and the market launch of Cerezyme[R] enzyme in Japan.
Cerezyme[R] enzyme sales accounted for 83% of the combined revenues for the
two products during the second quarter of 1998. Combined revenues for
Cerezyme[R] enzyme and Ceredase[R] enzyme for the three and six months
ended June 30, 1998 were $98.6 million and $192.1 million, respectively, as
compared to $80.3 million and $156.7 million, respectively, for the same
periods of 1997. Genzyme General's results of operations are highly
dependent on these products, which together represented 64% and 66% of
product sales for the three and six months ended June 30, 1998,
respectively, compared to 61% and 60%, respectively, in the corresponding
periods of last year.
Revenues for the Surgical Products business unit increased 2% to $29.0
million in the three months ended June 30, 1998 from $28.4 million in the
corresponding period of last year due primarily to increased sales of
Seprafilm[R] bioresorbable membrane, offset in part by an 18% decrease in
sales of fluid management products. During the quarter, Genzyme obtained
reimbursement approval from the Japanese Ministry of Health and Welfare for
the use of Seprafilm[R] bioresorbable membrane in gynecological surgery.
Based on this approval, Genzyme General's marketing partner in Japan, Kaken
Pharmaceutical Co., Ltd., can begin selling Seprafilm[R]. In addition,
clinical trials in Japan of Seprafilm[R] for use in abdominal surgery are
progressing, and Genzyme expects to file for reimbursement approval in
Japan for this indication in late 1998 or early 1999. For the six months
ended June 30, 1998, Surgical Products' revenues declined 4% to $54.5
million from $57.0 million despite stronger sales of Seprafilm[R]
bioresorbable membrane due primarily to a 16% reduction in sales of fluid
management products in comparison to the same period of 1997.
Revenues for the Diagnostics business unit increased 2% to $31.3 million
for the three months ended June 30, 1998 from $30.7 million in the same
period of last year. For the six months ending June 30, 1998, Diagnostics'
revenues declined to $61.8 million from $62.3 million in the corresponding
period of 1997 due primarily to a reduction in genetic testing revenues,
offset in part by increased sales of diagnostic products.
-30-
<PAGE> 31
International sales as a percentage of total product and service sales for
the three and six months ended June 30, 1998 increased to 42% in each such
period from 37% for each of the corresponding periods of 1997. The increase
in international sales for the three and six months ended June 30, 1998 is
due primarily to increases in the international sales of Cerezyme[R]
enzyme.
MARGINS AND OPERATING EXPENSES
Gross margins for the quarters ended June 30, 1998 and 1997 were 66% and
63%, respectively, and 65% and 62% for the six months ended June 30, 1998
and 1997, respectively, due primarily to increased Cerezyme[R] enzyme
sales. Genzyme General provides a broad range of health care products and
services, resulting in a range of gross margins depending on the particular
market conditions of each product or service. Product margins for both the
three and six months ended June 30, 1998 were 68% compared to 65% for each
of the same periods of 1997. The increase in product margins in both
periods is primarily due to increased sales volume of Cerezyme[R] enzyme.
Genetic testing service margins for the three and six months ended June 30,
1998 increased to 39% and 40%, respectively, in comparison to 37% for both
of the corresponding periods of 1997, due primarily to the continued
consolidation of facilities and services.
SG&A expenses and amortization of intangibles for the three months ended
June 30, 1998 were $51.2 million as compared to $44.0 million for the same
period in 1997, an increase of 16%. SG&A expenses and amortization of
intangibles for the six months ended June 30, 1998 increased 13% to $99.5
million from $88.0 million in the corresponding period of 1997. The
increase for both periods was due primarily to increased staffing in
support of the growth in several product lines.
Research and development expenses for the three months ended June 30, 1998
were $21.1 million compared to $19.0 million for the three months ended
June 30, 1997, an increase of 11%, due primarily to $2.5 million of
additional research and development expenses resulting from the
consolidation of the results of ATIII LLC and for which there were no
comparable amounts in the same period of 1997. This increase was partially
offset by a decrease in Genzyme General's research and development spending
of $0.4 million. For the six months ended June 30, 1998, research and
development expenses were $39.5 million compared to $36.3 million for the
same period of 1997, an increase of 9%, due primarily to $5.0 million of
research and development expenses resulting from the consolidation of the
results of ATIII LLC for which there were no comparable amounts in the
corresponding period of 1997, offset partially by a decrease in Genzyme
General's research and development spending of $1.8 million.
OTHER INCOME AND EXPENSES
Other income and expenses for the three months ended June 30, 1998 was a
net other income of approximately $647,000 compared to net other income of
approximately $92,000 in the three months ended June 30, 1997. The increase
is primarily due to increased interest income due to higher average cash
balances, offset in part by increased losses from unconsolidated affiliates
and increased interest expense. Equity in net loss of Genzyme's
unconsolidated affiliates increased from $0.8 million in the three months
ended June 30, 1997 to $4.1 million for the three months ended June 30,
1998. The change is primarily due to increased losses from GTC and
Genzyme's portion of the losses of RenaGel LLC, which was established on
June 17, 1997. These losses were offset by a gain on Genzyme General's
investment in GTC, due to issuance of GTC's Common Stock, of approximately
$2.4 million which was recorded in the three months ended June 30, 1998.
Interest expense for the three months ended June 30, 1998 increased to $3.4
million from $1.7 million in the same period of 1997 due to additional
interest expense recorded resulting from the issuance of the GGD Notes in
May 1998. For the three months ended June 30, 1998, Genzyme recorded
minority interest of $0.9 million, representing GTC's portion of the
results of ATIII LLC for the period then ended.
Other income and expenses for the six months ended June 30, 1998 was a net
expense of approximately $464,000 compared to a net other income of
approximately $59,000 in the six months ended June 30, 1997. The change is
primarily due to increased losses from unconsolidated affiliates and
increased interest expense, offset in part by increased interest income due
to higher average cash balances. Equity in net loss of Genzyme's
unconsolidated affiliates increased from $0.9 million for the six months
ended June 30, 1997 to $7.0 million for the six months ended June 30, 1998.
The change is primarily due to increased losses from GTC and Genzyme's
portion of the losses of RenaGel LLC. These losses were offset by a $2.4
million gain on Genzyme General's investment in GTC, due to issuance of
GTC's common stock,
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<PAGE> 32
which was recorded in the three months ended June 30, 1998. Interest
expense for the six months ended June 30, 1998 increased to $5.3 million
from $4.0 million in the same period of 1997 due to additional interest
expense recorded as a result of the issuance of the GGD Notes in May 1998.
For the six months ended June 30, 1998 Genzyme recorded minority interest
in the results of ATIII LLC of $1.7 million, representing GTC's portion of
the losses of the joint venture for the first six months of 1998.
The tax provisions for the three and six months ended June 30, 1998 vary
from the U.S. statutory tax rate because of the provision for state income
taxes, the use of a foreign sales corporation to effect overseas sales,
nondeductible amortization of intangibles, tax credits and Genzyme
General's share of the losses of unconsolidated subsidiaries. The effective
tax rate for the three months ended June 30, 1998 was 37.9%, a slight
decrease from 38.1% for the same period of 1997. For the three months ended
June 30, 1998, tax benefits allocated from GTR and GMO of $3.4 million and
$2.9 million, respectively, reduced Genzyme General's tax rate to 22.4% and
in the corresponding period of 1997, tax benefits allocated from GTR and
GMO of $4.3 million and $0.2 million, respectively, reduced Genzyme
General's tax rate to 23.1%. The effective tax rate for the six months
ended June 30, 1998 increased slightly to 38.6% from 38.4% in the same
period of 1997. For the six months ended June 30, 1998, tax benefits
allocated from GTR and GMO of $7.8 million and $4.1 million, respectively,
reduced Genzyme General's tax rate to 22.1% and in the corresponding period
of 1997, tax benefits allocated from GTR and GMO of $8.8 million and $0.2
million, respectively, reduced Genzyme General's tax rate to 22.8%.
GENZYME TISSUE REPAIR
REVENUES
Service revenues for the three and six months ended June 30, 1998 were $4.3
million and $8.0 million, respectively, representing increases of 64% and
71% over the same periods in 1997. Sales of Carticel[TM] AuCC were $2.5
million and $5.0 million for the three and six months ended June 30, 1998
as compared to $1.6 million and $2.7 million for the three and six months
ended June 30, 1997, representing increases of 60% and 85%, respectively.
The growth in Carticel[TM] AuCC sales is primarily attributable to
increased market penetration and the number of orthopedic surgeons trained
in the technique as well as an increase in reimbursement and policy
coverage by insurance companies following approval by the FDA of GTR's
biologics license application in August 1997 for Carticel[TM] AuCC (the
"BLA"). Sales of the Epicel[TM] service increased 69% and 53% to $1.8
million and $3.0 million in the three and six months ended June 30, 1998,
respectively, from $1.1 million and $1.9 million in the same periods of
1997, in each case due to improvements in marketing and reimbursement
efforts.
MARGINS AND OPERATING EXPENSES
GTR's gross margins for the three and six months ended June 30, 1998 were
13% and 12%, respectively, as compared to the three and six months ended
June 30, 1997, when the cost of services sold exceeded revenues by 18% and
29%, respectively. These improvements in service margins are primarily
attributable to the higher sales volumes and efficiencies gained in the
manufacturing process.
SG&A expenses were $6.0 million and $12.3 million for the three and six
months ended June 30, 1998, respectively, as compared to $6.2 million and
$12.7 million in the comparable periods of last year, representing
decreases of 3% in both periods. The decreases are attributable to
decreased marketing costs for Carticel[TM] AuCC. GTR incurs direct SG&A
charges as well as an SG&A charge, based on actual amounts incurred, from
Genzyme General for SG&A work performed by Genzyme General on behalf of
GTR. In the three and six months ended June 30, 1998, $1.7 million and $3.4
million, respectively, of SG&A services were provided by Genzyme General as
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<PAGE> 33
compared to $2.0 million and $4.1 million for the same periods of 1997.
These changes were due to decreases in expenses incurred in connection with
the marketing of Carticel[TM] AuCC and the costs incurred in the first
quarter of 1997 related to filing of the BLA for Carticel[TM] AuCC with the
FDA.
Research and development expenses for the three and six months ended
June 30, 1998 were $2.8 million and $5.9 million, respectively, compared to
$2.2 million and $5.0 million in the comparable periods of 1997. The
increases were primarily due to spending on Carticel[TM] AuCC. In the three
and six months ended June 30, 1998, $2.3 million and $4.5 million,
respectively, of research and development services were provided to GTR by
Genzyme General, compared to $1.8 million and $3.7 million in the same
periods of 1997 due to increased support for the various Carticel[TM]
programs.
OTHER INCOME AND EXPENSES
Interest income was $0.2 million for both the three months ended June 30,
1998 and June 30, 1997 and increased to $0.7 million for the six months
ended June 30, 1998 from $0.4 million for the same period of 1997. These
increases were due primarily to higher average cash balances during the
first quarter of 1998.
Interest expense was $0.7 million and $1.5 million for the three and six
months ended June 30, 1998, respectively, as compared to $0.9 million and
$1.2 million for the same periods of 1997. The changes in interest expense
were the result of interest and accretion of the conversion feature related
to the March 1997 addition of $13.0 million of debt from the GTR Note.
On October 1, 1996, Diacrin/Genzyme LLC was established as a joint venture
between GTR and Diacrin, Inc. to develop and commercialize products and
processes using porcine fetal cells for the treatment of Parkinson's
disease and Huntington's disease in humans. Under the terms of the joint
venture agreement, GTR provided 100% of the initial $10.0 million of the
funding requirements and will provide 75% of the next $40.0 million of
funding requirements for products to be developed by the joint venture.
Thereafter, all costs will be shared equally by the two parties. In the
three and six months ending June 30, 1998, GTR provided $1.4 million and
$3.4 million, respectively, of funding to, and realized net losses of $1.7
million and $3.6 million, respectively, from the joint venture as compared
to funding of $2.3 million and $4.1 million, respectively, and net losses
of $1.8 million and $3.4 million, respectively, for the corresponding
periods in 1997. The decreased funding is due primarily to the reduction of
GTR's funding obligation of the expenses incurred by Diacrin/Genzyme LLC
from 100% to 75%.
GENZYME MOLECULAR ONCOLOGY
REVENUES
GMO recorded service revenues of $0.3 million and $1.2 million for the
three and six months ended June 30, 1998, respectively. Service revenues
consisted of SAGE[TM] service contracts primarily with third parties. GMO
also recorded research and development revenues of $1.4 million and $3.3
million in the three and six months ended June 30, 1998, respectively, as
compared to no revenues in the corresponding periods in 1997. These
revenues consisted of gene therapy research and development contracts with
strategic partners and work performed on behalf of StressGen/Genzyme LLC.
MARGINS AND OPERATING EXPENSES
For the three and six months ended June 30, 1998, GMO recorded cost of
revenues of $1.1 million and $2.3 million, respectively. There were no
similar amounts in the corresponding periods in 1997. Cost of revenues
consisted of work performed related to the development of gene therapies
on behalf of StressGen/Genzyme LLC, as well as development efforts
attributable to gene therapy and SAGE[TM] contracts with third parties.
GMO recorded $2.0 million and $3.2 million of SG&A expenses in the three
and six months ended June 30, 1998, respectively, as compared to $0.2 and
$0.3 million in the comparable periods in 1997. The increases from 1997 are
due primarily to increased administrative support corresponding with the
growth of GMO's business in the areas of gene therapy and drug discovery.
The increases are also attributable to legal fees related to patents.
Research and development expenses incurred by GMO in the three and six
months ended June 30, 1998 were $2.2 million and $5.5 million,
respectively, compared to $1.0 million and $1.5 million in the same periods
of 1997. The increases in research and development costs relate to
increases in research personnel and other costs associated with the
continued development of GMO's drug discovery, gene therapy, and SAGE[TM]
programs.
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<PAGE> 34
GMO's amortization of intangibles for the three and six months ended June
30, 1998 were $3.0 million and $6.1 million, respectively, as compared to
$0.2 million during the same periods in 1997. Amortization of intangibles
is attributable to certain intangible assets acquired in connection with
the acquisition of PharmaGenics on June 18, 1997.
In the second quarter of 1997, GMO recorded a $7.0 million charge resulting
from the value assigned to PharmaGenics programs which were still in the
developmental stage and for which there was no alternative use. There were
no similar amounts in 1998.
OTHER INCOME AND EXPENSES
Interest income and interest expense were $0.2 million and $1.1 million,
respectively, for the three months ended June 30, 1998, and were $0.5
million and $2.3 million, respectively, for the six months ended June 30,
1998. In the comparable periods in 1997, GMO's interest expense was
$17,000. The interest income results from higher average cash balances due
to the issuance of the GMO Debentures. The interest expense consists of
interest and the related accretion of the conversion feature of the GMO
Debentures.
On July 31, 1997, StressGen/Genzyme LLC was established as a joint venture
among Genzyme, StressGen and CMDF to develop stress gene therapies for the
treatment of cancer. GMO recorded an equity in the loss of
StressGen/Genzyme LLC of $0.5 million and $1.0 million in the three and six
months ended June 30, 1998, respectively.
GMO recorded a tax benefit of $0.7 million and $1.3 million for the three
and six months ended June 30, 1998, respectively, from the amortization of
the deferred tax liability established upon the acquisition of
PharmaGenics.
LIQUIDITY AND CAPITAL RESOURCES
GENZYME CORPORATION AND SUBSIDIARIES
As of June 30, 1998, Genzyme had cash, cash equivalents, and short- and
long-term investments of $509.5 million, an increase of $263.2 million from
December 31, 1997. Operating and financing activities provided $50.6
million and $244.0 million of cash, respectively, investing activities used
$88.9 million and fluctuations in exchange rates caused a reduction in cash
of $1.9 million. In the six months ended June 30, 1998, financing
activities provided $18.0 million of cash proceeds from the exercise of
stock options and $243.7 million from the issuance of debt, net of
underwriters' fees and debt offering costs of approximately $6.3 million,
and used $19.1 million for the repayment of debt and capital lease
obligations. At June 30, 1998, $100.0 million was outstanding under the
Revolving Credit Facility, of which $82.0 million was allocated to Genzyme
General and $18.0 million was allocated to GTR. In the six months ended
June 30, 1998, investing activities provided $2.0 million of cash from the
repayment of loans by affiliates and $0.6 million from the sale of
property, plant and equipment. Investing activities used $57.4 million of
cash for the investment portfolio; $18.1 million of cash to fund capital
expenditures; $7.1 million of cash to fund Genzyme's investments in joint
ventures; $8.3 million of cash to fund acquisitions for the Diagnostics
business unit's genetic testing services group; and $0.5 million to fund
other noncurrent assets.
In May 1998, Genzyme completed the private placement of the GGD Notes
resulting in net proceeds (after giving effect to the initial purchasers'
discount and offering costs) to Genzyme of $243.7 million. The GGD Notes
bear interest at 5.25% per annum and interest is payable semi-annually on
June 1 and December 1 of each year, commencing on December 1, 1998. The GGD
Notes are convertible, at any time at or before maturity (unless previously
redeemed) into shares of GGD Stock at a conversion price of $39.60 per
share, subject to adjustment in certain events. The GGD Notes may not be
redeemed prior to June 10, 2001 and are redeemable, subject to certain
subordination provisions, on such date and thereafter at the option of
Genzyme, as a whole or from time to time in part, at the following prices
(expressed as percentages of the principal amount) plus accrued interest
to, but not including, the redemption date: 102.63% if redeemed on or
before May 31, 2002; 101.75% if redeemed between June 1, 2002 and May 31,
2003; 100.88% if redeemed between June 1, 2003 and May 31, 2004; and 100%
if redeemed on or after June 1, 2004.
GENZYME GENERAL
As of June 30, 1998, Genzyme had cash, cash equivalents, and short- and
long-term investments of $471.2 million, an increase of $278.0 million from
December 31, 1997. Operating and financing activities provided $74.0
million and $247.7 million of cash, respectively, investing activities used
$109.4 million and fluctuations in exchange rates caused a reduction in
cash of $1.9 million. In the six months ended June 30, 1998, financing
activities provided
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<PAGE> 35
$16.7 million of cash proceeds from the exercise of stock options and
$243.7 million from the issuance of the GGD Notes, net of underwriters'
fees and debt offering costs of approximately $6.3 million, and used $14.1
million for the repayment of debt and capital lease obligations. At June
30, 1998, $82.0 million of funds allocated to Genzyme General under the
Revolving Credit Facility remained outstanding. In the six months ended
June 30, 1998, investing activities provided $2.0 million of cash from the
repayment of loans by affiliates and $0.6 million from the sale of
property, plant and equipment. Investing activities used a net of $65.4
million of cash for the investment portfolio; $34.0 million of cash to fund
capital expenditures; $3.7 million of cash to fund Genzyme's investments in
joint ventures; $8.3 million of cash to fund acquisitions for the
Diagnostics business unit's genetic testing services group; and $0.5
million to fund other noncurrent assets.
In May 1998, the GGD Notes and related cash proceeds, net of approximately
$6.3 million of underwriters' fees and debt offering costs were allocated
to Genzyme General.
In June 1998, the Genzyme Board increased the amount of the equity line of
credit available from Genzyme General to GTR from $13.0 million to $50.0
million. Under the terms of the equity line, GTR may draw down funds as
needed on a quarterly basis in exchange for GTR Designated Shares.
Management of Genzyme General believes that its available cash, investments
and cash flow from product and service sales will be sufficient to finance
its planned operations and capital requirements for the foreseeable future.
Although Genzyme General currently has substantial cash resources, it has
committed to utilize a portion of its resources for certain purposes, such
as completing the market introduction of Seprafilm[R] bioresorbable
membrane in the United States and Europe and developing other products on
behalf of a joint venture between Genzyme and Genzyme Development Partners,
L.P. ("GDP"), and for making certain payments to third parties in
connection with strategic collaborations. Genzyme General's cash resources
will also be diminished upon repayment of amounts borrowed, plus accrued
interest, under the Revolving Credit Facility and if Genzyme exercises its
option to acquire the partnership interests in GDP using cash to pay some
or all of the exercise price. In addition to these commitments, Genzyme
historically has pursued strategic acquisitions and collaborations with
complementary businesses as opportunities become available and expects to
seek additional acquisitions and collaborations in the future. Further, to
the extent the liabilities or contingencies of GTR and GMO affect Genzyme's
resources or financial condition, such liabilities or contingencies could
affect the financial condition or results of operations of Genzyme General.
As a result of the foregoing, Genzyme may have to obtain additional
financing. There can be no assurance that such financing will be available
on terms reasonably acceptable to Genzyme, if at all.
GENZYME TISSUE REPAIR
As of June 30, 1998, GTR had cash, cash equivalents and short-term
investments of $28.5 million, a decline of $3.4 million from December 31,
1997. In the six months ended June 30, 1998, GTR used $17.5 million of cash
for operations. Investing activities provided $20.6 million of cash which
consisted of $16.5 million from the transfer of property to Genzyme General
and $7.5 million from the sale and maturity of investments, offset by $3.4
million used to fund GTR's investment in Diacrin/Genzyme LLC. Financing
activities provided $1.2 million of cash which included $1.3 million of
cash proceeds from employee stock plans.
As of June 30, 1998, $18.0 million of funds allocated to GTR in December
1996 under the Revolving Credit Facility remained outstanding.
Management of GTR believes its available cash and investments will be
sufficient to finance planned operations and capital requirements through
1998. In June 1998, the Genzyme Board increased the amount of the equity
line of credit available from Genzyme General to GTR from $13.0 million to
$50.0 million. Under the terms of the equity line, GTR may draw down funds
as needed on a quarterly basis in exchange for GTR Designated Shares. The
rate of exchange will be determined by dividing the draw down amount by the
average market value of a share of GTR Stock during the 20 trading days
prior to the date the funding is drawn down. Management of GTR does not
anticipate that it will need to draw down funds from the equity line until
1999. GTR may need to raise significant additional capital in order to
continue operations at current levels beyond 1999. GTR's plans to raise
additional capital include the consideration of the sale of additional
equity securities, additional borrowings, strategic alliances with third
parties to fund further development and marketing of Carticel(TM) AuCC and
TGF[beta-2] for the treatment of chronic skin ulcers and other business
transactions that would generate capital resources to assure continuation
of GTR's operations and research programs. If these initiatives are not
successful, GTR may be required to delay, scale back or eliminate certain
of its programs, or to license third parties to commercialize technologies
or products that GTR would otherwise undertake itself.
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<PAGE> 36
GENZYME MOLECULAR ONCOLOGY
As of June 30, 1998, GMO had cash, cash equivalents, and short- and
long-term investments of $9.8 million, a decrease of $11.4 million from
December 31, 1997. GMO used $5.9 million for operations. Financing
activities used $4.9 million of cash, which was primarily the repayment of
$5.0 million which had been allocated to GMO under the Revolving Credit
Facility. GMO also has $5.0 million available under an equity line of
credit (the "GMO Equity Line") from Genzyme General.
Management of GMO currently believes that existing cash balances, revenues
generated from SAGE[TM] agreements, committed research funding from
collaborators and cash available for allocation to GMO from Genzyme General
pursuant to the GMO Equity Line will enable GMO to maintain its current and
planned operations through 1999. In April 1998, GMO filed with the
Securities and Exchange Commission an amended registration statement (which
has not yet become effective) on Form S-3 covering the initial public
offering of 3,450,000 shares of GMO Stock (including 450,000 shares
issuable upon exercise of the underwriters' over-allotment option). There
can be no assurance, however, that the initial public offering of GMO Stock
will be completed. Upon successful completion of the offering, the GMO
Equity Line will terminate. Management of GMO anticipates that if the
initial public offering is completed, the proceeds from the offering,
together with GMO's existing cash balances, revenues from SAGE[TM]
agreements and committed research funding from collaborators would be
sufficient to fund GMO's operations through the end of 1999. Substantial
additional funds will be required to complete development and
commercialization of GMO's products and services (other than SAGE[TM]
services). In addition, GMO's cash requirements may vary materially from
those now planned as a result of numerous factors, including progress of
GMO's research and development programs, achievement of milestones under
strategic alliance arrangements, the ability of GMO to establish and
maintain additional strategic alliances and licensing arrangements, the
progress of development efforts of GMO's strategic partners, competing
technological and market developments, the costs involved in enforcing
patent claims and other intellectual property rights and the cost and
timing of regulatory approvals. Insufficient funds may require GMO to
delay, scale back or eliminate certain of its programs or to license third
parties to commercialize technologies or products that GMO would otherwise
undertake itself.
YEAR 2000
Many computer systems experience problems handling dates beyond the year
1999. Therefore, some computer hardware and software will need to be
modified prior to the year 2000 in order to remain functional. The Company
is assessing the internal readiness of its computer systems for handling
the year 2000. The Company expects to implement successfully the systems
and programming changes necessary to address year 2000 issues, and does not
believe that the cost of such actions will have a material effect on the
Company's results of operations or financial condition. There can be no
assurance, however, that there will not be a delay in, or increased costs
associated with, the implementation of such changes, and the Company's
inability to implement such changes could have an adverse effect on future
results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP 98-5. SOP 98-5
requires all costs of start-up activities (as defined by the SOP) to be
expensed as incurred. Genzyme has not assessed the impact of SOP 98-5 on
its consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS 133.
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging
activities. SFAS 133 requires companies to recognize all derivatives as
either assets or liabilities, with the instruments measured at fair value.
The accounting for changes in fair value, gains or losses, depends on the
intended use of the derivative and its resulting designation. The statement
is effective for all fiscal quarters of fiscal years beginning after June
15, 1999. Genzyme will adopt SFAS 133 by January 1, 2000. Genzyme is
evaluating SFAS 133 to determine its impact on its consolidated financial
statements.
SUBSEQUENT EVENTS -- GENZYME GENERAL
On July 1, 1998, Genzyme completed the sale of the primary assets of its
research products business to TECHNE. The purchase price consisted of $24.8
million in cash, approximately 987,000 shares of TECHNE common stock, and
royalties on TECHNE's biotechnology group sales for the next five years.
Royalty income will be recorded as earned.
On July 17, 1998, Genzyme made an equity investment in Pharming Group N.V.,
a Dutch publicly traded company, of approximately $14.0 million at NLG
33.33 per share for a total of 852,307 shares of Pharming Group N.V. common
stock. The investment will be accounted for under the cost method of
accounting.
ITEM 3. QUANTITATIVE AND QUALITATIVE ANALYSIS OF MARKET RISK
Not applicable.
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GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, JUNE 30, 1998
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The information concerning the GGD Notes set forth in Part I, Item 2
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the second paragraph under the heading "Liquidity and Financial
Resources -- Genzyme Corporation and Subsidiaries" is incorporated herein by
reference. The GGD Notes were sold to Credit Suisse First Boston, Cowen &
Company and Goldman, Sachs & Co. (the "Initial Purchasers"). Genzyme believes
that the sale of the GGD Notes to the Initial Purchasers qualifies as a
transaction by an issuer not involving a public offering within the meaning of
Section 4(2) of the Securities Act (the "Act") based on the manner of offering
(a negotiated sale to a limited number of "qualified institutional buyers" (as
defined in Rule 501 of the Act) without general solicitation) and the
purchasers' financial status, investment experience and investment intent, as
represented to Genzyme.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
I. The Company held an annual meeting of stockholders on May 28, 1998.
The following represents the results of the voting on proposals
submitted to a vote of stockholders at such meeting:
a. Proposal to elect two directors for a term of office expiring
in 2001:
Nominee
-------
Henry E. Blair Number of Votes
---------------------------
For Withheld
---------- ----------
GGD 66,238,364 1,235,712
GTR* 5,906,226 67,270
GMO** 207,634 410
---------- ----------
Total 72,352,224 1,303,392
Nominee
-------
Douglas A. Berthiaume Number of Votes
---------------------------
For Withheld
---------- ----------
GGD 66,246,393 1,227,683
GTR* 5,907,360 66,135
GMO** 208,044 0
---------- ----------
Total 72,361,797 1,293,818
b. Proposal to amend the Company's 1990 Employee Stock Purchase
Plan (the "1990 ESPP") to increase the number of shares of GGD Stock
available for issuance under the 1990 ESPP by 250,000 shares.
<TABLE>
<CAPTION>
Number of Number of Number of Votes Number of
Votes for Votes Against Abstaining Broker Non-Votes
---------- ------------- --------------- ----------------
<S> <C> <C> <C> <C>
GGD 59,830,581 7,449,759 193,735 -
GTR* 5,034,170 907,261 32,065 -
GMO** 206,658 876 509 -
---------- --------- -------
Total 65,071,409 8,357,896 226,309 -
</TABLE>
----------------
* Represents the actual number of GTR shares voted multiplied by
.33
** Represents the actual number of GMO shares voted multiplied by
.25
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<PAGE> 38
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, JUNE 30, 1997
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (CONTINUED)
c. Proposal to amend the 1990 ESPP to increase the number of shares
of GTR Stock available for issuance under the 1990 ESPP by 350,000
shares.
<TABLE>
<CAPTION>
Number of Number of Number of Votes Number of
Votes for Votes Against Abstaining Broker Non-Votes
---------- ------------- --------------- ----------------
<S> <C> <C> <C> <C>
GGD 60,052,906 7,222,497 198,672 -
GTR* 5,136,999 802,094 34,402 -
GMO** 206,658 876 509 -
---------- --------- -------
Total 65,396,563 8,025,467 233,583 -
</TABLE>
d. Proposal to approve the Company's 1998 Director Stock Option
Plan.
<TABLE>
<CAPTION>
Number of Number of Number of Votes Number of
Votes for Votes Against Abstaining Broker Non-Votes
---------- ------------- --------------- ----------------
<S> <C> <C> <C> <C>
GGD 47,532,455 17,759,999 2,181,621 -
GTR* 4,478,395 1,441,784 53,316 -
GMO** 205,715 2,195 132 -
---------- ---------- --------
Total 52,216,565 19,203,978 2,235,069 -
</TABLE>
----------------
* Represents the actual number of GTR shares voted multiplied by
.33
** Represents the actual number of GMO shares voted multiplied by
.25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Indenture, dated as of May 22, 1998, between Genzyme
and State Street Bank and Trust Company, as Trustee,
including the form of Note. Filed as Exhibit 4.3 to
Genzyme's Registration Statement on Form S-3 (File
No. 333-59513) and incorporated herein by reference.
4.2 Registration Rights Agreement, dated as of May 19,
1998, among Genzyme, Credit Suisse First Boston
Corporation, Goldman, Sachs & Co. and Cowen &
Company. Filed as Exhibit 4.4 to Genzyme's
Registration Statement on Form S-3 (File No.
333-59513) and incorporated herein by reference.
4.3 Purchase Agreement, dated as of May 19, 1998, among
Genzyme, Credit Suisse First Boston Corporation,
Goldman, Sachs & Co. and Cowen & Company. Filed as
Exhibit 4.5 to Genzyme's Registration Statement on
Form S-3 (Filed No. 333-59513) and incorporated
herein by reference.
10.1 Second Amendment to Credit Agreement dated as of
April 15, 1998 by and among Genzyme and those of
its subsidiaries party thereto, Fleet National Bank,
as Administrative Agent, BankBoston, as Documentation
Agent, and the lenders identified on the signature
pages thereto. Filed herewith.
27.1 Financial Data Schedules for Genzyme for the six
months ended June 30, 1998 (for EDGAR filing purposes
only). Filed herewith.
27.2 Financial Data Schedules for Genzyme for the six
months ended June 30, 1997 (for EDGAR filing purposes
only). Filed herewith.
(b) Report on Form 8-K
On May 20, 1998, Genzyme Corporation filed a Current Report on
Form 8-K to announce that it had entered into a purchase
agreement for a private placement of $250.0 million aggregate
principal amount of the GGD Notes.
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<PAGE> 39
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, JUNE 30, 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENZYME CORPORATION
DATE: August 14, 1998 By: /s/ David J. McLachlan
---------------------------------------
David J. McLachlan
Duly Authorized Officer and
Executive Vice President, Finance;
Chief Financial Officer
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<PAGE> 40
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, JUNE 30, 1998
EXHIBIT INDEX
Exhibit
No. Description Page No.
- ------- ----------- --------
4.1 Indenture, dated as of May 22, 1998, between Genzyme
and State Street Bank and Trust Company, as Trustee,
including the form of Note. Filed as Exhibit 4.3 to
Genzyme's Registration Statement on Form S-3 (File
No. 333-59513) and incorporated herein by reference.
4.2 Registration Rights Agreement, dated as of May 19,
1998, among Genzyme, Credit Suisse First Boston
Corporation, Goldman, Sachs & Co. and Cowen &
Company. Filed as Exhibit 4.4 to Genzyme's
Registration Statement on Form S-3 (File No.
333-59513) and incorporated herein by reference.
4.3 Purchase Agreement, dated as of May 19, 1998, among
Genzyme, Credit Suisse First Boston Corporation,
Goldman, Sachs & Co. and Cowen & Company. Filed as
Exhibit 4.5 to Genzyme's Registration Statement on
Form S-3 (Filed No. 333-59513) and incorporated
herein by reference.
10.1 Second Amendment to Credit Agreement dated as of
April 15, 1998 by and among Genzyme and those of its
subsidiaries party thereto, Fleet National Bank as
Administrative Agent, BankBoston, as Documentation
Agent, and the lenders identified on the signature
pages thereto. Filed herewith.
27.1 Financial Data Schedules for Genzyme for the six
months ended June 30, 1998 (for EDGAR filing purposes
only). Filed herewith.
27.2 Financial Data Schedules for Genzyme for the six
months ended June 30, 1997 (for EDGAR filing purposes
only). Filed herewith.
-40-
<PAGE> 1
EXHIBIT 10.1
SECOND AMENDMENT TO CREDIT AGREEMENT
SECOND AMENDMENT to Credit Agreement ("Second Amendment") dated as of April
15, 1998 among and between Genzyme Corporation (the "Company"); each of the
Subsidiaries of the Company identified under the caption "Subsidiary Guarantors"
on the signature pages hereto; each of the Lenders identified under the caption
"Lenders" on the signature pages hereto (each a "Lender" and collectively, the
"Lenders"); Fleet National Bank ("Fleet") as administrative agent for the
Lenders (the "Administrative Agent"); and BankBoston ("BankBoston") as
documentation agent for the Lenders (the "Documentation Agent").
Reference is made to the Credit Agreement dated as of November 14, 1996, as
amended, among and between the Company, the Subsidiary Guarantors, the Lenders,
the Administrative Agent and the Documentation Agent, pursuant to which the
Lenders furnished to the Company a $225,000,000 revolving line of credit.
Capitalized terms used in this Second Amendment have the meanings given such
terms in the Credit Agreement, as amended hereby, except as provided otherwise
herein.
The Company has requested that the Credit Agreement be amended to establish
the basis for the issuance of subordinated debt by the Company and to amend
certain financial covenants. Under Section 12.5 of the Agreement, to be
effective, this Second Amendment must be signed by the Company, the
Administrative Agent and the Lenders constituting the Required Lenders.
1. Amendment to Section 1.1 - (Certain Defined Terms). Section 1.1 of the
Credit Agreement is amended as follows:
(a) The following definition of "Capital Stock" is added between the
definitions "Capital Lease Obligations" and "Cash Equivalents":
"Capital Stock" shall mean capital stock of the Company that does not
rank prior, as to the payment of dividends or as to the distribution
of assets upon any voluntary or involuntary liquidation, dissolution
or winding up of the Company, to shares of capital stock of any other
class of the Company.
(b) Intentionally omitted.
(c) The definition of Consolidated Operating Income is deleted and the
following is substituted in place thereof:
"Consolidated Operating Income" shall mean, for any period, the
Consolidated Net Income of the Company for such period, provided,
however, that, to the extent the following items have been included in
determining Consolidated Net Income, they shall NOT be considered in
computing Consolidated Operating Income: provision for income taxes,
interest expense, equity in the operating results of unconsolidated
subsidiaries (including partnerships, joint ventures and Affiliates
but only to the extent that such results represent noncash,
nonoperating
1
<PAGE> 2
items) and other non-operating, non-cash items including, but not limited
to, write-off of acquired technology or acquired, in-process research and
development which, in accordance with GAAP, must be charged to income.
Furthermore, all charges arising from the acquisition of Neozyme II
Corporation and/or Deknatel Snowden Pencer, Inc. which are included in the
determination of Consolidated Net Income for any period shall be excluded
from the computation of Consolidated Operating Income whether such charges
be of a cash or non-cash nature.
(d) The following definition of "Fundamental Change" is added between the
definitions "Federal Funds Rate" and "GAAP":
"Fundamental Change" shall mean any of the following:
(i) a "person" or "group" (within the meaning of Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), becoming the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act) of Voting Shares of the Company entitled to exercise
more than 50% of the total voting power of all outstanding Voting Shares
of the Company (including any right to acquire Voting Shares that are not
then outstanding of which such person or group is deemed the beneficial
owner); or
(ii) a change in the Board of Directors in which the individuals who
constituted the Board of Directors at the beginning of the two-year period
immediately preceding such change (together with any other director whose
election by the Board of Directors or whose nomination for election by the
shareholders of the Company was approved by a vote of at least two-thirds
of the directors then in office who either were directors at the beginning
of such period or whose election or nomination for election was previously
so approved) cease for any reason to constitute a majority of the directors
then in office; or
(iii) any consolidation of the Company with, or merger of the Company into,
any other Person, any merger of another Person into the Company, or any
sale or transfer of all or substantially all of the assets of the Company
to another Person (other than (w) a merger which does not result in any
reclassification, conversion, exchange or cancellation of outstanding
shares of Capital Stock, (x) a merger which is effected solely to change
the jurisdiction of incorporation of the Company, (y) any consolidation
with or merger of the Company into a Wholly Owned Subsidiary of the
Company, or any sale or transfer by the Company of all or substantially all
of its assets to one or more of its Wholly Owned Subsidiaries, in any one
transaction or a series of transactions, provided, in any such case, that
the resulting corporation or each such Wholly Owned Subsidiary assumes the
Obligations under the Loan Documents; or (z) a merger or consolidation in
which the holders of the Company's Voting Shares immediately prior to such
event
2
<PAGE> 3
continue to hold more than 50% of the Voting Shares outstanding
immediately after such event).
(e) The definition of "Net Equity Proceeds" is deleted and the following is
substituted in place thereof:
"Net Equity Proceeds" shall mean the aggregate amount of all cash
payments and the fair market value of any non-cash consideration
received by the Company and its Subsidiaries directly or indirectly in
connection with any Investment made as a capital contribution to
equity to the Company and its Subsidiaries including upon conversion
of Subordinated Debt into equity of the Company or any Subsidiary;
provided that Net Equity Proceeds shall be net of the amount of any
legal expenses, commissions other fees and expenses paid by the
Company and its Subsidiaries to any non-Affiliated person in
connection with such Investment.
(f) The definition of "Person" is deleted and the following is substituted
in place thereof:
"Person" shall mean any individual, corporation, company, voluntary
association, partnership, joint venture, trust, unincorporated
organization or government (or any agency, instrumentality or
political subdivision thereof) and shall include any syndicate or
group which would be deemed to be a "person" under Section 13(d)(3) of
the Exchange Act.
(g) The definition of "Subordinated Debt" is deleted and the following is
substituted in place thereof:
"Subordinated Debt" means (1) the Company's $13 million Convertible
Note, issued February 28, 1997, (2) the Company's $20 million of
Convertible Debentures, issued August 29, 1997, (3) unsecured
Indebtedness of the Company or a Subsidiary of the Company in an
aggregate principal amount outstanding at any time not in excess of
$250,000,000 which, by its terms, is explicitly subordinated to the
prior payment in full of the Obligations to at least the following
extent: (a) no payments of principal of (or premium, if any) or
interest on (or otherwise due in respect of) such Indebtedness may be
permitted for so long as any Default or Event of Default in the
payment of principal (or premium, if any) or interest on the Loans
exists; (b) in the event that any other Default or Event of Default
exists, upon notice by the Required Lenders, the Administrative Agent
shall have the right to give notice to the Company and the holders of
such Indebtedness (or agents therefor) of a payment blockage, and
thereafter no payments of principal of (or premium, if any) or
interest on (or otherwise due in respect of) such Indebtedness may be
made for a period of 179 days from the date of such notice unless,
prior to such time, such Default or Event of Default is cured or
waived; provided, however, that only one such notice of a payment
blockage shall be effective during any 365 consecutive day period and
provided, further, that no such other Default or Event of Default that
existed upon first delivery of such a notice shall be the basis for a
subsequent notice of payment blockage unless such Default or Event of
Default shall have been cured or waived for a
3
<PAGE> 4
period of 180 consecutive days; (c) such Indebtedness may not (i) provide for
payments of principal of such Indebtedness at the stated maturity thereof or by
way of a sinking fund applicable thereto or by way of any mandatory redemption,
defeasance, retirement or repurchase thereof by the Company or any Subsidiary
(including any redemption, retirement or repurchase which is contingent upon
events or circumstances but not including any exchange, conversion or payment
with equity or other Subordinated Debt), in each case prior to the Revolving
Credit Commitment Termination Date (without giving effect to any potential
extension pursuant to Section 2.9) or (ii) permit redemption or other retirement
(including pursuant to an offer to purchase made by the Company or any
Subsidiary) of such other Indebtedness at the option of the holder thereof prior
to the Revolving Credit Commitment Termination Date (without giving effect to
any potential extension pursuant to Section 2.9) other than by conversion to
Capital Stock or other equity of the Company or other Subordinated Debt;
provided, however, in the case of either (i) or (ii), such Indebtedness may
provide for payment prior to the stated maturity of such Indebtedness if any
event which causes, or (with the giving of any notice or the lapse of time or
both) permits the holder or holders of such Indebtedness (or a trustee or agent
on behalf of such holder or holders) to cause such Indebtedness to become due,
or to be prepaid (whether by redemption, purchase, offer to purchase or
otherwise), prior to its stated maturity would also cause a Default or an Event
of Default (subject, however, to the limitations of clauses (a), (b), (d) and
(e) hereof); (d) the terms of such Indebtedness shall provide, to the extent not
prohibited in the Trust Indenture Act of 1939, as amended, that no action to
enforce the payment thereof or to exercise any remedy with respect thereto shall
occur unless the holders of such Indebtedness (or agents therefor) give the
Administrative Agent notice of such default and thereafter no such enforcement
action or exercise of remedies shall occur until 180 days shall have elapsed
from the date of such notice without the cure or waiver of such default,
provided that such standstill period shall continue for as long as a Default or
an Event of Default under clause (a) above exists; provided, further, however,
that the restrictions described in this clause (d) shall not apply if the event
which gives rise to the right to enforce such payment or exercise such remedy
triggers a Default or an Event of Default (subject, however, to the limitations
of clauses (a), (b), (c), and (e); and (e) such Indebtedness shall further
provide that, upon any bankruptcy, insolvency, liquidation or similar case or
proceeding relative to the Company or any of its Subsidiaries, or upon the
realization of any amounts by the holders of the Indebtedness (or the agents
therefor) resulting from an action under clause (d) above, the Obligations shall
first be paid in full to the Administrative Agent or such payment shall have
been provided for to the satisfaction of the Required Lenders before any payment
or distribution is made to or retained by the holders of the Indebtedness (or
the agents therefor), (4) any other Indebtedness of the Company or its
Subsidiaries, incurred after the date hereof, containing subordination terms,
which are specifically consented to in writing by the Required Lenders and (5)
any refinancing of Subordinated Debt incurred pursuant to subsections (1), (2),
(3) or (4), in which (x) the principal amount of Subordinated Debt resulting
from such refinancing does not exceed the sum of (i) the principal amount of the
Subordinated Debt so refinanced plus (ii) customary fees and expenses incurred
in connection with such refinancing and (y) the Indebtedness resulting from such
refinancing satisfies the criteria for Subordinated Debt hereunder."
4
<PAGE> 5
(h) The following definition of "Voting Shares" is added between the
definition of "U.S. Person" and "Wholly Owned Subsidiary":
"Voting Shares" shall mean all outstanding shares of any class or
series (however designated) of Capital Stock entitled to vote generally in the
election of members of the Board of Directors of the Company.
2. Amendment to Section 9.9(c). Section 9.9(c) is amended to delete the
phrase "ratio of Consolidated Funded Debt to Consolidated EBITDA" as it appears
on the second and third lines therein and to insert the phrase "ratio of (a)
Consolidated Funded Debt less all cash and Cash Equivalents and Marketable
Investments of the Company and its Consolidated Subsidiaries in excess of
$125,000,000; to (b) Consolidated EBITDA" in lieu thereof.
3. Amendment to Section 10. Section 10 is amended to add the following
subparagraph (l) after subparagraph (k) (which subparagraph (k) also is amended
to add the word "or" at the end thereof):
"(l) Any Fundamental Change shall occur;"
4. Representations and Warranties. In order to induce the Agents and Lenders to
enter into this Second Amendment, the Company makes the following
representations and warranties, all of which shall survive the execution and
delivery of this Second Amendment:
(a) Each of the Company and the Subsidiary Guarantors has all requisite
corporate, partnership or other power and authority to execute, deliver and
perform its obligations under this Second Amendment and under the Credit
Agreement, as amended hereby. This Second Amendment has been duly authorized,
executed and delivered by the Company and each Subsidiary Guarantor, and does
not conflict with, violate or result in a breach of or require any consent under
any applicable law, rule or regulation or any of the terms of the charter or
by-laws (or equivalent constitutional documents) of any Obligor, any agreement
or instrument to which the Company or any Subsidiary is a party or to which any
of them or their Property is bound or to which any of them is subject. This
Second Amendment and the Credit Agreement, as amended hereby, constitute the
legal, valid and binding obligation of each Obligor enforceable against each
Obligor in accordance with its terms.
(b) On the date hereof each of the representations and warranties in the
Credit Agreement are true, accurate and complete in all material respects.
(c) Upon the execution and delivery of this Second Amendment, and the
satisfaction of each of the conditions precedent set forth in Section 4 of this
Second Amendment, no Default or Event of Default shall exist and be continuing.
5. Conditions Precedent. The agreements contained herein and the amendments
contemplated hereby shall become effective on the date (the "Effective Date")
when Company,
5
<PAGE> 6
the Required Lenders, and the Administrative Agent shall have executed this
Second Amendment and when each of the following conditions shall have been
fulfilled:
(a) Execution of Documents, Etc. This Second Amendment and any other
agreements, documents and instruments to be executed and/or delivered in
connection herewith (collectively the "Second Amendment Documents") shall have
been duly and properly authorized and executed by: the Company, the
Administrative Agent, and the Required Lenders and shall be in full force and
effect on and as of the Effective Date of this Second Amendment and all
representations and warranties of the Company hereunder shall continue to be
true, accurate and complete.
(b) Proceedings; Receipt of Documents. All requisite corporate action
and proceedings of the Company and the Subsidiary Guarantors in connection with
the execution and delivery of this Second Amendment and the other Second
Amendment Documents shall be satisfactory in form and substance to the
Administrative Agent and its counsel, and the Administrative Agent and its
counsel shall have received all information and copies of all documents,
including without limitation, records of requisite corporate action and
proceedings which the Administrative Agent or its counsel may have requested in
connection therewith, such documents where requested by the Administrative
Agent or its counsel to be certified by appropriate persons or governmental
authorities.
(c) Material Litigation. There shall be no pending or, to the best
knowledge of the Company, threatened litigation with respect to the Company or
any Subsidiary Guarantor before any court, arbitrator or governmental or
administrative body or agency which challenges or relates to (i) the
transactions contemplated hereby or (ii) the Loan Documents.
(d) Payment of Amendment Fee. Upon approval by the Required Lenders, the
Company shall pay to the Administrative Agent an amendment fee of five basis
points on the Revolving Credit Commitment of each of the Lenders that responds
either affirmatively or negatively in writing as required by the Administrative
Agent's request for approval of this Second Amendment dated April 8, 1998 on or
before 9:00 A.M. (E.S.T.) April 15, 1998 (the "Responding Lenders"). This
amendment fee shall be paid over by the Administrative Agent only to the
Responding Lenders in accordance with their respective Revolving Credit
Commitments.
6. Reaffirmation and Ratification of Existing Agreements, Etc. The Company
and the Subsidiary Guarantors each: (i) reaffirms and ratifies all the
Obligations to the Agents and the Lenders, in respect of the Credit Agreement,
as hereby amended, and the other Loan Documents, (ii) certifies that there are
no defenses, offsets or counterclaims to such Obligations as of the date
hereof, (iii) expressly acknowledges its continuing liability pursuant thereto,
and (iv) agrees that each of the Credit Agreement, as amended hereby, and the
other Loan Documents shall remain in full force and effect, enforceable against
the Company and Subsidiary Guarantors in accordance with its terms.
7. Miscellaneous.
6
<PAGE> 7
(a) This Second Amendment may be executed on separate counterparts by
the parties hereto, each of which when so executed and delivered shall be an
original, but all of which shall constitute one and the same agreement.
(b) This Second Amendment and the rights and obligations of the
parties hereunder shall be construed in accordance with and be governed by the
laws of the Commonwealth of Massachusetts (without giving effect to the
conflict of law principles thereof).
(c) The headings of the several sections of this Second Amendment are
inserted for convenience only and shall not in any way affect the meaning or
construction of any provision of this Second Amendment.
(d) This Second Amendment, together with the other Second Amendment
Documents, embodies the entire agreement and understanding among the parties
relating to the subject matter hereof and supersedes all prior proposals,
negotiation, agreements and understandings relating to such subject matter.
(e) This Second Amendment, together with the other Second Amendment
Documents, shall be deemed to be Loan Documents under the Credit Agreement.
(f) EACH OF THE OBLIGORS, THE AGENTS AND THE LENDERS HEREBY
IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND
ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING
TO THIS SECOND AMENDMENT, OR THE TRANSACTIONS CONTEMPLATED HEREBY.
(g) The Company shall pay on demand the reasonable costs and
expenses, including, without limitation, reasonable attorneys' fees and
expenses incurred, or which may be incurred by the Agents or the Lenders in
connection with the negotiation, documentation, administration and enforcement
of this Second Amendment.
7
<PAGE> 8
IN WITNESS WHEREOF, this Second Amendment has been duly executed and
delivered as a sealed instrument at Boston, Massachusetts as of the date first
above written.
THE COMPANY:
GENZYME CORPORATION
By: /s/ David J. McLachlan
-----------------------------------
Title: Executive Vice President -
Finance
SUBSIDIARY GUARANTORS:
DEKNATEL SNOWDEN PENCER, INC.
By: /s/ David J. McLachlan
-----------------------------------
Title: Vice President and Treasurer
GENZYME SURGICAL PRODUCTS
CORPORATION f/k/a DSP WORLDWIDE, INC.
By: /s/ John G. Schulte
-----------------------------------
Title: President
ALLSTON LANDING LIMITED PARTNERSHIP
By: Allston Landing Corporation,
its General Partner
By: /s/ David J. McLachlan
-----------------------------------
Title: Treasurer
ADMINISTRATIVE AGENT:
FLEET NATIONAL BANK
By: /s/ Kimberly Martone
-----------------------------------
Title: Vice President
DOCUMENTATION AGENT:
BANKBOSTON
By: /s/ [signature illegible]
------------------------------------
Title: Vice President
8
<PAGE> 9
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing Second Amendment to Credit Agreement
dated April , 1998.
Revolving Credit Commitment: FLEET NATIONAL BANK
$35,000,000.00 By: /s/ Kimberly Martone
-----------------------------
Title: Vice President
[Signature Page to Second Amendment to Credit Agreement
dated April , 1998]
<PAGE> 10
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing Second Amendment to Credit Agreement
dated April , 1998.
Revolving Credit Commitment: BANKBOSTON
$22,000,000.00 By: /s/ [signature illegible]
-----------------------------
Title: Vice President
[Signature Page to Second Amendment to Credit Agreement
dated April , 1998]
<PAGE> 11
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing Second Amendment to Credit Agreement
dated April , 1998.
Revolving Credit Commitment: BANK OF TOKYO-MITSUBISHI TRUST COMPANY
$13,000,000.00 By: /s/ Michael J. Cronin
-----------------------------
Title: Vice President
[Signature Page to Second Amendment to Credit Agreement
dated April , 1998]
<PAGE> 12
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing Second Amendment to Credit Agreement
dated April , 1998.
Revolving Credit Commitment: CREDIT LYONNAIS NEW YORK BRANCH
$13,000,000.00 By:
-----------------------------
Title:
[Signature Page to Second Amendment to Credit Agreement
dated April , 1998]
<PAGE> 13
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing Second Amendment to Credit Agreement
dated April , 1998.
Revolving Credit Commitment: THE FUJI BANK, LIMITED, NEW YORK BRANCH
$13,000,000.00 By:
-----------------------------
Title:
[Signature Page to Second Amendment to Credit Agreement
dated April , 1998]
<PAGE> 14
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing Second Amendment to Credit Agreement
dated April , 1998.
Revolving Credit Commitment: MELLON BANK, N.A.
$13,000,000.00 By: /s/ [signature illegible]
-----------------------------
Title: Vice President
[Signature Page to Second Amendment to Credit Agreement
dated April , 1998]
<PAGE> 15
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing Second Amendment to Credit Agreement
dated April , 1998.
Revolving Credit Commitment: NATIONSBANK, N.A.
$13,000,000.00 By: /s/ Michael Sylvester
-----------------------------
Title: Vice President
[Signature Page to Second Amendment to Credit Agreement
dated April , 1998]
<PAGE> 16
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing Second Amendment to Credit Agreement
dated April , 1998.
Revolving Credit Commitment: REPUBLIC NATIONAL BANK OF NEW YORK
$13,000,000.00 By: /s/ Theodore R. Koemer
-----------------------------
Title: First Vice President
By: /s/ Jean-Pierre F. Diels
-----------------------------
Title: Executive Vice President
[Signature Page to Second Amendment to Credit Agreement
dated April , 1998]
<PAGE> 17
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing Second Amendment to Credit Agreement
dated April , 1998.
Revolving Credit Commitment: ABN AMRO BANK N.V.
$7,500,000.00 By: /s/ [signature illegible]
-----------------------------
Title: Vice President
By: /s/ [signature illegible]
-----------------------------
Title: Senior Vice President
[Signature Page to Second Amendment to Credit Agreement
dated April , 1998]
<PAGE> 18
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing Second Amendment to Credit Agreement
dated April , 1998.
Revolving Credit Commitment: BANK LEUMI USA
$7,500,000.00 By: /s/ [signature illegible]
-----------------------------
Title: Vice President
By: /s/ [signature illegible]
-----------------------------
Title: Vice President
[Signature Page to Second Amendment to Credit Agreement
dated April , 1998]
<PAGE> 19
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing Second Amendment to Credit Agreement
dated April , 1998.
Revolving Credit Commitment: THE BANK OF NOVA SCOTIA
$7,500,000.00 By: /s/ T.M. Pitcher
-----------------------------
Title: Authorized Signatory
[Signature Page to Second Amendment to Credit Agreement
dated April , 1998]
<PAGE> 20
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing Second Amendment to Credit Agreement
dated April , 1998.
Revolving Credit Commitment: CITIZENS BANK OF MASSACHUSETTS
$7,500,000.00 By: /s/ [signature illegible]
-----------------------------
Title: Vice President
[Signature Page to Second Amendment to Credit Agreement
dated April , 1998]
<PAGE> 21
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing Second Amendment to Credit Agreement
dated April , 1998.
Revolving Credit Commitment: CORESTATES BANK, N.A.
$7,500,000.00 By: /s/ [signature illegible]
-----------------------------
Title: Vice President
[Signature Page to Second Amendment to Credit Agreement
dated April , 1998]
<PAGE> 22
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing Second Amendment to Credit Agreement
dated April , 1998.
Revolving Credit Commitment: CREDIT SUISSE FIRST BOSTON
$7,500,000.00 By: /s/ Robert N. Finnery
-----------------------------
Title: Managing Director
By: /s/ James P. Moran
-----------------------------
Title: Director
[Signature Page to Second Amendment to Credit Agreement
dated April , 1998]
<PAGE> 23
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing Second Amendment to Credit Agreement
dated April , 1998.
Revolving Credit Commitment: KREDIETBANK, N.V.
$7,500,000.00 By:
-----------------------------
Title:
By:
-----------------------------
Title:
[Signature Page to Second Amendment to Credit Agreement
dated April , 1998]
<PAGE> 24
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing Second Amendment to Credit Agreement
dated April , 1998.
Revolving Credit Commitment: LTCB TRUST CO.
$7,500,000.00 By: /s/ [signature illegible]
-----------------------------
Title: Senior Vice President
[Signature Page to Second Amendment to Credit Agreement
dated April , 1998]
<PAGE> 25
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing Second Amendment to Credit Agreement
dated April , 1998.
Revolving Credit Commitment: THE NORTHERN TRUST COMPANY
$7,500,000.00 By: /s/ [signature illegible]
-----------------------------
Title: Vice President
[Signature Page to Second Amendment to Credit Agreement
dated April , 1998]
<PAGE> 26
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing Second Amendment to Credit Agreement
dated April , 1998.
Revolving Credit Commitment: THE SAKURA BANK, LIMITED
$7,500,000.00 By: /s/ Yasumasa Kikuchi
-----------------------------
Title: Senior Vice President
[Signature Page to Second Amendment to Credit Agreement
dated April , 1998]
<PAGE> 27
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing Second Amendment to Credit Agreement
dated April , 1998.
Revolving Credit Commitment: THE SANWA BANK, LIMITED
$7,500,000.00 By: /s/ Takayoshi Futae
-----------------------------
Title: Deputy General Manager
[Signature Page to Second Amendment to Credit Agreement
dated April , 1998]
<PAGE> 28
LENDERS:
The undersigned Lender, with the Revolving Credit Commitment set forth
herein, hereby enters into the foregoing Second Amendment to Credit Agreement
dated April , 1998.
Revolving Credit Commitment: THE SUMITOMO BANK, LIMITED,
NEW YORK BRANCH
$7,500,000.00 By: /s/ John C. Kissinger
-----------------------------
Title: Joint General Manager
[Signature Page to Second Amendment to Credit Agreement
dated April , 1998]
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR GENZYME CORPORATION FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND AS OF JUNE 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AS INCLUDED
IN THE FORM 10-Q FOR GENZYME CORPORATION DATED JUNE 30, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 306,296
<SECURITIES> 43,722
<RECEIVABLES> 137,749
<ALLOWANCES> 21,152
<INVENTORY> 135,788
<CURRENT-ASSETS> 671,602
<PP&E> 515,205
<DEPRECIATION> 129,796
<TOTAL-ASSETS> 1,574,937
<CURRENT-LIABILITIES> 132,705
<BONDS> 0
0
0
<COMMON> 1,029
<OTHER-SE> 1,046,296
<TOTAL-LIABILITY-AND-EQUITY> 1,574,937
<SALES> 330,048
<TOTAL-REVENUES> 335,425
<CGS> 94,923
<TOTAL-COSTS> 119,178
<OTHER-EXPENSES> 179,755
<LOSS-PROVISION> 3,234
<INTEREST-EXPENSE> 9,122
<INCOME-PRETAX> 35,439
<INCOME-TAX> 14,559
<INCOME-CONTINUING> 20,880
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,880
<EPS-PRIMARY> 0.40<F1>
<EPS-DILUTED> 0.39<F1>
<FN>
<F1>THE EARNING PER SHARE FIGURES PRESENTED ON THIS SCHEDULE REPRESENT EPS DATA
FOR NET INCOME ATTRIBUTABLE TO GENZYME GENERAL DIVISION COMMON STOCK ("GGD
STOCK"). GENZYME CORPORATION REPORTS EARNINGS BASED ON ITS THREE TRACKING
STOCKS, GGD STOCK, GENZYME TISSUE REPAIR COMMON STOCK ("GTR STOCK") AND GENZYME
MOLECULAR ONCOLOGY COMMON STOCK ("GMO STOCK"). THEREFORE, CONSOLIDATED EARNINGS
PER SHARE DATA IS NOT APPLICABLE. FOR THE SIX MONTHS ENDED JUNE 30, 1998,
GENZYME GENERAL HAD NET INCOME OF $56,138 AND NET INCOME PER SHARE OF GGD STOCK
- -- BASIC AND DILUTED OF $0.72 AND $0.70, RESPECTIVELY. NET LOSS FOR GTR FOR THE
SIX MONTHS ENDED JUNE 30, 1998, WAS $(21,775) OR $(1.08) PER SHARE OF GTR STOCK
- -- BASIC AND DILUTED. NET LOSS FOR GMO FOR THE SIX MONTHS ENDED JUNE 30, 1998,
WAS $(13,987) OR $(3.56) PER SHARE OF GMO STOCK -- BASIC AND DILUTED.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF GENZYME CORPORATION FOR THE THREE AND SIX
MONTHS ENDED JUNE 30, 1997 AND 1996 AND AS OF JUNE 30, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AS INCLUDED IN THE FORM
10-Q FOR GENZYME CORPORATION DATED JUNE 30, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 105,096
<SECURITIES> 47,243
<RECEIVABLES> 130,344
<ALLOWANCES> 9,400
<INVENTORY> 136,757
<CURRENT-ASSETS> 443,870
<PP&E> 488,654
<DEPRECIATION> 98,207
<TOTAL-ASSETS> 1,223,987
<CURRENT-LIABILITIES> 113,725
<BONDS> 0
0
0
<COMMON> 937
<OTHER-SE> 948,368
<TOTAL-LIABILITY-AND-EQUITY> 1,223,987
<SALES> 259,792
<TOTAL-REVENUES> 296,861
<CGS> 92,010
<TOTAL-COSTS> 116,296
<OTHER-EXPENSES> 147,250
<LOSS-PROVISION> 2,395
<INTEREST-EXPENSE> 5,255
<INCOME-PRETAX> 26,706
<INCOME-TAX> 13,070
<INCOME-CONTINUING> 13,636
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,636
<EPS-PRIMARY> 0.59<F1>
<EPS-DILUTED> 0.57<F1><F2><F3>
<FN>
<F1>Genzyme Corporation has one class of common stock which currently consists
of three series of common stock -- Genzyme General Division Common Stock ("GGD
Stock"), Genzyme Tissue Repair Division Common Stock ("GTR Stock") and Genzyme
Molecular Oncology Division Common Stock ("GMO Stock"). Earnings (loss) per
share is reported separately for each series of common stock. Net income per
share for GGD Stock has been restated to conform to SFAS 128. Primary and fully
diluted net income per share of GGD Stock for the three and six months ended
June 30, 1997 was historically reported as $0.30 per share and $0.57 per
share. For the three and six months ended June 30, 1997, primary EPS and
fully diluted EPS for GGD Stock were $0.30 and $0.57, respectively.
<F2> Net loss attributable to GTR Stock for the three and six months ended
June 30, 1997, computed to conform to SFAS 128 is the same as net loss per share
of GTR Stock for the relevant periods as computed under APB 15 as the inclusion
of certain potentially dilutive shares in the dilutive loss per share
calculation for each such period would have been anti-dilutive. Net loss
attributable to GTR Stock for the three and six months ended June 30, 1997 was
$(0.86) per share and $(1.76) per share, respectively.
<F3>Pro forma net loss attributable to GMO Stock for the three and six months
ended June 30, 1997 computed to conform to SFAS 128 is the same as pro forma net
loss per share of GMO Stock computed under APB 15 as the inclusion of certain
potentially dilutive securities in the pro forma dilutive loss per share
calculation for each such period would have bee anti-dilutive. Pro forma net
loss attributable to GMO Stock was $(2.14) per share and $(2.30) per share,
respectively.
</FN>
</TABLE>
