-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AsCcDvySGYTSHiluMH5GLuorYZLSaLQsy3Ly8CcesgdmU4BJChuK+tfh6TG5Phtz RkwDGKlnSl17yKslK7RymQ== 0000912057-00-024969.txt : 20000516 0000912057-00-024969.hdr.sgml : 20000516 ACCESSION NUMBER: 0000912057-00-024969 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENZYME CORP CENTRAL INDEX KEY: 0000732485 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 061047163 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-14680 FILM NUMBER: 636239 BUSINESS ADDRESS: STREET 1: ONE KENDALL SQ CITY: CAMBRIDGE STATE: MA ZIP: 02139 BUSINESS PHONE: 6172527500 MAIL ADDRESS: STREET 1: ONE KENDALL SQUARE CITY: CAMBRIDGE STATE: MA ZIP: 02139 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended MARCH 31, 2000 ------------------- 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 series of common stock as of April 30, 2000: Genzyme General Division Common Stock 84,804,000 ("GENZ Stock") 13,625,593 Genzyme Molecular Oncology Division Common Stock ("GZMO Stock") 14,902,895 Genzyme Surgical Products Division Common Stock ("GZSP Stock") Genzyme Tissue Repair Division Common Stock 28,658,735 ("GZTR Stock") GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, MARCH 31, 2000 NOTE REGARDING FORWARD-LOOKING STATEMENTS: This report on Form 10-Q contains forward-looking statements, including statements regarding our: - planned creation of a new division and a new publicly traded stock; - the planned acquisition of Biomatrix, Inc.; - the expected allocation of the new series of stock and composition of the merger consideration; - expected future revenues, operations and expenditures; and - projected cash needs. These statements are based upon the current assumptions of our management and are only expectations of future results. These statements are subject to risks and uncertainties, and our actual results may differ significantly from those that are described in this report on Form 10-Q. These risks and uncertainties include: - our ability to successfully complete preclinical and clinical development of our products and services; - our ability to manufacture sufficient amounts of our products for development and commercialization activities; - our ability to obtain and maintain adequate patent and other proprietary rights protection of our products and services; - the content and timing of decisions made by the FDA and other regulatory agencies; - the accuracy of our estimates of the size and characteristics of the markets to be addressed by our products and services; - market acceptance of our products and services; - our ability to obtain reimbursement for our products and services from third-party payors; - our ability to establish and maintain licenses, strategic collaborations and distribution arrangements; - the continued funding of our joint ventures; - the accuracy of our information regarding the products and resources of our competitors and potential competitors; - the likelihood that the regulatory and other approvals required to create a new division and to complete the Biomatrix acquisition will be obtained and the closing conditions for the merger will be satisfied. - conditions in financial markets relevant to the proposed merger and recapitalization; and - the operational integration of the other risks generally associated with mergers and recapitalizations. For a further description of these risks and other uncertainties, we encourage you to carefully read Exhibit 99.2, "Factors Affecting Future Operating Results," to our Annual Report on Form 10-K for the fiscal year ended December 31, 1999. NOTE REGARDING REFERENCES TO GENZYME DIVISIONS Throughout this Form 10-K, the words "we," "us," "our" and "Genzyme" refer to Genzyme Corporation and all of its operating divisions taken as a whole, and "our board of directors" refers to the board of directors of Genzyme Corporation. In addition, we refer to our four operating divisions as follows: - - Genzyme General Division = "Genzyme General;" - - Genzyme Molecular Oncology Division = "Genzyme Molecular Oncology;" - - Genzyme Surgical Products Division = "Genzyme Surgical Products;" and - - Genzyme Tissue Repair Division = "Genzyme Tissue Repair." We currently have four designated series of common stock. Each of these series is intended to reflect the value and track the performance of one of our divisions. We refer to each series of common stock by their Nasdaq trading symbols: - Genzyme General Division Common Stock = "GENZ Stock;" - Genzyme Molecular Oncology Division Common Stock = "GZMO Stock;" - Genzyme Surgical Products Division Common Stock = "GZSP Stock;" and - Genzyme Tissue Repair Division Common Stock = "GZTR Stock." NOTE REGARDING INCORPORATION BY REFERENCE The Securities and Exchange Commission ("SEC") allows us to disclose important information to you by referring you to other documents we have filed with the SEC. The information that we refer you to is "incorporated by reference" into this report on Form 10-Q. Please read that information. NOTE REGARDING TRADEMARKS GENZYME-Registered Trademark-, CEREZYME-Registered Trademark-, CEREDASE-Registered Trademark-, THYROGEN-Registered Trademark-, SEPRA FILM-Registered Trademark-, and CARTICEL-Registered Trademark- are registered trademarks of Genzyme. SAGE-TM-, AND EPICEL-TM- are trademarks of Genzyme. GENZYME-Registered Trademark- is a service mark of Genzyme, RENAGEL-Registered Trademark- is a registered trademark of GelTex Pharmaceuticals, INC. NEUROCELL-TM--PD is a trademark of Diacrin, INC. ALDURAZYME-TM- is a trademark of BioMarin/Genzyme LLC. GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, MARCH 31, 2000 TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO. ITEM 1. Financial Statements GENZYME GENERAL Unaudited, Combined Statements of Operations for the Three Months Ended March 31, 2000 and 1999........ Unaudited, Combined Balance Sheets as of March 31, 2000 and December 31, 1999.......................... Unaudited, Combined Statements of Cash Flows for the Three Months Ended March 31, 2000 and 1999........ Notes to Unaudited, Combined Financial Statements...................................................... GENZYME MOLECULAR ONCOLOGY Unaudited, Combined Statements of Operations for the Three Months Ended March 31, 2000 and 1999........ Unaudited, Combined Balance Sheets as of March 31, 2000 and December 31, 1999.......................... Unaudited, Combined Statements of Cash Flows for the Three Months Ended March 31, 2000 and 1999........ Notes to Unaudited, Combined Financial Statements...................................................... GENZYME SURGICAL PRODUCTS Unaudited, Combined Statements of Operations for the Three Months Ended March 31, 2000 and 1999........ Unaudited, Combined Balance Sheets as of March 31, 2000 and December 31, 1999.......................... Unaudited, Combined Statements of Cash Flows for the Three Months Ended March 31, 2000 and 1999........ Notes to Unaudited, Combined Financial Statements...................................................... GENZYME TISSUE REPAIR Unaudited, Combined Statements of Operations for the Three Months Ended March 31, 2000 and 1999........ Unaudited, Combined Balance Sheets as of March 31, 2000 and December 31, 1999.......................... Unaudited, Combined Statements of Cash Flows for the Three Months Ended March 31, 2000 and 1999........ Notes to Unaudited, Combined Financial Statements...................................................... GENZYME CORPORATION AND SUBSIDIARIES Unaudited, Consolidated Statements of Operations for the Three Months Ended March 31, 2000 and 1999... Unaudited, Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999...................... Unaudited, Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2000 and 1999.... Notes to Unaudited, Consolidated Financial Statements.................................................. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........ ITEM 3. Quantitative and Qualitative Disclosures About Market Risk................................... Part II. Other Information ITEM 6. Exhibits and Reports on Form 8-K ............................................................ Signatures..................................................................................................
PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GENZYME GENERAL COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, ----------------------------------- 2000 1999 ------ ------ (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues: Net product sales ........................................................... $ 155,339 $ 136,349 Net service sales ........................................................... 15,120 13,892 Revenue from research and development contracts: Related parties ........................................................ 131 480 Other .................................................................. 36 45 --------- --------- Total revenues ....................................................... 170,626 150,766 Operating costs and expenses: Cost of products sold ........................................................ 32,220 27,967 Cost of services sold ........................................................ 8,828 8,755 Selling, general and administrative .......................................... 38,222 35,725 Research and development (including research and development related to contracts) ............................................................. 23,243 21,065 Amortization of intangibles .................................................. 1,968 2,086 Charge for purchase of in-process research and development ................... 19,500 -- --------- --------- Total operating costs and expenses ...................................... 123,981 95,598 --------- --------- Operating income ................................................................. 46,645 55,168 Other income (expenses): Equity in net loss of unconsolidated affiliates .............................. (8,133) (7,756) Gain on affiliate sale of stock .............................................. 20,270 606 Gain on sale of investments in equity securities ............................. -- 1,963 Minority interest ............................................................ 856 866 Gain on sale of assets ....................................................... 35 -- Other ........................................................................ (56) -- Investment income ............................................................ 8,087 7,923 Interest expense ............................................................. (3,551) (5,049) --------- --------- Total other income (expenses) ........................................... 17,508 (1,447) --------- --------- Income before income taxes ....................................................... 64,153 53,721 Provision for income taxes ....................................................... (18,844) (20,216) --------- --------- Net income ....................................................................... 45,309 33,505 Tax benefit allocated from Genzyme Molecular Oncology ............................ 1,096 1,934 Tax benefit allocated from Genzyme Surgical Products ............................. 3,420 3,825 Tax benefit allocated from Genzyme Tissue Repair ................................. 1,812 3,962 --------- --------- Net income attributable to GENZ Stock ............................................ $ 51,637 $ 43,226 ========= =========
The accompanying notes are an integral part of these unaudited, combined financial statements. GENZYME GENERAL COMBINED STATEMENTS OF OPERATIONS (CONTINUED)
THREE MONTHS ENDED MARCH 31, -------------------- 2000 1999 ---- ---- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net income attributable to GENZ Stock ............................................... $ 51,637 $ 43,226 ========= ========= Per GENZ common share: Net income per GENZ common share-basic .............................................. $ 0.61 $ 0.53 ========= ========= Weighted average shares outstanding ................................................. 84,502 81,958 ========= ========= Net income per GENZ common and common equivalent share-diluted ....................................................... $ 0.57 $ 0.49 ========= ========= Adjusted weighted average shares outstanding ........................................ 94,726 92,591 ========= ========= Net income .......................................................................... $ 45,309 $ 33,505 Other comprehensive income (loss) net of tax: Foreign currency translation adjustments ....................................... (10,223) (8,826) Unrealized gains (losses) on securities: Unrealized gains (losses) arising during the period ....................... 78,759 (2,319) Reclassification adjustment for losses included in net income ............. -- (1,214) --------- --------- Unrealized gains (losses) on securities, net ......................... 78,759 (3,533) --------- --------- Other comprehensive income (loss)............................................... 68,536 (12,359) --------- --------- Comprehensive income ................................................................ $ 113,845 $ 21,146 ========= =========
The accompanying notes are an integral part of these unaudited, combined financial statements. GENZYME GENERAL COMBINED BALANCE SHEETS
MARCH 31, DECEMBER 31, 2000 1999 ---- ---- (UNAUDITED, AMOUNTS IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents ...................................................... $ 77,209 $ 94,523 Short-term investments ......................................................... 187,651 214,240 Accounts receivable, net ....................................................... 138,084 141,949 Inventories .................................................................... 79,475 84,384 Prepaid expenses and other current assets ...................................... 23,359 17,632 Due from Genzyme Molecular Oncology ............................................ 2,459 3,793 Due from Genzyme Surgical Products ............................................. 5,017 6,406 Due from Genzyme Tissue Repair ................................................. 1,243 683 Deferred tax assets-current .................................................... 40,780 41,195 ---------- ---------- Total current assets ........................................................ 555,277 604,805 Property, plant and equipment, net ................................................. 365,921 362,548 Long-term investments .............................................................. 295,770 205,142 Intangibles, net ................................................................... 73,160 75,370 Deferred tax assets-noncurrent ..................................................... 16,032 19,844 Investments in equity securities ................................................... 174,431 94,719 Other noncurrent assets ............................................................ 50,384 37,155 ---------- ---------- Total assets ................................................................ $1,530,975 $1,399,583 ========== ========== LIABILITIES AND DIVISION EQUITY Current liabilities: Accounts payable ............................................................... $ 16,035 $ 23,229 Accrued expenses ............................................................... 66,264 62,514 Income taxes payable ........................................................... 35,567 27,946 Deferred revenue ............................................................... 4,132 3,475 Current portion of long-term debt and capital lease obligations ................ 539 80 ---------- ---------- Total current liabilities ................................................... 122,537 117,244 Noncurrent liabilities: Capital lease obligations ..................................................... 103 -- Convertible notes and debentures .............................................. 272,885 272,622 Other noncurrent liabilities .................................................. 2,110 2,103 ---------- ---------- Total liabilities ........................................................... 397,635 391,969 Division equity .................................................................... 1,133,340 1,007,614 ---------- ---------- Total liabilities and division equity ....................................... $1,530,975 $1,399,583 ========== ==========
The accompanying notes are an integral part of these unaudited, combined financial statements. GENZYME GENERAL COMBINED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, ---------------------------------- 2000 1999 ---- ---- (UNAUDITED, AMOUNTS IN THOUSANDS) OPERATING ACTIVITIES: Net income ................................................................... $ 45,309 $ 33,505 Reconciliation of net income to net cash provided by operating activities: Depreciation and amortization ......................................... 11,896 12,156 Equity in net loss of unconsolidated affiliates ....................... 8,133 7,756 Accrued interest/amortization of marketable securities ................ (2,040) (2,499) Provision for bad debts and inventory ................................. 2,466 2,754 Gain on affiliate sale of stock ....................................... (20,270) (606) Minority interest in net loss of subsidiary ........................... (856) (866) Gain on sale of investments in equity securities ...................... -- (1,963) Deferred income tax expense ........................................... 3,901 -- Other ................................................................. 317 (422) Increase (decrease) in cash from working capital: Accounts receivable .............................................. (781) (6,916) Inventories ...................................................... 2,635 2,038 Prepaid expenses and other assets ................................ (1,776) (2,315) Due from Genzyme Molecular Oncology .............................. 1,334 247 Due from Genzyme Surgical Products ............................... 1,389 -- Due from Genzyme Tissue Repair ................................... (560) (3,446) Accounts payable, accrued expenses, income taxes payable and deferred revenue ............................ 9,534 15,708 -------- -------- Net cash provided by operating activities ........................ 64,183 55,131 INVESTING ACTIVITIES: Purchases of investments ................................................. (160,452) (196,387) Sales and maturities of investments ...................................... 97,246 105,106 Proceeds from sale of investments in equity securities ................... -- 11,090 Acquisitions of property, plant and equipment ............................ (14,548) (9,628) Investments in unconsolidated affiliates ................................. (6,032) (9,592) Other .................................................................... 2,215 3,702 -------- -------- Net cash used in investing activities ............................ (81,571) (95,709) FINANCING ACTIVITIES: Proceeds from issuance of common stock ..................................... 12,713 19,900 Payments of debt ........................................................... (6) (350) Net cash allocated to Genzyme Surgical Products ............................ (906) (12,421) Net cash allocated to Genzyme Tissue Repair ................................ (4,949) (5,000) Bank overdraft ............................................................. (7,220) -- Other ...................................................................... 1,918 1,548 -------- -------- Net cash provided by financing activities .......................... 1,550 3,677 Effect of exchange rate changes on cash ........................................ (1,476) (2,642) -------- -------- Decrease in cash and cash equivalents .......................................... (17,314) (39,543) Cash and cash equivalents at beginning of period ............................... 94,523 100,012 -------- -------- Cash and cash equivalents at end of period ..................................... $ 77,209 $ 60,469 ========= =========
The accompanying notes are an integral part of these unaudited, combined financial statements. GENZYME GENERAL NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION We prepared the unaudited, combined financial statements for Genzyme General following the requirements of the SEC for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by generally accepted accounting principles can be condensed or omitted. Certain prior year data have been reclassified to conform to the 2000 presentation. These financial statements include all normal and recurring adjustments that we consider necessary for the fair presentation of Genzyme General's financial position and operating results. Since these are interim financial statements, you should also read the financial statements and notes for Genzyme General included in our 1999 Form 10-K. Revenues, expenses, assets and liabilities can vary from quarter to quarter. Therefore, the results and trends in these interim financial statements may not be the same as those for future periods. In June 1999, we created Genzyme Surgical Products. The business of Genzyme Surgical Products previously operated as a business unit of Genzyme General. These unaudited combined financial statements reflect the financial position, results of operations and cash flows of Genzyme General as if Genzyme Surgical Products had existed as a separate division of Genzyme for all periods presented. 2. FINANCIAL INFORMATION We present financial information specific to Genzyme General in these unaudited, combined financial statements. We present financial information and accounting policies relevant to the corporation and its operating divisions taken as a whole in our unaudited, consolidated financial statements. You should read our unaudited, consolidated financial statements. 3. INVENTORIES
MARCH 31, 2000 DECEMBER 31, 1999 -------------- ----------------- (Amounts in thousands) Raw materials ....................... $22,674 $24,057 Work-in-process ..................... 39,253 40,592 Finished products ................... 17,548 19,735 ------- ------- Total ............................. $79,475 $84,384 ======= =======
4. EQUITY LINE OF CREDIT In 1998, our board of directors made $50.0 million of cash available to Genzyme Tissue Repair under an equity line of credit from Genzyme General. Genzyme Tissue Repair may draw down funds as needed each fiscal quarter in exchange for GZTR designated shares. GZTR designated shares are shares of GZTR Stock that are not issued and outstanding, but which our board of directors may issue, sell or distribute without allocating the proceeds to Genzyme Tissue Repair. In February 1999, Genzyme Tissue Repair made a $5.0 million draw under this equity line in exchange for 1,633,399 GZTR designated shares. In May 1999, the amount available under this equity line was reduced by $25.0 million to $20.0 million in connection with the reallocation of our ownership interest in Diacrin/Genzyme LLC from Genzyme Tissue Repair to Genzyme General. In March 2000, Genzyme Tissue Repair made a $5.0 million draw on this equity line in exchange for 765,169 GZTR designated shares. As required by our charter, the number of designated shares of GZTR Stock was determined using the average closing price of the GZTR Stock for the 20 trading days beginning on the thirtieth trading day before the draw. The funds will be used for Genzyme Tissue Repair's operating needs. GENZYME GENERAL NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS 5. PURCHASE OF IN-PROCESS TECHNOLOGY In March 2000, Genzyme General recorded a charge of $19.5 million to in-process research and development representing the initial amounts payable to Synpac (North Carolina), Inc. under a license granted by Synpac to Genzyme to develop and commercialize an enzyme replacement therapy for Pompe disease produced using a Chinese hamster ovary cell line. In connection with this license, Genzyme General will pay Synpac certain amounts upon the achievement of certain development and commercialization milestones. Genzyme General will also pay Synpac royalties for a specified period of time based on certain percentages of sales. In Apri 2000, Genzyme and Pharming Group N.V. signed a letter agreement to share in the development and the funding for the commercialization of an enzyme replacement therapy for Pompe disease licensed by Genzyme from Synpac in March 2000. Upon execution of the definitive agreement, Pharming will issue a convertible note payable to Genzyme for an aggregate principal amount of $10.0 million, representing Pharming's share of the payments previously paid to Synpac by Genzyme. 6. GAIN ON AFFILIATE SALE OF STOCK Genzyme General recognized a gain of $20.3 million for the three months ended March 31, 2000 and $0.6 million for the three months ended March 31, 1999 due to the issuance by Genzyme Transgenics Corporation of additional shares of Genzyme Transgenics common stock. 7. NET INCOME PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended March 31, -------------------------- 2000 1999 ---- ---- (Amounts in thousands, except per share amounts) Net income - basic ...................................... $51,637 $43,226 Effect of dilutive securities (net of tax): Genzyme's 5 1/4% convertible subordinated notes due June 2005 (the "GENZ Notes"): Interest expense .................................. 2,163 2,046 Amortization of purchasers' discount and Offering costs (1) ........................... 154 146 Genzyme's 5% convertible subordinated debentures due August 2003 (the "GENZ Debentures"): Interest expense .................................. 175 165 Amortization of debt offering costs (2) ........... 30 28 ------- ------- Net income - diluted .................................... $54,159 $45,611 ======= ======= Shares used in net income per common share - basic ...... 84,502 81,958 Effect of dilutive securities: Employee and director stock options ............... 3,281 3,642 Warrants .......................................... -- 32 GENZ Notes (3) .................................... 6,313 6,313 GENZ Debentures (3) ............................... 630 646 ------- ------- Shares used in net income per common share-diluted (4) .. 94,726 92,591 ======= ======= Net income per common share - basic ..................... $ 0.61 $ 0.53 ======= ======= Net income per common share - diluted (4) ............... $ 0.57 $ 0.49 ======= =======
- -------------- (1) The purchasers' discount and offering costs of approximately $7.0 million are being amortized over the term of the GENZ Notes, which mature in June 2005. GENZYME GENERAL NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS 7. NET INCOME PER SHARE (CONTINUED): (2) The offering costs of approximately $0.9 million are being amortized over the term of the GENZ Debentures, which mature in August 2003. (3) The GENZ Notes were issued in May 1998 and the GENZ Debentures were issued in August 1998. (4) Certain securities were not included in the computation of Genzyme General's diluted earnings per share for the three months ended March 31, 2000 and for the same period of 1999 because each such security had an exercise price greater than the average market price of GENZ Stock during each respective period. Such securities include:
Three Months Ended March 31, -------------------------- 2000 1999 ---- ---- (Amounts in thousands) Shares of GENZ Stock issuable for options ................ 2,965 1,381 Shares of GENZ Stock issuable for warrants (1) ........... -- 80 ----- ----- Total shares with exercise prices greater than the average market price of GENZ Stock during the period ......... 2,965 1,461 ===== =====
----------------- (1) In 1997, we sold three warrants to the Canadian Medical Discoveries Fund ("CMDF") to purchase a total of 120,000 shares of GENZ Stock for an aggregate purchase price of $1.0 million (Canadian). Two of the warrants which entitled CMDF to purchase a total of 80,000 shares of GENZ stock, were exercisable in the three months ended March 31, 1999. All of these warrants were cancelled in August 1999 when CMDF exercised its right to require us to repurchase the fund's interest in StressGen/Genzyme LLC. 8. SEGMENT REPORTING We present segment information in a manner consistent with the method we use to report this information to our management. Applying Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information," Genzyme General has two reportable segments: - the Therapeutics business unit, which develops, manufactures and distributes human therapeutic products for significant unmet medical needs. The business derives substantially all of its revenue from Cerezyme-Registered Trademark- enzyme and Ceredase-Registered Trademark- enzyme sales. - the Diagnostic Products business unit, which provides diagnostic products to niche markets with a focus on IN VITRO diagnostics. Information concerning the operations in these reportable segments is as follows:
Three Months Ended March 31, ------------------ 2000 1999 (Amounts in thousands) REVENUES: Therapeutics ................................................... $133,802 $115,041 Diagnostic Products ............................................ 15,238 14,692 Other .......................................................... 21,422 20,457 Eliminations/Adjustments ....................................... 164 576 -------- -------- Total ....................................................... $170,626 $150,766 ======== ========
GENZYME GENERAL NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS 8. SEGMENT REPORTING (CONTINUED):
THREE MONTHS ENDED MARCH 31, 2000 1999 ---- ---- (Amounts in thousands) NET INCOME: Therapeutics......................................... $29,263 $ 33,871 Diagnostic Products.................................. 715 1,129 Other ............................................... (171) (2,038) Eliminations/Adjustments............................. 15,502 543 ------- -------- Total $45,309 $ 33,505 ======= ========
There has been no material change in segment assets since December 31, 1999. 9. SUBSEQUENT EVENT In 1998, our board of directors made $30.0 million of cash available to Genzyme Molecular Oncology under an equity line of credit from Genzyme General. Genzyme Molecular Oncology may draw down funds as needed in exchange for GZMO designated shares. GZMO designated shares are shares of GZMO Stock that are not issued and outstanding, but which our board of directors may issue, sell or distribute without allocating the proceeds to Genzyme Molecular Oncology. In April 2000, Genzyme Molecular Oncology drew $15.0 million of cash under this equity line in exchange for 676,254 GZMO designated shares. As required by our charter, the number of designated shares of GZMO Stock was determined using the average closing price of the GZMO Stock for the 20 trading days beginning on the thirtieth trading day before the draw. These funds will be used for Genzyme Molecular Oncology's operating needs. In April, 2000, Genzyme General received net proceeds of approximately $5.1 million in connection with a settlement of a lawsuit. The lawsuit, initiated in 1993, pertained to an accidental spill of Ceredase at a fill facility operated by a contractor to Genzyme General. GENZYME MOLECULAR ONCOLOGY COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, ------------------ 2000 1999 ---- ---- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Service revenue................................................ $ -- $ 900 Service revenue - related party ............................... -- 11 Revenue from research and development contracts - related party ................................................ -- 298 Royalty and licensing ......................................... 2,555 404 -------- -------- Total revenues ............................................ 2,555 1,613 Operating costs and expenses: Cost of service revenues ...................................... -- 346 Cost of research and development, royalty and licensing revenue ...................................................... 56 294 Selling, general and administrative ........................... 1,190 1,619 Research and development ...................................... 4,058 3,905 Amortization of intangibles ................................... 2,956 2,956 -------- -------- Total operating costs and expenses: ....................... 8,260 9,120 -------- -------- Operating loss ..................................................... (5,705) (7,507) Other income (expenses): Equity in net loss of joint venture ........................... -- (375) Interest income ............................................... 73 163 Interest expense .............................................. (87) (3) -------- -------- Total other income (expenses) ............................. (14) (215) -------- -------- Loss before income taxes ........................................... (5,719) (7,722) Tax benefit ........................................................ 662 662 -------- -------- Net loss attributable to GZMO Stock ................................ $ (5,057) $ (7,060) ======== ======== Per GZMO basic and diluted common share: Net loss ...................................................... $ (0.37) $ (0.56) ======== ======== Weighted average shares outstanding ................................ 13,495 12,658 ======== ======== Net loss ........................................................... $ (5,057) $ (7,060) Other comprehensive loss, net of tax: Unrealized gains (losses) on securities arising during the period .............................................. -- -- -------- -------- Comprehensive loss ........................................ $ (5,057) $ (7,060) ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. GENZYME MOLECULAR ONCOLOGY COMBINED BALANCE SHEETS
MARCH 31, DECEMBER 31, 2000 1999 --------- ------------ (UNAUDITED, AMOUNTS IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents....................................................... $ 1,542 $ 3,587 Prepaid expenses and other current assets....................................... 453 218 ---------- ------------ Total current assets......................................................... 1,995 3,805 Equipment, net..................................................................... 744 467 Intangibles, net................................................................... 2,464 5,420 --------- ----------- Total assets.................................................................. $ 5,203 $ 9,692 ======== ========== LIABILITIES AND DIVISION EQUITY Current liabilities: Accrued expenses................................................................ $ 1,082 $ 676 Due to Genzyme General.......................................................... 2,459 3,793 Deferred revenue................................................................ 840 225 Current portion of long-term debt and capital lease obligation.................. 5,105 5,000 --------- ---------- Total current liabilities..................................................... 9,486 9,694 Noncurrent liabilities: Deferred tax liability............................................................. 552 1,213 Other noncurrent liabilities....................................................... 210 - ----------- -------------- Total liabilities............................................................. 10,248 10,907 Division equity.................................................................... (5,045) (1,215) -------- --------- Total liabilities and division equity......................................... $ 5,203 $ 9,692 ========= ==========
The accompanying notes are an integral part of these unaudited, combined financial statements. GENZYME MOLECULAR ONCOLOGY COMBINED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, ------------------ 2000 1999 ---- ---- (UNAUDITED, AMOUNTS IN THOUSANDS) OPERATING ACTIVITIES: Net loss ......................................................................... $ (5,057) $ (7,060) Reconciliation of net loss to net cash provided by (used in) operating activities: Depreciation and amortization .................................................. 2,995 3,028 Deferred tax benefit ........................................................... (662) (662) Equity in net loss of joint venture ............................................ -- 375 Accrued interest/amortization of marketable securities ......................... -- 10 Other .......................................................................... -- 10 Increase (decrease) in cash from working capital: Accounts receivable .......................................................... -- 5,500 Prepaid expenses and other current assets .................................... (235) (19) Accrued expenses, deferred revenue and other ................................. 1,021 (277) Due to Genzyme General ....................................................... (1,334) (247) -------- -------- Net cash provided by (used in) operating activities ........................ (3,272) 658 INVESTING ACTIVITY: Maturities of investments ........................................................ -- 1,022 -------- -------- Net cash provided by investing activity .................................... -- 1,022 FINANCING ACTIVITIES: Proceeds from issuance of common stock ........................................... 1,228 -- Other ............................................................................ (1) (2) -------- -------- Net cash provided by (used in) financing activities ........................ 1,227 (2) -------- -------- Increase (decrease) in cash and cash equivalents .................................... (2,045) 1,678 Cash and cash equivalents at beginning of period .................................... 3,587 10,868 -------- -------- Cash and cash equivalents at end of period .......................................... $ 1,542 $ 12,546 ======== ======== Supplemental Non-cash Investing Activity: Equipment acquired under capital lease obligations.................................. $ 315 $ -- ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. GENZYME MOLECULAR ONCOLOGY NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION We prepared these unaudited, combined financial statements for Genzyme Molecular Oncology following the requirements of the SEC for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by generally accepted accounting principles can be condensed or omitted. Certain prior year data have been reclassified to conform to the 2000 presentation. These financial statements include all normal and recurring adjustments that we consider necessary for the fair presentation of Genzyme Molecular Oncology's financial position and operating results. Since these are interim financial statements, you should also read the financial statements and notes for Genzyme Molecular Oncology included in our 1999 Form 10-K. Revenues, expenses, assets and liabilities can vary from quarter to quarter. Therefore, the results and trends in these interim financial statements may not be the same as those for future periods. 2. FINANCIAL INFORMATION We present financial information specific to Genzyme Molecular Oncology in these unaudited, combined financial statements. We present financial information and accounting policies relevant to the corporation and its operating divisions taken as a whole in our unaudited, consolidated financial statements. You should read our unaudited, consolidated financial statements. 3. REGISTRATION STATEMENT In March 2000, we filed with the SEC a Prospectus pursuant to Rule 424(b)(5) of the Securities Act of 1933, as amended, covering the offering of 3,000,000 shares of GZMO Stock (plus 450,000 shares issuable upon exercise of the underwriters's over-allotment option). The proceeds of the offering were to be used to fund research, preclinical and clinical development programs, to repay existing indebtedness, and for working capital and general corporate purposes. In April 2000, in light of recent market volatility and current market conditions, Genzyme Molecular Oncology withdrew the offering of shares of GZMO Stock contemplated by the Prospectus. 4. NET LOSS PER SHARE We have disclosed certain information about Genzyme Molecular Oncology's net loss per share in Note 6., "Net Income (Loss) Per Share," to our unaudited, consolidated financial statements. We incorporate that information into this note by reference. 5. SUBSEQUENT EVENT In 1998, our board of directors made $30.0 million of cash available to Genzyme Molecular Oncology under an equity line of credit from Genzyme General. Genzyme Molecular Oncology may draw down funds as needed in exchange for GZMO designated shares. GZMO designated shares are shares of GZMO Stock that are not issued and outstanding, but which our board of directors may issue, sell or distribute without allocating the proceeds to Genzyme Molecular Oncology. In April 2000, Genzyme Molecular Oncology drew $15.0 million of cash under this equity line in exchange for 676,254 GZMO designated shares. As required by our charter, the number of designated shares of GZMO Stock was determined using the average closing price of the GZMO Stock for the 20 trading days beginning on the thirtieth trading day before the draw. These funds will be used for Genzyme Molecular Oncology's operating needs. GENZYME SURGICAL PRODUCTS COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, ------------------ 2000 1999 ---- ---- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Total revenues ................................................ $ 29,082 $ 27,353 Operating costs and expenses: Cost of products sold .................................... 16,039 15,844 Selling, general and administrative ...................... 16,400 15,287 Research and development ................................. 6,971 5,602 Amortization of intangibles .............................. 1,426 1,417 -------- -------- Total operating costs and expenses ................... 40,836 38,150 -------- -------- Operating loss ................................................ (11,754) (10,797) Other income (expenses) Loss on sale of assets ................................... (4) -- Other .................................................... 32 46 Investment income ........................................ 1,682 7 Interest expense ......................................... 1 (1) -------- -------- Total other income (expenses) ........................ 1,711 52 -------- -------- Net loss attributable to GZSP Stock ........................... $(10,043) $(10,745) ======== ======== Per GZSP basic and diluted common share: Net loss ................................................... $ (0.68) ======== Weighted average shares outstanding ........................... 14,855 ======== Pro forma net loss per GZSP basic and diluted common share .... $ (0.73) ======== Pro forma weighted average shares outstanding ................. 14,800 ======== Net loss ...................................................... $(10,043) $(10,745) Other comprehensive income (loss), net of tax: Unrealized gains on securities arising during the period 1,439 -- -------- -------- Comprehensive loss ....................................... $ (8,604) $(10,745) ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. GENZYME SURGICAL PRODUCTS COMBINED BALANCE SHEETS
MARCH 31, DECEMBER 31, 2000 1999 --------- ------------ (UNAUDITED, AMOUNTS IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents....................................................... $ 24,999 $ 22,673 Short-term investments.......................................................... 64,615 41,606 Accounts receivable, net........................................................ 19,796 19,886 Inventories..................................................................... 36,138 30,491 Prepaid expenses and other current assets....................................... 1,368 815 ------------- --------------- Total current assets......................................................... 146,916 115,471 Property, plant and equipment, net................................................. 17,835 17,621 Long-term investments.............................................................. 26,388 61,846 Intangibles, net................................................................... 171,396 172,833 Investment in equity securities.................................................... 6,483 3,140 Other.............................................................................. 1,326 13 ------------ ------------- Total assets.................................................................. $ 370,344 $ 370,924 ============ ============= LIABILITIES AND DIVISION EQUITY Current liabilities: Accounts payable................................................................ $ 4,949 $ 3,562 Accrued expenses................................................................ 9,220 7,038 Due to Genzyme General.......................................................... 5,017 6,406 ------------ ----------- Total current liabilities..................................................... 19,186 17,006 Division equity.................................................................... 351,158 353,918 ------------ ------------- Total liabilities and division equity......................................... $ 370,344 $ 370,924 ============ =============
The accompanying notes are an integral part of these unaudited, combined financial statements. GENZYME SURGICAL PRODUCTS COMBINED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, ------------------------- 2000 1999 ------------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS) OPERATING ACTIVITIES: Net loss ........................................................... $(10,043) $(10,745) Reconciliation of net loss to net cash used in operating activities: Depreciation and amortization .................................... 2,224 2,008 Equity in loss of unconsolidated affiliate ....................... -- -- Accrued interest/amortization of marketable securities ........... 610 -- Provision for bad debts and inventory ............................ 1,470 329 Other ............................................................ 4 (36) Increase (decrease) in cash from working capital: Accounts receivable ............................................ 15 (681) Inventories .................................................... (7,042) (3,222) Prepaid expenses and other current assets ...................... (553) 585 Accounts payable and accrued expenses .......................... 3,360 1,691 Due to Genzyme General ......................................... (1,389) -- ------- ------- Net cash used in operating activities ........................ (11,344) (10,071) INVESTING ACTIVITIES: Purchases of investments ........................................... (35,450) -- Sales and maturities of investments ................................ 47,315 -- Acquisitions of property, plant and equipment ...................... (939) (660) Other .............................................................. (1,378) (491) ------- ------- Net cash provided by (used in) investing activities .......... 9,548 (1,151) FINANCING ACTIVITIES: Net cash allocated from Genzyme General ............................ 906 12,421 Bank overdraft ..................................................... 208 -- Proceeds from issuance of common stock ............................. 362 -- Other .............................................................. 2,646 -- ------- ------- Net cash provided by financing activities .................... 4,122 12,421 ------- ------- Increase in cash and cash equivalents ................................. 2,326 1,199 Cash and cash equivalents at beginning of period ...................... 22,673 -- ------- ------- Cash and cash equivalents at end of period ............................ $ 24,999 $ 1,199 ======= =======
The accompanying notes are an integral part of these unaudited, combined financial statements. GENZYME SURGICAL PRODUCTS NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION We created Genzyme Surgical Products in June 1999. The business of Genzyme Surgical Products previously operated as a business unit of Genzyme General. These unaudited, combined financial statements reflect the financial position, results of operations and cash flows of Genzyme Surgical Products as if it had existed as a separate division of Genzyme for all periods presented. We prepared the unaudited, combined financial statements for Genzyme Surgical Products following the requirements of the SEC for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by generally accepted accounting principles can be condensed or omitted. Certain prior year data have been reclassified to conform to the 2000 presentation. These financial statements include all normal and recurring adjustments that we consider necessary for the fair presentation of Genzyme Surgical Products' financial position and operating results. Since these are interim financial statements, you should also read the financial statements and notes for Genzyme Surgical Products included in our 1999 Form 10-K. Revenues, expenses, assets and liabilities can vary from quarter to quarter. Therefore, the results and trends in these interim financial statements may not be the same as those for future periods. 2. FINANCIAL INFORMATION We present financial information specific to Genzyme Surgical Products in these unaudited, combined financial statements. We present financial information and accounting policies relevant to the corporation and its operating divisions taken as a whole in our unaudited, consolidated financial statements. You should read our unaudited, consolidated financial statements. 3. INVENTORIES
March 31, 2000 December 31, 1999 -------------- ----------------- (Amounts in thousands) Raw materials................................... $ 15,091 $ 15,473 Work-in-process................................. 1,797 2,029 Finished products............................... 19,250 12,989 ---------- --------- Total....................................... $ 36,138 $ 30,491 ========= ========
4. NET LOSS PER SHARE We have disclosed certain information about Genzyme Surgical Products' net loss per share in Note 6., "Net Income (Loss) Per Share," to our unaudited, consolidated financial statements. We incorporate that information into this note by reference. 5. SEGMENT INFORMATION We present segment information in a manner consistent with the method we use to report this information to our management. Applying SFAS 131, Genzyme Surgical Products has two reportable segments: - Cardiovascular Surgery, which includes chest drainage systems, instruments and closures used in coronary artery bypass, valve replacement, and other cardiothoracic surgeries; and - General Surgery, which includes surgical instruments and Sepra Film-Registered Trademark- bioresorbable membrane. GENZYME SURGICAL PRODUCTS NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS 5. SEGMENT INFORMATION (CONTINUED): We have provided information concerning the operations in these reportable segments in the following table:
Three Months Ended March 31, ------------------ 2000 1999 --------- --------- (Amounts in thousands) REVENUES: Cardiovascular Surgery............................ $ 19,650 $ 19,388 General Surgery................................... 6,989 5,897 Other............................................. 2,443 2,068 --------- --------- Total........................................... $ 29,082 $ 27,353 ======== ======== GROSS PROFIT: Cardiovascular Surgery............................ $ 8,387 $8,570 General Surgery................................... 3,562 1,878 Other............................................. 1,094 1,061 -------- -------- Total........................................... $ 13,043 $ 11,509 ======== ========
There has been no material change in segment assets since December 31, 1999. 6. ACQUISITION OF BIOMATRIX, INC. AND FORMATION OF GENZYME BIOSURGERY In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon completion of the acquisition, we will form a new operating division called Genzyme Biosurgery and create a new series of common stock to reflect its value and track its performance. We refer to this stock as "GZBX Stock." In connection with the merger, the assets of Genzyme Surgical Products and Genzyme Tissue Repair will become part of Genzyme Biosurgery. In addition, GZSP Stock and GZTR Stock will be exchanged for GZBX Stock. We will account for the acquisition of Biomatrix as a purchase. Biomatrix stockholders will have the option of receiving $37.00 in cash or one share of GZBX Stock for each share of Biomatrix common stock they hold. The merger agreement provides, however, that Genzyme will pay cash for up to 28.38% of the outstanding shares of Biomatrix common stock that receive merger consideration, or up to approximately $245.0 million. Holders of GZSP Stock will receive 0.6060 share of GZBX Stock for each share of GZSP Stock they hold and holders of GZTR Stock will receive 0.3352 share of GZBX Stock for each share of GZTR Stock they hold. For more information about the merger and the merger consideration, we encourage you to carefully read our Registration Statement on Form S-4 filed with SEC on April 18, 2000, as it may be amended. GENZYME SURGICAL PRODUCTS NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS 7. SUBSEQUENT EVENT We have included information regarding Focal Inc.'s exercise of the First Option under the Genzyme/Focal Stock Purchase Agreement in April 2000 in Note 9., "Subsequent Events," to our unaudited, consolidated financial statements. We incorporate that information into this note by reference. GENZYME TISSUE REPAIR COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, ------------------ 2000 1999 ---- ---- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Total revenues .............................................. $ 5,867 $ 4,023 Operating costs and expenses: Cost of services sold ................................... 3,023 2,998 Selling, general and administrative ..................... 5,739 6,314 Research and development ................................ 1,871 1,968 -------- -------- Total operating costs and expenses: ................... 10,633 11,280 -------- -------- Operating loss .............................................. (4,766) (7,257) Other income (expenses): Equity in net loss of joint venture ..................... -- (2,007) Other ................................................... (5) -- Interest income ......................................... 102 93 Interest expense ........................................ (302) (445) -------- -------- Total other income (expenses) ......................... (205) (2,359) -------- -------- Net loss attributable to GZTR Stock ......................... $ (4,971) $ (9,616) ======== ======== Per GZTR common share (basic and diluted): Net loss ............................................... $ (0.17) $ (0.44) ======== ======== Weighted average shares outstanding ......................... 28,531 21,945 ======== ======== Net loss .................................................... $ (4,971) $ (9,616) Other comprehensive income (loss), net of tax: Unrealized gains (losses) on securities arising during the period ............................................ -- -- -------- -------- Comprehensive loss ..................................... $ (4,971) $ (9,616) ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. GENZYME TISSUE REPAIR COMBINED BALANCE SHEETS
MARCH 31, DECEMBER 31, 2000 1999 --------- ------------ (UNAUDITED, AMOUNTS IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents ........................ $ 8,444 $ 9,373 Accounts receivable, net ......................... 5,356 4,968 Inventories ...................................... 2,378 2,394 Other current assets ............................. 383 253 -------- -------- Total current assets ........................... 16,561 16,988 Plant and equipment, net ............................ 2,343 2,545 Other ............................................... 104 115 -------- -------- Total assets ................................... $ 19,008 $ 19,648 ======== ======== LIABILITIES AND DIVISION EQUITY Current liabilities: Accounts payable ................................. $ 371 $ 1,062 Accrued expenses ................................. 1,621 3,131 Due to Genzyme General ........................... 1,243 683 -------- -------- Total current liabilities ...................... 3,235 4,876 Noncurrent liabilities: Long-term debt ................................... 18,000 18,000 Other ............................................ 190 227 -------- -------- Total liabilities .............................. 21,425 23,103 Division equity ..................................... (2,417) (3,455) -------- -------- Total liabilities and division equity .......... $ 19,008 $ 19,648 ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. GENZYME TISSUE REPAIR COMBINED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, ------------------ 2000 1999 ---- ---- OPERATING ACTIVITIES: (UNAUDITED, AMOUNTS IN THOUSANDS) Net loss ........................................................... $(4,971) $(9,616) Reconciliation of net loss to net cash used in operating activities: Depreciation and amortization .................................... 335 328 Provision for bad debt and inventory ............................. 404 422 Technology license fee ........................................... 250 -- Equity in net loss of joint venture .............................. -- 2,007 Amortization of deferred rent .................................... (37) (37) Increase (decrease) in cash from working capital: Accounts receivable ............................................ (388) 700 Inventories .................................................... (388) (382) Other current assets ........................................... (130) (81) Accounts payable and accrued expenses .......................... (2,773) (816) Due to Genzyme General ......................................... 560 3,446 ------- ------- Net cash used in operating activities ........................ (7,138) (4,029) INVESTING ACTIVITIES: Investment in joint venture ........................................ -- (2,084) Purchases of property, plant and equipment ......................... (133) (345) Other .............................................................. 11 34 ------- ------- Net cash used in investing activities ........................ (122) (2,395) FINANCING ACTIVITIES: Proceeds from issuance of common stock, net ........................ 411 116 Proceeds from issuance of debt, net ................................ -- -- Payments of debt and capital lease obligations ..................... -- (47) Cash allocated from Genzyme General ................................ 4,949 5,000 Bank overdraft ..................................................... 572 -- Other .............................................................. 399 -- ------- ------- Net cash provided by financing activities .................... 6,331 5,069 ------- ------- Decrease in cash and cash equivalents ................................. (929) (1,355) Cash and cash equivalents at beginning of period ...................... 9,373 7,732 ------- ------- Cash and cash equivalents at end of period ............................ $ 8,444 $ 6,377 ======= =======
The accompanying notes are an integral part of these unaudited, combined financial statements. GENZYME TISSUE REPAIR NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION We prepared the unaudited, combined financial statements for Genzyme Tissue Repair following the requirements of the SEC for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by generally accepted accounting principles can be condensed or omitted. Certain prior year data have been reclassified to conform to the 2000 presentation. These financial statements include all normal and recurring adjustments that we consider necessary for the fair presentation of Genzyme Tissue Repair's financial position and operating results. Since these are combined financial statements, you should also read the financial statements and notes for Genzyme Tissue Repair included in our 1999 Form 10-K. Revenues, expenses, assets and liabilities can vary from quarter to quarter. Therefore, the results and trends in these interim statements may not be the same as those for future periods. 2. FINANCIAL INFORMATION We present financial information specific to Genzyme Tissue Repair in these unaudited, combined financial statements. We present financial information and accounting policies relevant to the corporation and its operating divisions taken as a whole in our unaudited, consolidated financial statements. You should read our unaudited, consolidated financial statements. 3. INVENTORIES
MARCH 31, 2000 DECEMBER 31, 1999 -------------- ----------------- (Amounts in thousands) Raw materials ....................... $ 432 $ 428 Work-in-process ..................... 1,916 1,938 Finished products ................... 30 28 ------ ------ Total ........................... $2,378 $2,394 ====== ======
4. NET LOSS PER SHARE We have disclosed certain information about Genzyme Tissue Repair's net loss per share in Note 6., "Net Income (Loss) Per Share," to our unaudited, consolidated financial statements. We incorporate that information into this note by reference. 5. DIACRIN JOINT VENTURE In May 1999, we reallocated our ownership interest in Diacrin/Genzyme LLC, our joint venture with Diacrin, Inc. to develop and commercialize products using porcine fetal cells for the treatment of Parkinson's and Huntington's diseases, from Genzyme Tissue Repair to Genzyme General in exchange for $25.0 million in cash. If the joint venture does not initiate a Phase III clinical trial of NeuroCell-TM--PD by June 30, 2000, Genzyme Tissue Repair will be required to pay to Genzyme General $20.0 million plus accrued interest at an annual rate of 13.5%. Any required refund may be paid in cash, GZTR designated shares, or a combination of both, at Genzyme Tissue Repair's option. GZTR designated shares are shares of GZTR Stock that are not issued and outstanding, but which our board of directors may issue, sell or distribute without allocating the proceeds to Genzyme Tissue Repair. GENZYME TISSUE REPAIR NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS 6. EQUITY LINE OF CREDIT In 1998, our board of directors made $50.0 million of cash available to Genzyme Tissue Repair under an equity line of credit from Genzyme General. Genzyme Tissue Repair may draw down funds as needed each fiscal quarter in exchange for GZTR designated shares. In February 1999, Genzyme Tissue Repair made a $5.0 million draw under this equity line in exchange for 1,633,399 GZTR designated shares. In May 1999, the amount available under this equity line was reduced by $25.0 million to $20.0 million in connection with the reallocation of our ownership interest in Diacrin/Genzyme LLC from Genzyme Tissue Repair to Genzyme General. In March 2000, Genzyme Tissue Repair made a $5.0 million draw on this equity line in exchange for 765,169 GZTR designated shares. As required by our charter, the number of designated shares of GZTR Stock was determined using the average closing price of the GZTR Stock for the 20 trading days beginning on the thirtieth trading day before the draw. The funds will be used for Genzyme Tissue Repair's operating needs. 7. ACQUISITION OF BIOMATRIX, INC. AND FORMATION OF GENZYME BIOSURGERY In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon completion of the acquisition, we will form a new operating division called Genzyme Biosurgery and create a new series of common stock to reflect its value and track its performance. We refer to this stock as "GZBX Stock." In connection with the merger, the assets of Genzyme Surgical Products and Genzyme Tissue Repair will become part of Genzyme Biosurgery. In addition, GZSP Stock and GZTR Stock will be exchanged for GZBX Stock. We will account for the acquisition of Biomatrix as a purchase. Biomatrix stockholders will have the option of receiving $37.00 in cash or one share of GZBX Stock for each share of Biomatrix common stock they hold. The merger agreement provides, however, that Genzyme will pay cash for up to 28.38% of the outstanding shares of Biomatrix common stock that receive merger consideration, or up to approximately $245.0 million. Holders of of GZSP Stock will receive 0.6060 share of GZBX Stock for each share of GZSP Stock they hold and holders of GZTR Stock will receive 0.3352 share of GZBX Stock for each share of GZTR Stock they hold. For more information about the merger and the merger consideration, we encourage you to carefully read our Registration Statement on Form S-4 filed with the SEC on April 18, 2000, as it may be amended. GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, --------------------------------- 2000 1999 ---- ---- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues: Net product sales .................................................... $ 184,421 $ 163,702 Net service sales .................................................... 20,966 18,730 Revenue from research and development contracts ...................... 2,743 1,312 --------- --------- Total revenues ................................................... 208,130 183,744 Operating costs and expenses: Cost of products sold ................................................. 48,259 43,818 Cost of services sold ................................................. 11,851 12,088 Selling, general and administrative ................................... 61,551 58,945 Research and development (including research and development related to contracts) ................................................ 36,199 32,834 Amortization of intangibles ........................................... 6,098 6,207 Charge for purchase of in-process research and development ............ 19,500 -- --------- --------- Total operating costs and expenses ............................... 183,458 153,892 --------- --------- Operating income .......................................................... 24,672 29,852 Other income (expenses): Equity in net loss of unconsolidated affiliates ....................... (8,133) (10,092) Gain on affiliate sale of stock ....................................... 20,270 606 Gain on sale of investments in equity securities ...................... -- 1,963 Minority interest ..................................................... 856 866 Gain on sale of assets ................................................ 31 -- Other ................................................................. (29) -- Investment income ..................................................... 9,944 8,193 Interest expense ...................................................... (3,939) (5,498) --------- --------- Total other income (expenses) .................................... 19,000 (3,962) Income before income taxes ................................................ 43,672 25,890 Provision for income taxes ................................................ (11,854) (9,833) --------- --------- Net income ................................................................ $ 31,818 $ 16,057 ========= =========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
THREE MONTHS ENDED MARCH 31, --------------------------------- 2000 1999 ---- ---- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Attributable to Genzyme General: Net income ......................................................... $ 45,309 $ 33,505 Tax benefit allocated from Genzyme Molecular Oncology .............. 1,096 1,934 Tax benefit allocated from Genzyme Surgical Products ............... 3,420 3,825 Tax benefit allocated from Genzyme Tissue Repair ................... 1,812 3,962 --------- --------- Net income attributable to GENZ Stock .............................. $ 51,637 $ 43,226 ========= ========= Per GENZ common share: Net income per GENZ common share-basic ......................... $ 0.61 $ 0.53 ========= ========= Weighted average shares outstanding ................................ 84,502 81,958 ========= ========= Net income per GENZ common and common equivalent share-diluted . $ 0.57 $ 0.49 ========= ========= Adjusted weighted average shares outstanding ....................... 94,726 92,591 ========= ========= Attributable to Genzyme Molecular Oncology: Net loss attributable to GZMO Stock ................................ $ (5,057) $ (7,060) ========= ========= Per GZMO basic and diluted common share: Net loss ....................................................... $ (0.37) $ (0.56) ========= ========= Weighted average shares outstanding ................................ 13,495 12,658 ========= ========= Attributable to Genzyme Surgical Products: Net loss attributable to GZSP Stock ................................ $ (10,043) $ (10,745) ========= ========= Per GZSP basic and diluted common share: Net loss ....................................................... $ (0.68) ========= Weighted average shares outstanding ................................ 14,855 ========= Pro forma net loss per GZSP basic and diluted common share ......... $ (0.73) ========= Pro forma weighted average shares outstanding ...................... 14,800 ========= Attributable to Genzyme Tissue Repair: Net loss attributable to GZTR Stock ................................ $ (4,971) $ (9,616) ========= ========= Per GZTR basic and diluted common share: Net loss ....................................................... $ (0.17) $ (0.44) ========= ========= Weighted average shares outstanding ................................ 28,531 21,945 ========= ========= Net income ............................................................ $ 31,818 $ 16,057 Other comprehensive income (loss) net of tax: Foreign currency translation adjustments ......................... (10,223) (8,826) Unrealized gains (losses) on securities: Unrealized gains (losses) arising during the period ......... 80,198 (2,319) Reclassification adjustment for losses included in net income -- (1,214) --------- --------- Unrealized gains (losses) on securities, net ........... 80,198 (3,533) --------- --------- Other comprehensive income (loss) ................................ 69,975 (12,359) --------- --------- Comprehensive income .................................................. $ 101,793 $ 3,698 ========= =========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31, 2000 1999 ---- ---- (UNAUDITED, AMOUNTS IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents ................................... $ 112,194 $ 130,156 Short-term investments ...................................... 252,266 255,846 Accounts receivable, net .................................... 163,236 166,803 Inventories ................................................. 117,991 117,269 Prepaid expenses and other current assets ................... 25,563 18,918 Deferred tax assets-current ................................. 40,780 41,195 ----------- ----------- Total current assets ...................................... 712,030 730,187 Property, plant and equipment, net ............................ 386,843 383,181 Long-term investments ......................................... 322,158 266,988 Intangibles, net .............................................. 246,803 253,153 Deferred tax assets-noncurrent ................................ 15,480 18,631 Investments in equity securities .............................. 180,914 97,859 Other noncurrent assets ....................................... 51,814 37,283 ----------- ----------- Total assets .............................................. $ 1,916,042 $ 1,787,282 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ............................................ $ 21,355 $ 27,853 Accrued expenses ............................................ 78,187 73,359 Income taxes payable ........................................ 35,567 27,946 Deferred revenue ............................................ 4,972 3,700 Current portion of long-term debt and capital lease obligations 5,644 5,080 ----------- ----------- Total current liabilities ................................. 145,725 137,938 Noncurrent liabilities: Long-term debt .............................................. 18,103 18,000 Convertible notes and debentures ............................ 272,885 272,622 Other noncurrent liabilities ................................ 2,510 2,330 ----------- ----------- Total liabilities ......................................... 439,223 430,890 Stockholders' equity: Preferred Stock ............................................. -- -- GENZ Stock, $.01 par value .................................. 848 842 GZMO Stock, $.01 par value .................................. 137 134 GZSP Stock, $.01 par value .................................. 149 148 GZTR Stock, $.01 par value .................................. 287 285 Treasury Stock - at cost .................................... (901) (901) Additional paid-in capital - Genzyme General ................ 475,324 469,776 Additional paid-in capital - Genzyme Molecular Oncology ..... 68,896 67,672 Additional paid-in capital - Genzyme Surgical Products ...... 546,347 542,343 Additional paid-in capital - Genzyme Tissue Repair .......... 223,110 217,103 Retained earnings ........................................... 89,020 57,202 Accumulated other comprehensive income ...................... 73,602 1,788 ----------- ----------- Total stockholders' equity .................................... 1,476,819 1,356,392 ----------- ----------- Total liabilities and stockholders' equity .................... $ 1,916,042 $ 1,787,282 =========== ===========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. GENZYME CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, --------------------------------- 2000 1999 ---- ---- (UNAUDITED, AMOUNTS IN THOUSANDS) OPERATING ACTIVITIES: Net income ............................................................... $ 31,818 $ 16,057 Reconciliation of net income to net cash provided by operating activities: Depreciation and amortization ..................................... 17,198 17,268 Equity in loss of unconsolidated affiliates ....................... 8,133 10,138 Accrued interest/amortization of marketable securities ............ (1,430) (2,489) Provision for bad debts and inventory ............................. 4,340 3,505 Technology license fee ............................................ 250 -- Gain on affiliate sale of stock ................................... (20,270) (606) Minority interest in net loss of subsidiary ....................... (856) (866) Gain on sale of investments in equity securities .................. -- (1,963) Deferred income tax expense (benefit) ............................. 3,239 (662) Amortization of deferred rent ..................................... (37) (37) Other ............................................................. 321 (448) Increase (decrease) in cash from working capital: Accounts receivable .......................................... (1,154) (1,397) Inventories .................................................. (4,795) (1,566) Prepaid expenses and other assets ............................ (858) (1,830) Accounts payable, accrued expenses, income taxes payable and deferred revenue ........................ 4,814 6,585 --------- --------- Net cash provided by operating activities .................... 42,429 41,689 INVESTING ACTIVITIES: Purchases of investments ............................................. (195,902) (196,387) Sales and maturities of investments .................................. 144,561 106,128 Proceeds from sale of investments in equity securities ............... -- 11,090 Acquisitions of property, plant and equipment ........................ (15,620) (10,633) Investments in unconsolidated affiliates ............................. (6,032) (11,676) Other ................................................................ 848 3,245 --------- --------- Net cash used in investing activities ........................ (72,145) (98,233) FINANCING ACTIVITIES: Proceeds from issuance of common stock ................................. 14,714 20,016 Payments of debt ....................................................... (6) (397) Bank overdraft ......................................................... (6,440) -- Other .................................................................. 4,962 1,546 --------- --------- Net cash provided by financing activities ...................... 13,230 21,165 Effect of exchange rate changes on cash .................................... (1,476) (2,642) --------- --------- Decrease in cash and cash equivalents ...................................... (17,962) (38,021) Cash and cash equivalents at beginning of period ........................... 130,156 118,612 --------- --------- Cash and cash equivalents at end of period ................................. $ 112,194 $ 80,591 ========= =========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. GENZYME CORPORATION NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION We prepared the unaudited, consolidated financial statements for Genzyme following the requirements of the SEC for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by generally accepted accounting principles can be condensed or omitted. We have reclassified certain 1999 data to conform with the 2000 presentation. These financial statements include all normal and recurring adjustments that we consider necessary for the fair presentation of our financial position and operating results. Since these are interim financial statements, you should also read the financial statements and notes included in our 1999 Form 10-K. Revenues, expenses, assets and liabilities can vary from quarter to quarter. Therefore, the results and trends in these interim financial statements may not be the same as those for future periods. 2. REGISTRATION STATEMENT In March 2000, we filed with the SEC a Prospectus pursuant to Rule 424(b)(5) of the Securities Act of 1933, as amended, covering the offering of 3,000,000 shares of GZMO Stock (plus 450,000 shares issuable upon exercise of the underwriters' over-allotment option). The proceeds of the offering were to be used by Genzyme Molecular Oncology to fund research, pre-clinical and clinical development programs, to repay existing indebtedness, and for working capital and general corporate purposes. In April 2000, in light of recent market volatility and current market condition, we withdrew the offering of shares of GZMO Stock contemplated by the Prospectus. 3. INVENTORIES
MARCH 31, 2000 DECEMBER 31, 1999 -------------- ----------------- (Amounts in thousands) Raw materials ............................. $ 38,197 $ 39,958 Work-in-process ........................... 56,555 44,559 Finished products ......................... 23,239 32,752 -------- -------- Total ................................... $117,991 $117,269 ======== ========
4. PURCHASE OF IN-PROCESS TECHNOLOGY In March 2000, we recorded a charge of $19.5 million to in-process research and development representing the initial amounts payable to Synpac (North Carolina) Inc. under a license granted by Synpac to Genzyme to develop and commercialize an enzyme replacement therapy for Pompe disease produced using a Chinese hamster ovary cell line. In connection with this license, Genzyme General will pay Synpac certain amounts upon the achievement of certain development and commercialization milestones. Genzyme General will also pay Synpac royalties for a specified period of time based on certain percentages of sales. In April 2000, Genzyme and Pharming Group N.V. signed a letter agreement to share in the development and the funding for the commercialization of an enzyme replacement therapy for Pompe disease licensed by Genzyme from Synpac in March 2000. Upon execution of the definitive agreement, Pharming will issue a convertible note payable to Genzyme General for an aggregate principal amount of $10.0 million, representing Pharming's share of the payments previously paid to Synpac by Genzyme. 5. GAIN ON AFFILIATE SALE OF STOCK We recognized a gain of $20.3 million for the three months ended March 31, 2000 and $0.6 million for the three months ended March 31, 1999 due to the issuance by Genzyme Transgenics Corporation of additional shares of Genzyme Transgenics common stock. GENZYME CORPORATION NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS 6. NET INCOME (LOSS) PER SHARE GENZYME GENERAL: The following table sets forth the computation of basic and diluted earnings per share of GENZ Stock:
Three Months Ended March 31, ------------------------- 2000 1999 ---- ---- (Amounts in thousands, except per share amounts) Net income - basic ...................................................... $51,637 $43,226 Effect of dilutive securities (net of tax): GENZ Notes: Interest expense .................................................. 2,163 2,046 Amortization of purchasers' discount and offering costs (1) ........................................... 154 146 GENZ Debentures: Interest expense .................................................. 175 165 Amortization of debt offering costs (2) ........................... 30 28 ------- ------- Net income - diluted .................................................... $54,159 $45,611 ======= ======= Shares used in net income per common share - basic ...................... 84,502 81,958 Effect of dilutive securities: Employee and director stock options ............................... 3,281 3,642 Warrants .......................................................... -- 32 GENZ Notes (3) .................................................... 6,313 6,313 GENZ Debentures (3) ............................................... 630 646 ------- ------- Shares used in net income per common share-diluted (4) .................. 94,726 92,591 ======= ======= Net income per common share - basic ..................................... $ 0.61 $ 0.53 ======= ======= Net income per common share - diluted (4) ............................... $ 0.57 $ 0.49 ======= =======
- ---------- (1) The purchasers' discount and offering costs of approximately $7.0 million are being amortized over the term of the GENZ Notes, which mature in June 2005. (2) The offering costs of approximately $0.9 million are being amortized over the term of the GENZ Debentures, which mature in August 2003. (3) The GENZ Notes were issued in May 1998 and the GENZ Debentures were issued in August 1998. (4) Certain securities were not included in the computation of Genzyme General's diluted earnings per share for the three months ended March 31, 2000 and 1999 because each such security had an exercise price greater than the average market price of GENZ Stock during each respective period. Such securities include: GENZYME CORPORATION NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS 6. NET INCOME (LOSS) PER SHARE (CONTINUED) GENZYME GENERAL (CONTINUED):
Three Months Ended March 31, ---------------------- 2000 1999 (Amounts in thousands) Shares of GENZ Stock issuable for options ................ 2,965 1,381 Shares of GENZ Stock issuable for warrants (1) ........... -- 80 ----- ----- Total shares with exercise prices greater than the average market price of GENZ Stock during the period ......... 2,965 1,461 ===== =====
- ---------------- (1) In 1997, we sold three warrants to CMDF to purchase a total of 120,000 shares of GENZ Stock for an aggregate purchase price of $1.0 million (Canadian). Two of the warrants, which entitled CMDF to purchase a total of 80,000 shares of GENZ Stock were exercisable in the three months ended March 31, 1999. All of these warrants were cancelled in August 1999 when the Canadian Medical Discoveries Fund exercised its right to require us to repurchase the fund's interest in StressGen/Genzyme LLC. GENZYME MOLECULAR ONCOLOGY: For both periods presented, basic and diluted net loss per share of GZMO common share are the same. We did not include the securities described in the following table in the computation of Genzyme Molecular Oncology's diluted loss per share for each period because these securities would have an anti-dilutive effect due to Genzyme Molecular Oncology's net loss per share:
Three Months Ended March 31, ---------------------- 2000 1999 (Amounts in thousands) Shares of GZMO Stock issuable for options .......... 673 1,604 Warrants to purchase GZMO Stock .................... 10 10 Shares of GZMO Stock issuable upon conversion of the GENZ Notes .................................... 682 682 GZMO designated shares ............................. 1,006 728 ----- ----- Total shares excluded from the diluted loss per GZMO share calculation ............................. 2,371 3,024 ===== =====
GENZYME CORPORATION NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS 6. NET INCOME (LOSS) PER SHARE (CONTINUED) GENZYME SURGICAL PRODUCTS: We disclose pro forma net loss per share for Genzyme Surgical Products for the three months ended March 31, 1999 because GZSP Stock was not outstanding for this period. For both periods presented, basic and diluted net loss per share of GZSP common share are the same. We did not include the securities described in the following table in the computation of Genzyme Surgical Products' diluted loss per share for each period because these securities would have an anti-dilutive effect due to Genzyme Surgical Products' net loss per share:
Three Months Ended March 31, ------------------ 2000 1999 ---- ---- (Amounts in thousands) Shares of GZSP Stock issuable for options .......... 554 -- Shares of GZSP Stock issuable upon conversion of the GENZ Notes .................................... 1,130 -- GZSP designated shares (1) ......................... 35 -- ----- ----- Total shares excluded from the diluted loss per GZSP share calculation ............................. 1,719 -- ===== =====
- ---------- (1) GZSP designated shares are shares of GZSP Stock that are not issued and outstanding, but which our board of directors may issue, sell or distribute without allocating the proceeds to Genzyme Surgical Products. GENZYME TISSUE REPAIR: For both periods presented, basic and diluted net loss per share of GZTR common share are the same. We did not include the securities described in the following table in the computation of Genzyme Tissue Repair's diluted loss per share for each period because these securities would have an anti-dilutive effect due to Genzyme Tissue Repair's net loss per share:
Three Months Ended March 31, ------------------ 2000 1999 ---- ---- (Amounts in thousands) Shares of GZTR Stock issuable for options .......... 2,485 3,875 Shares of GZTR Stock issuable upon conversion of the 5% convertible subordinated note (1) .......... -- 6,458 GZTR designated shares ............................. 2,977 2,310 ----- ----- Total shares excluded from the diluted loss per GZTR Share calculation ............................. 5,462 12,643 ====== ======
- -------------- (1) The conversion of Genzyme Tissue Repair's 5% convertible subordinated note was completed in the fourth quarter of 1999. GENZYME CORPORATION NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS 7. SEGMENT REPORTING We present segment information in a manner consistent with the method we use to report this information to our management. Applying SFAS 131, we have five reportable segments: - Therapeutics, which develops, manufactures and distributes human therapeutic products for significant unmet medical needs. The business derives substantially all of its revenue from sales of Cerezyme-Registered Trademark- enzyme. - Diagnostic Products, which provides diagnostic products to niche markets with a focus on IN VITRO diagnostics. - Genzyme Molecular Oncology, which is developing cancer products, with a focus on therapeutic vaccines and angiogenesis inhibitors. - Genzyme Surgical Products, which develops, manufactures and markets surgical products for cardiovascular surgery and general surgery. - Genzyme Tissue Repair, which develops and markets biological products for orthopedic injuries such as cartilage repair and severe burns. Information concerning the operations of these reportable segments is as follows:
Three Months Ended March 31, ---------------------- 2000 1999 ---- ---- (Amounts in thousands) REVENUES: Genzyme General: Therapeutics .......... $ 133,802 $ 115,041 Diagnostic Products ... 15,238 14,692 Genzyme Molecular Oncology 2,555 1,613 Genzyme Surgical Products 29,082 27,353 Genzyme Tissue Repair .... 5,867 4,023 Other .................... 21,422 20,457 Eliminations/Adjustments.. 164 565 --------- --------- Total ............... $ 208,130 $ 183,744 ========= ========= NET INCOME: Genzyme General: Therapeutics .......... $ 29,263 $ 33,871 Diagnostic Products ... 715 1,129 Genzyme Molecular Oncology (5,057) (7,060) Genzyme Surgical Products (10,043) (10,745) Genzyme Tissue Repair .... (4,971) (9,616) Other .................... (171) (2,038) Eliminations/Adjustments . 22,082 10,516 --------- --------- Total ................ $ 31,818 $ 16,057 ========= =========
There has been no material change in segment assets since December 31, 1999. GENZYME CORPORATION NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS 8. ACQUISITION OF BIOMATRIX, INC. AND FORMATION OF GENZYME BIOSURGERY In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon completion of the acquisition, we will form a new operating division called Genzyme Biosurgery and create a new series of common stock to reflect its value and track its performance. We refer to this stock as "GZBX Stock." In connection with the merger, the assets of Genzyme Surgical Products and Genzyme Tissue Repair will become part of Genzyme Biosurgery. In addition, GZSP Stock and GZTR Stock will be exchanged for GZBX Stock. We will account for the acquisition of Biomatrix as a purchase. Biomatrix stockholders will have the option of receiving $37.00 in cash or one share of GZBX Stock for each share of Biomatrix common stock they hold. The merger agreement provides, however, that Genzyme will pay cash for up to 28.38% of the outstanding shares of Biomatrix common stock that receive merger consideration, or up to approximately $245.0 million. Holders of GZSP Stock will receive 0.6060 share of GZBX Stock for each share of GZSP Stock they hold and holders of GZTR Stock will receive 0.3352 share of GZBX Stock for each share of GZTR Stock they hold. For more information about the merger and the merger consideration, we encourage you to carefully read our Registration Statement on Form S-4 filed with the SEC on April 18, 2000, as it may be amended. 9. SUBSEQUENT EVENT In April 2000, Focal Inc. exercised its First Option under the Genzyme/Focal Stock Purchase Agreement. Under the terms of this agreement, Genzyme Surgical Products was required to purchase $5.0 million worth of Focal common stock, or 614,250 shares at a price of $8.14 per share. We are committed, at Focal's option, to make future equity investments of up to $10.0 million subject to certain conditions. In April, 2000, Genzyme General received net proceeds of approximately $5.1 million in connection with a settlement of a lawsuit. The lawsuit, initiated in 1993, pertained to an accidental spill of Ceredase at a fill facility by a contractor to Genzyme General. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion contains forward-looking statements. These forward-looking statements represent the expectations of our management as of the filing date of this report. Actual results could differ materially from those anticipated by the forward-looking statements due to numerous reasons, including the risks and uncertainties described in Exhibit 99.2, "Factors Affecting Future Operating Results," to our 1999 Form 10-K. You should consider carefully each of these risks and uncertainties in evaluating our financial condition and results of operations. We are a biotechnology company that develops innovative products and services for significant unmet medical needs. We have four operating divisions: - Genzyme General, which develops and markets therapeutic products, with an expanding focus on products to treat patients suffering from lysosomal storage disorders and other specialty therapeutics; diagnostic products, with a focus on IN VITRO diagnostics; and other products and services, such as genetic testing services and lipids and peptides for drug delivery. - Genzyme Molecular Oncology, which is developing cancer products, with a focus on therapeutic vaccines and angiogenesis inhibitors; - Genzyme Surgical Products, which develops, manufactures and markets surgical products for cardiovascular surgery and general surgery; and - Genzyme Tissue Repair, which develops and markets biological products for orthopedic injuries, such as cartilage damage and severe burns. For purposes of financial presentation, we allocate all of our programs, products, assets and liabilities to our divisions. We provide separate financial statements for each of our divisions as well as consolidated financial statements that include the consolidated results of each of our divisions and our corporate operations taken as a whole. Holders of GENZ Stock, GZMO Stock, GZSP Stock and GZTR Stock are common stockholders of Genzyme Corporation and have no specific rights to the assets to which each stock relates. Genzyme Corporation continues to hold title to all of the assets and is responsible for all of the liabilities allocated to each of our divisions. This report contains five sets of financial statements: one that presents our results on a consolidated basis and one for each of our four operating divisions. The discussion that follows is a summary of the factors our management believes are necessary for an understanding of each of the five sets of financial statements. In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon completion of the acquisition, we will form a new operating division that will be called Genzyme Biosurgery, and the assets of Genzyme Surgical Products and Genzyme Tissue Repair will become part of that new division. See "Liquidity and Capital Resources" and "Subsequent Events" below. A. RESULTS OF OPERATIONS GENZYME CORPORATION The components of Genzyme's consolidated statements of operations are described in the following table:
THREE MONTHS ENDED MARCH 31, INCREASE/ -------------------- (DECREASE) 2000 1999 % CHANGE ---- ---- -------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Total revenues ................................. $ 208,130 $ 183,744 13% Cost of products and services sold ............. 60,110 55,906 8% Selling, general and administrative ............ 61,551 58,945 4% Research and development (including research and development related to contracts) ..... 36,199 32,834 10% Amortization of intangibles .................... 6,098 6,207 (2)% Charge for purchase of in-process research and development................................ 19,500 -- N/A -------- -------- Total operating costs and expenses ............. 183,458 153,892 19% -------- -------- Operating income ............................... 24,672 29,852 (17)% Other income (expenses), net ................... 19,000 (3,962) 580% -------- -------- Income before income taxes ..................... 43,672 25,890 69% Provision for income taxes ..................... (11,854) (9,833) 21% -------- -------- Net income ..................................... $ 31,818 $ 16,057 98% ======== =========
REVENUES
THREE MONTHS ENDED MARCH 31, INCREASE/ -------------------- (DECREASE) 2000 1999 % CHANGE ---- ---- -------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Product revenue............................... $184,421 $ 163,702 13% Service revenue................................ 20,966 18,730 12% -------- -------- Total product and service revenue......... 205,387 182,432 13% Research and development revenue.............. 2,743 1,312 109% -------- -------- Total revenues...................... $ 208,130 $ 183,744 13% ======== =========
PRODUCT REVENUE: We derive product revenue from sales by Genzyme General of therapeutic and diagnostic products and sales by Genzyme Surgical Products of cardiovascular and general surgery products. Our increase in product revenue during the three months ended March 31, 2000 as compared to the three months ended March 31, 1999 is largely due to increased sales of Cerezyme-Registered Trademark- enzyme, which is a therapy for the treatment of Gaucher disease. The increase In sales of Cerezyme-Registered Trademark- enzyme is attributable to our identification of new Gaucher disease patients throughout the world and strong international sales. We also sell Ceredase-Registered Trademark- enzyme for the treatment of Gaucher disease, but we have successfully converted virtually all Gaucher disease patients to a treatment regimen using Cerezyme-Registered Trademark- enzyme. We have provided information regarding the growth in sales of our Gaucher disease therapies during the periods in the following table:
THREE MONTHS ENDED MARCH 31, INCREASE/ -------------------- (DECREASE) 2000 1999 % CHANGE ---- ---- -------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Sales of Cerezyme-Registered Trademark-enzyme and Ceredase-Registered Trademark-enzyme....... $128,605 $ 113,754 13% % of total product revenue.................... 70% 69%
Our results of operations are highly dependent on sales of Cerezyme-Registered Trademark- enzyme and a reduction in revenue from sales of this product would adversely affect our results of operations. Revenue from Cerezyme-Registered Trademark- enzyme would be impacted negatively if competitors developed alternative treatments for Gaucher disease and the alternative products gained commercial acceptance. We are aware of companies that have initiated efforts to develop competitive products and other companies may do so in the future. SERVICE REVENUE: We derive service revenue from four principal sources: - - genetic testing services performed by Genzyme General; - - genomics services using Genzyme Molecular Oncology's SAGE-TM- gene expression technology; - - Genzyme Tissue Repair's Carticel-Registered Trademark- chondrocytes for the treatment of cartilage damage; and - - Genzyme Tissue Repair's Epicel-TM- skin grafts for the treatment of severe burns. Our service revenue increased during the three months ended March 31, 2000 as compared to the same period in 1999 as a result of increased sales of Carticel-Registered Trademark- chondrocytes and Epicel-TM- skin grafts, as well as increased revenue from genetic testing. The increase in genetic testing service revenue during the period is a result of growth in sales of our DNA and cancer testing services. These increases in service revenues were partially offset by a decrease in genomics service revenue as a result of lower sales volume. RESEARCH AND DEVELOPMENT REVENUE: Our research and development revenue increased during the three months ended March 31, 2000 as compared to the same period of 1999 due to an increase in licensing revenue. Genzyme Molecular Oncology recognized licensing revenue in the first three months of 2000 as a result of a $2.0 million development milestone payment received related to the advancement by Schering- Plough Corporation of the p53 tumor suppressor gene in ovarian cancer clinical trials. The increase in research and development revenue was partially offset by a decrease in revenue related to StressGen/Genzyme LLC, our joint venture with StressGen Biotechnologies Corporation and the Canadian Medical Discoveries Fund, Inc. to develop stress gene therapies for the treatment of cancer. This joint venture was dissolved at the end of 1999. The research and development revenues for the three months ended March 31, 1999 included work performed by Genzyme Molecular Oncology on behalf of the joint venture for which there was no comparable amount in the same period of 2000. INTERNATIONAL PRODUCT AND SERVICE REVENUE: A substantial portion of Genzyme's revenue was generated outside of the United States, as described in the following table. Most of these revenues were attributable to sales of Cerezyme-Registered Trademark- enzyme.
THREE MONTHS ENDED MARCH 31, INCREASE/ -------------------- (DECREASE) 2000 1999 % CHANGE ---- ---- -------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) International product and service revenue.......................... $86,777 $72,336 20% % of total product and service revenue........ 42% 40%
MARGINS
THREE MONTHS ENDED MARCH 31, INCREASE/ -------------------- (DECREASE) 2000 1999 % CHANGE ---- ---- -------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Product margin................................ $136,162 $ 119,884 14% % of product revenue.......................... 74% 73% Service margin................................ 9,115 6,642 39% % of service revenue.......................... 43% 35% Total gross margin............................ $ 145,277 $ 126,526 15% % of total product and service revenue........ 71% 69%
We provide a broad range of healthcare products and services. As a result, our gross margin varies significantly based on the category of product or service. Sales of therapeutic products, including Cerezyme-Registered Trademark- enzyme, result in higher margins than diagnostic products. Our service margin increased during the period. This increase is attributable to: - an increase in sales of DNA and cancer testing services; - increased sales of Carticel-Registered Trademark- chondrocytes and Epicel-TM- skin grafts; and - a reduction in labor, materials and production costs for Carticel-Registered Trademark- chondrocytes and Epicel-TM- skin grafts. These increases to service margins were partially offset, however, by reduced margins from our genomics services business due to lower sales volume. OPERATING EXPENSES The increase in selling, general and administrative expenses for the three months ended March 31, 2000 is related to: - increased staffing to support the growth in several of Genzyme General's product lines; - increased expenditures to support the increased sales of Cerezyme-Registered Trademark- enzyme and Thyrogen -Registered Trademark- hormone; and - increased expenditures for marketing Genzyme Surgical Products' cardiovascular products, primarily the minimally invasive cardiac surgery instrument line. The increases in selling, general and administrative expenses were partially offset by a reduction of legal costs by Genzyme Molecular Oncology associated with the prosecution and maintenance of its intellectual property portfolio and a decrease in its license issue fees. The increase in research and development expense for the three months ended March 31, 2000 as compared to the same period of 1999 is primarily a result of: - increased costs in connection with the operations of ATIII LLC, our joint venture with Genzyme Transgenics Corporation for the development and commercialization of transgenic recombinant human antithrombin III; - increased spending on our program to develop Fabrazyme-TM- enzyme for the treatment of Fabry disease; - increased spending in our cell and gene therapy programs; and - increased spending on the development programs for our surgical instruments and devices. In March 2000, we recorded a charge of $19.5 million to in-process research and development representing the initial amounts payable to Synpac (North Carolina), Inc. under a license granted by Synpac to Genzyme to develop and commercialize an enzyme replacement therapy for Pompe disease produced using a Chinese hamster ovary cell line. OTHER INCOME AND EXPENSES
THREE MONTHS ENDED MARCH 31, INCREASE/ -------------------- (DECREASE) 2000 1999 % CHANGE ---- ---- -------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Equity in net loss of unconsolidated affiliates .................... $ (8,133) $(10,092) (19)% Gain on affiliate sale of stock .... 20,270 606 3,245% Gain on sale of investments in equity securities ............. -- 1,963 N/A Minority interest .................. 856 866 (1)% Gain on sale of assets ............. 31 -- N/A Other .............................. (29) -- N/A Investment income .................. 9,944 8,193 21% Interest expense ................... (3,939) (5,498) (28)% --------- --------- Total other income (expenses), net . $ 19,000 $ (3,962) 580% ========= =========
EQUITY IN NET LOSS OF UNCONSOLIDATED AFFILIATES We currently own approximately 30% of the common stock of Genzyme Transgenics and record our portion of its results in net loss of unconsolidated affiliates. We also record the results of the following joint ventures in net loss of unconsolidated affiliates:
JOINT VENTURE PARTNER EFFECTIVE DATE PRODUCT/INDICATION GENZYME DIVISION - ------------- ------- -------------- ------------------ ---------------- RenaGel LLC GelTex Pharmaceuticals, Inc. June 1997 Renagel-Registered Trademark- Genzyme General capsules for the reduction of serum phosphorus in patients with end-stage renal disease BioMarin/ BioMarin Pharmaceutical Inc. September 1998 Aldurazyme-TM-enzyme for Genzyme General Genzyme LLC the treatment of mucopolysaccharidosis-I Pharming/ Genzyme LLC Pharming Group, N.V. October 1998 Transgenic human alpha-glucosidase Genzyme General for the treatment of Pompe disease Diacrin/Genzyme LLC Diacrin, Inc. October 1996 Products using porcine Genzyme Tissue Repair fetal cells for the (until May 1999); treatment of Parkinson's Genzyme General (after and Huntington's diseases May 1999)
Our equity in net loss of unconsolidated affiliates decreased for the three months ended March 31, 2000 as compared to the three months ended March 31, 1999 as a result of; - decreased losses from Genzyme Transgenics and RenaGel LLC; and - the dissolution of StressGen/Genzyme LLC. These decreases were partially offset by increased losses from our joint ventures with BioMarin and Pharming. GAIN ON AFFILIATE SALE OF STOCK We recognized a gain of $20.3 million for the three months ended March 31, 2000 and $0.6 million for the three months ended March 31, 1999 due to the issuance by Genzyme Transgenics of additional shares of Genzyme Transgenics common stock. MINORITY INTEREST We consolidate the results of ATIII LLC and record Genzyme Transgenics' portion of the losses of that joint venture as minority interest. Minority interest decreased, notwithstanding increases in ATIII LLC's losses, because Genzyme Transgenics' portion of those losses decreased. GAIN ON SALE OF INVESTMENTS IN EQUITY SECURITIES We recorded a gain of $2.0 million in January 1999 upon the sale of the shares of Techne Corporation common stock that we received when we sold our research products business to Techne. There were no such sales of stock during the three months ended March 31, 2000. INVESTMENT INCOME Our investment income increased for the three months ended March 31, 2000 due primarily to higher average cash balances as compared to the three months ended March 31, 1999. INTEREST EXPENSE Our interest expense decreased for the period as a result of our repayment in November 1999 of $82.0 million outstanding under our revolving credit facility from a syndicate of banks. TAX PROVISION
THREE MONTHS ENDED MARCH 31, INCREASE/ -------------------- (DECREASE) 2000 1999 % CHANGE ---- ---- -------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Provision for income taxes............... $ 11,854 $ 9,833 21% Tax rate................................. 27% 38%
Our tax rates vary from the U.S. statutory tax rate as a result of our: - provision for state income taxes; - use of a foreign sales corporation; - nondeductible amortization of intangibles; - use of tax credits; and - share of losses of unconsolidated affiliates. In the three months ended March 31, 2000, we released one of our valuation allowances which reduced our tax provision by approximately $3.4 million and reduced our tax rate by 7.8%. GENZYME GENERAL In June 1999, we created Genzyme Surgical Products. The business of Genzyme Surgical Products previously operated as a business unit of Genzyme General. The discussion that follows reflects the results of operations of Genzyme General as if Genzyme Surgical Products had existed as a separate division of Genzyme for all periods presented. The components of Genzyme General's combined statements of operations are described in the following table:
THREE MONTHS ENDED MARCH 31, INCREASE/ -------------------- (DECREASE) 2000 1999 % CHANGE ---- ---- -------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Total revenues ................................. $ 170,626 $ 150,766 13% Cost of products and services sold ............. 41,048 36,722 12% Selling, general and administrative ............ 38,222 35,725 7% Research and development (including research and development related to contracts) .............. 23,243 21,065 10% Amortization of intangibles .................... 1,968 2,086 (6)% Charge for purchase of in-process research and development ............................. 19,500 -- N/A --------- --------- Total operating costs and expenses ............. 123,981 95,598 30% --------- --------- Operating income ............................... 46,645 55,168 (15)% Other income (expenses), net ................... 17,508 (1,447) 1,310% --------- --------- Income before income taxes ..................... 64,153 53,721 19% Provision for income taxes ..................... (18,844) (20,216) (7)% --------- --------- Net income ..................................... 45,309 33,505 35% Allocated tax benefits ......................... 6,328 9,721 (35)% --------- --------- Net income attributable to GENZ Stock .......... $ 51,637 $ 43,226 19% ========= =========
REVENUES
THREE MONTHS ENDED MARCH 31, INCREASE/ -------------------- (DECREASE) 2000 1999 % CHANGE ---- ---- -------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Product revenue ................................ $155,339 $136,349 14% Service revenue ................................ 15,120 13,892 9% -------- -------- Total product and service revenue.......... 170,459 150,241 13% Research and development revenue ............... 167 525 (68)% -------- -------- Total revenues ....................... $170,626 $150,766 13% ======== ========
The following table sets forth Genzyme General's product and service revenue on a segment basis:
THREE MONTHS ENDED INCREASE/ MARCH 31, (DECREASE) 2000 1999 % CHANGE -------- -------- -------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Therapeutics ..................... $137,842 $117,915 17% Diagnostics: Product revenue ............. 15,268 14,694 4% Service revenue ............. 15,120 13,892 9% -------- -------- -------- Total Diagnostics ........... 30,388 28,586 6% Other ............................ 2,229 3,740 (40)% -------- -------- -------- Total product and service revenues $170,459 $150,241 13% ======== ======== ========
THERAPEUTICS Genzyme General's increase in product revenue is largely due to increased sales of Cerezyme-Registered Trademark- enzyme, which is attributable to the identification of new Gaucher disease patients throughout the world and strong international sales. We have provided information regarding the growth in sales of Genzyme General's Gaucher disease therapies during the period in the following table:
THREE MONTHS ENDED INCREASE/ MARCH 31, (DECREASE) 2000 1999 % CHANGE --------- --------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Sales of Cerezyme-Registered Trademark-enzyme and Ceredase-Registered Trademark-enzyme $128,605 $113,754 13% % of total product revenue .................. 83% 83%
Genzyme General's results of operations are highly dependent on sales of Cerezyme-Registered Trademark- enzyme. A reduction in revenue from sales of this product would adversely affect its results of operations. Revenue from Cerezyme-Registered Trademark- enzyme would be impacted negatively if competitors developed alternative treatments for Gaucher disease and the alternative products gained commercial acceptance. Genzyme General is aware of companies that have initiated efforts to develop competitive products and other companies may do so in the future. Therapeutics revenue for each period also includes sales of Thyrogen-Registered Trademark- hormone, which is an adjunctive diagnostic tool for well differentiated thyroid cancer. DIAGNOSTICS Diagnostics revenues increased for the three months ended March 31, 2000 as compared to the same period of 1999, due primarily to increased sales of HDL and LDL cholesterol testing products, despite the sale of our bioreagent and ELISA product lines, in July 1999. Diagnostics' product revenue includes royalties on product sales by Techne Corporation's biotechnology group. Diagnostics' service revenue increased during the period as a result of growth in sales of our DNA and cancer testing services. OTHER Other revenue for each period include sales of: - lipids and peptides for drug delivery; and - genetic testing services. INTERNATIONAL PRODUCT AND SERVICE REVENUE A substantial portion of Genzyme General's revenue was generated outside of the United States, as described in the following table. Most of these revenues were attributable to sales of Cerezyme-Registered Trademark- enzyme.
THREE MONTHS ENDED INCREASE/ MARCH 31, (DECREASE) 2000 1999 % CHANGE ------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) International product and service revenue ................. $77,772 $63,456 23% % of total product and service revenue 46% 42%
MARGINS
THREE MONTHS ENDED INCREASE/ MARCH 31, (DECREASE) 2000 1999 % CHANGE -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Product margin ....................... $123,119 $108,382 14% % of product revenue ................. 79% 79% Service margin ....................... 6,292 5,137 22% % of service revenue ................. 42% 37% Total gross margin ................... $129,411 $113,519 14% % of total product and service revenue 76% 76%
Genzyme General provides a broad range of healthcare products and services. As a result, Genzyme General's gross margin varies significantly based on the category of product or service. Sales of therapeutic products, including Cerezyme-Registered Trademark- enzyme, result in higher margins than diagnostic products. Our service margin increased during each period as a result of increases in sales of DNA and cancer testing services. OPERATING EXPENSES The increase in selling, general and administrative expenses for the three months ended March 31, 2000 as compared to the three months ended March 31, 1999 is primarily related to: - increased staffing to support the growth in several of Genzyme General's product lines; and - increased expenditures to support the increased sales of Cerezyme-Registered Trademark- enzyme and Thyrogen -Registered Trademark- hormone. The increase in research and development expense for the three months ended March 31, 2000 as compared to the three months ended March 31, 1999 is a result of: - increased costs in connection with the results of ATIII LLC, the joint venture with Genzyme Transgenics Corporation for the development and commercialization of transgenic recombinant human antithrombin III; and - increased spending on Genzyme General's program to develop Fabrazyme-TM- enzyme for the treatment of Fabry disease; In March 2000, Genzyme General recorded a charge of $19.5 million to in-process research and development representing the initial amounts payable to Synpac (North Carolina), Inc. under a license granted by Synpac to Genzyme to develop and commercialize an enzyme replacement therapy for Pompe disease produced using a Chinese hamster ovary cell line. OTHER INCOME AND EXPENSES
THREE MONTHS ENDED INCREASE/ MARCH 31, (DECREASE) 2000 1999 % CHANGE -------- -------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Equity in net loss of unconsolidated affiliates .................... $ (8,133) $ (7,756) 5% Gain on affiliate sale of stock .... 20,270 606 3,245% Gain on sale of investments in equity securities ............. -- 1,963 N/A Minority interest .................. 856 866 (1)% Gain on sale of assets ............. 35 -- N/A Other .............................. (56) -- N/A Investment income .................. 8,087 7,923 2% Interest expense ................... (3,551) (5,049) (30)% -------- -------- ---------- Total other income (expenses), net . $ 17,508 $ (1,447) 1,310% ======== ======== ==========
EQUITY IN NET LOSS OF UNCONSOLIDATED AFFILIATES Genzyme General records in equity in net loss of unconsolidated affiliates its portion of the results of our joint ventures with GelTex Pharmaceuticals, Inc., BioMarin Pharmaceutical Inc., Pharming Group, N.V. and Diacrin, Inc. Genzyme General also records a portion of the results of Genzyme Transgenics in equity in net loss of unconsolidated affiliates. Genzyme General's equity in net loss of unconsolidated affiliates increased for the three months ended March 31, 2000 as compared to the three months ended March 31, 1999 as a result of: - - the reallocation of our interest in our joint venture with Diacrin from Genzyme Tissue Repair to Genzyme General in May 1999; - - increased losses from our joint venture with BioMarin to develop and commercialize Aldurazyme-TM- enzyme for the treatment of mucopolysaccharidosis-I; and - - increased losses from our joint venture with Pharming to develop a therapy for Pompe disease. These increases were partially offset by decreased losses from Genzyme Transgenics and RenaGel LLC. GAIN ON AFFILIATE SALE OF STOCK Genzyme General recognized a gain of $20.3 million for the three months ended March 31, 2000 and $0.6 million for the three months ended March 31, 1999 due to the issuance by Genzyme Transgenics of additional shares of Genzyme Transgenics common stock. MINORITY INTEREST Genzyme General consolidates the results of ATIII LLC and records Genzyme Transgenics' portion of the losses of that joint venture as minority interest. Minority interest decreased, notwithstanding increases in ATIII LLC's losses, because Genzyme Transgenics' portion of those losses decreased. GAIN ON SALE OF INVESTMENTS IN EQUITY SECURITIES Genzyme General recorded gains of $2.0 million in January 1999 upon the sale of the shares of Techne common stock that it received when it sold its research products business to Techne. There were no such sales of stock during the three months ended March 31, 2000. INVESTMENT INCOME Genzyme General's investment income increased for the three months ended March 31, 2000 due primarily to higher average cash balances as compared to the three months ended March 31, 1999. INTEREST EXPENSE Genzyme General's interest expense decreased for the three months ended March 31, 2000 as a result of our repayment in November 1999 of $82.0 million outstanding under our revolving credit facility, which had been allocated to Genzyme General. TAX PROVISION AND ALLOCATED TAX BENEFITS
THREE MONTHS ENDED INCREASE/ MARCH 31, (DECREASE) 2000 1999 % CHANGE --------- --------- ----------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Provision for income taxes .... $ 18,844 $ 20,216 (7)% Effective tax rate ............ 29% 38% Tax benefits allocated from: Genzyme Molecular Oncology 1,096 1,934 (43)% Genzyme Surgical Products 3,420 3,825 (11)% Genzyme Tissue Repair .... 1,812 3,962 (54)% --------- --------- Net allocated tax benefits .... 6,328 9,721 (35)% --------- --------- Net tax provision ............. $ 12,516 $ 10,495 19% ========= =========
Genzyme General's tax rates vary from the U.S. statutory tax rate as a result of its: - - provision for state income taxes; - - use of a foreign sales corporation; - - nondeductible amortization of intangibles; - - use of tax credits; and - - share of losses of unconsolidated affiliates. In the three months ended March 31, 2000, we released one of our valuation allowances which reduced our tax provision by $3.4 million and reduced our tax rate by 5.3%. GENZYME MOLECULAR ONCOLOGY The components of Genzyme Molecular Oncology's combined statements of operations are described in the following table:
THREE MONTHS ENDED INCREASE/ MARCH 31, (DECREASE) 2000 1999 % CHANGE ------ ------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Total revenues ........................ $ 2,555 $ 1,613 58% Cost of revenues ...................... 56 640 (91%) Selling, general and administrative ... 1,190 1,619 (26%) Research and development .............. 4,058 3,905 4% Amortization of intangibles ........... 2,956 2,956 0% ------- ------- Total operating costs and expenses 8,260 9,120 (9%) ------- ------- Operating loss ........................ (5,705) (7,507) (24%) Other expenses, net ................... (14) (215) (93%) ------- ------- Loss before income taxes .............. (5,719) (7,722) (26%) Tax benefit ........................... 662 662 0% ------- ------- Net loss attributable to GZMO Stock ... $(5,057) $(7,060) (28%) ======= =======
REVENUES
THREE MONTHS ENDED INCREASE/ MARCH 31, (DECREASE) 2000 1999 % CHANGE ------- ------- ---------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Service revenue ................ $ -- $ 911 (100%) Research and development revenue -- 298 (100%) Royalty and licensing revenue .. 2,555 404 532% ------- ------- Total revenues ............ $2,555 $1,613 58% ======= =======
Service revenues decreased as a result of lower sales volumes for genomics services using Genzyme Molecular Oncology's SAGE-TM- gene expression technology. Our research and development revenue increased during the three months ended March 31, 2000 as compared to the same period of 1999 due to an increase in licensing revenue. Genzyme Molecular Oncology recognized licensing revenue in the first three months of 2000 as a result of a $2.0 million development milestone payment received related to the advancement by Schering-Plough Corporation of the p53 tumor suppressor gene in ovarian cancer clinical trials. Licensing revenue increased as a result of a $2.0 million development milestone payment received in the first quarter of 2000 under a license agreement with Schering-Plough Corporation. This milestone payment was related to the advancement by Schering-Plough of the p53 tumor suppressor gene in ovarian cancer clinical trials. COST OF REVENUES Genzyme Molecular Oncology's cost of revenues includes: - services performed using the SAGE-TM- gene expression technology on behalf of third parties; - royalties paid to third parties; and - work performed on behalf of StressGen/Genzyme LLC. Cost of revenues decreased as a result of the dissolution of StressGen/Genzyme LLC and a planned reduction of genomics services provided by Genzyme Molecular Oncology. OPERATING EXPENSES Genzyme Molecular Oncology's selling, general and administrative expenses decreased primarily as a result of reduced legal costs associated with the prosecution and maintenance of its intellectual property portfolio and a decrease in license issue fees. Genzyme Molecular Oncology's research and development expenses increased as a result of: - clinical trial costs for its melanoma and breast tumor vaccine product; and - an increase in the number of research personnel and related expenses required to support its immunotherapy and antiangiogenesis programs. AMORTIZATION OF INTANGIBLES Genzyme Molecular Oncology's amortization of intangibles is attributable to intangible assets acquired in connection with the acquisition of PharmaGenics, Inc. in June 1997. Genzyme Molecular Oncology's other expenses decreased as a result of the dissolution of StressGen/Genzyme LLC in December 1999. Genzyme Molecular Oncology no longer incurs expenses related to this joint venture because it was dissolved in 1999. GENZYME SURGICAL PRODUCTS In June 1999, we created Genzyme Surgical Products. The business of Genzyme Surgical Products previously operated as a business unit of Genzyme General. Genzyme Surgical Products consists primarily of: - - the products and assets we acquired upon the purchase of Deknatel Snowden Pencer, Inc. in 1996; - - the Sepra products (our line of products and product candidates designed to limit post-operative adhesions); and - - our research and development programs in biomaterials and gene and cell therapy for cardiovascular disease. Genzyme General transferred $150.0 million in cash, cash equivalents, investments and certain other assets, to Genzyme Surgical Products in connection with the creation of Genzyme Surgical Products as a separate division of Genzyme. In exchange for this transfer, we issued approximately 14.8 million shares of GZSP Stock and distributed them as a dividend to holders of GENZ Stock. The following discussion reflects the results of operations of Genzyme Surgical Products as if it had existed as a separate division of Genzyme for all periods presented. The components of Genzyme Surgical Products' combined statements of operations are described in the following table:
THREE MONTHS ENDED MARCH 31, INCREASE/(DECREASE) 2000 1999 % CHANGE ------------------- ------------------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Total revenues ........................ $ 29,082 $ 27,353 6% Cost of products sold ................. 16,039 15,844 1% Selling, general and administrative ... 16,400 15,287 7% Research and development .............. 6,971 5,602 24% Amortization of intangibles ........... 1,426 1,417 1% -------- -------- Total operating costs and expenses 40,836 38,150 7% -------- -------- Operating loss ........................ (11,754) (10,797) 9% Other income (expense), net ........... 1,711 52 3,190% -------- -------- Net loss attributable to GZSP Stock ... $(10,043) $(10,745) (7%) ======== ========
REVENUES
THREE MONTHS ENDED MARCH 31, ----------------- INCREASE/(DECREASE) 2000 1999 % CHANGE ------- ------ ------------------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Cardiovascular surgery products... $19,650 $19,388 1% General surgery products ......... 6,989 5,897 19%
Other products ................ 2,443 2,068 18% ------- -------- Total revenues ........... $29,082 $27,353 6% ======= ========
Cardiovascular surgery products include chest drainage and fluid management systems, surgical closures, biomaterials, and instruments for conventional and minimally invasive cardiac surgery. The increase in cardiovascular surgery product revenues is due to increased sales of instruments for minimally invasive cardiac surgery. This increase was partially offset by a decrease in sales of fluid management systems and surgical closures as a result of seasonal fluctuations for these products. The increase in general surgery product revenues is primarily due to the increase in sales of Sepra Film-Registered Trademark- bioresorbable membrane. Product sales of Sepra Film-Registered Trademark- bioresorbable membrane for the three months ended March 31, 2000 were $3.9 million compared to $2.9 million during the same period in 1999. An increase in general surgery instrument sales also contributed to the overall increase in general surgery product revenue. Other surgery product revenues consist of sales of Genzyme Surgical Products' Snowden-Pencer-Registered Trademark- line of instruments for plastic surgery and products sold to original equipment manufacturers, including sutures. The increase in other surgery product revenues for the first three months of 2000 as compared to the same period of 1999 is primarily due to increased sales of plastic surgery instruments. International revenue as a percentage of total sales for the three months ended March 31, 2000 was 29% as compared to 30% in the same period of 1999. MARGINS
THREE MONTHS ENDED MARCH 31, ----------------- INCREASE/(DECREASE) 2000 1999 % CHANGE ------- ------ ------------------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Gross margins ......................... $13,043 $11,509 13% % of total revenues .............. 45% 42%
Genzyme Surgical Products sells a broad range of products. As a result, Genzyme Surgical Products' gross margins may vary significantly depending on the particular market conditions of each product line. Gross margins increased in the first quarter of 2000 when compared to the same period of 1999 due to increased sales of higher margin products, such as devices for minimally invasive cardiac surgery. OPERATING EXPENSES Genzyme Surgical Products' selling, general and administrative expenses increased in the first three months of 2000 as a result of increased spending in marketing of the cardiovascular products, primarily the minimally invasive cardiac surgery instrument line. Genzyme Surgical Products' research and development expenses for the three months ended March 31, 2000 increased when compared to the same period in 1999 as a result of increased spending in Genzyme Surgical Products' cell and gene therapy programs as well as increased research and development spending for surgical instruments and devices. OTHER INCOME AND EXPENSES
THREE MONTHS ENDED MARCH 31, ----------------- INCREASE/(DECREASE) 2000 1999 % CHANGE ------- ------ ------------------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Loss on sale of assets..... $ (4) $ -- N/A Other ..................... 32 46 (30%) Investment income ......... 1,682 7 Interest expense .......... 1 (1) 200% ------- ----- Total other income $ 1,711 $ 52 3,190% ======= =====
The increase in other income and expenses is primarily due to an increase in investment income. Investment income increased because Genzyme Surgical Products had a higher average cash balance during the three months ended March 31, 2000 as a result of the allocation in June 1999 of $150.0 million in cash from Genzyme General to Genzyme Surgical Products. GENZYME TISSUE REPAIR The components of Genzyme Tissue Repair's combined statements of operations are described in the following table:
THREE MONTHS ENDED MARCH 31, ----------------- INCREASE/(DECREASE) 2000 1999 % CHANGE ------- ------ ------------------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Total revenues ...................... $ 5,867 $ 4,023 46% Cost of services sold ............... 3,023 2,998 1% Selling, general and administrative.. 5,739 6,314 (9)% Research and development ............ 1,871 1,968 (5)% -------- -------- Total operating costs and expenses 10,633 11,280 (6)% Operating loss ...................... (4,766) (7,257) (34)% Other income (expenses), net ........ (205) (2,359) (91)% -------- -------- Net loss attributable to GZTR stock.. $ (4,971) $ (9,616) (48)% ======== ======== REVENUES
THREE MONTHS ENDED MARCH 31, ----------------- INCREASE/(DECREASE) 2000 1999 % CHANGE ------- ------ ------------------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Carticel-Registered Trademark-chondrocytes $4,532 $2,942 54% Epicel-TM-skin grafts .................... 1,314 996 32% Other .................................... 21 85 (75)% ------ ------ Total revenues .............. $5,867 $4,023 46% ====== ======
Genzyme Tissue Repair's service revenue increased during the three months ended March 31, 2000 as compared to the same period of 1999 as a result of increases in sales of Carticel-Registered Trademark- chondrocytes and Epicel-TM- skin grafts. The increase in sales of Carticel-Registered Trademark- chondrocytes during the period is a result of continued increases in the numbers of patients treated and surgeons trained as well as an increase in the number of insurance reimbursement approvals. Revenue from Epicel-TM- skin grafts varies widely from quarter to quarter depending on the number of patients requiring severe burn care. GROSS MARGIN
THREE MONTHS ENDED MARCH 31, ----------------- INCREASE/(DECREASE) 2000 1999 % CHANGE ------- ------ ------------------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Total gross margin................................... $2,844 $1,025 177% % of total revenue................................... 48% 25%
Genzyme Tissue Repair's gross margins improved in both periods as a result of: - increased sales of Carticel-Registered Trademark- chondrocytes and Epicel-TM- skin grafts; - a reduction in labor, materials and production costs for Carticel-Registered Trademark- chondrocytes and Epicel-TM- skin grafts; and - continued expense controls. OPERATING EXPENSES Genzyme Tissue Repair's selling, general and administrative expenses decreased in the three months ended March 31, 2000 as compared to the same period of 1999 as a result of its efforts to streamline its operations. Its research and development expenses decreased in the period due to the termination of its TGF-beta and other research and development programs. OTHER INCOME AND EXPENSES
THREE MONTHS ENDED MARCH 31, ----------------- INCREASE/(DECREASE) 2000 1999 % CHANGE ------- ------ ------------------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA) Equity in net loss of joint venture.. $ -- $(2,007) (100)% Other ............................... (5) -- N/A Interest income ..................... 102 93 10% Interest expense .................... (302) (445) (32)% ------ ------- Total other income (expenses) .... $ (205) $(2,359) (91)% ====== =======
Equity in net loss of joint venture decreased during the period as a result of the reallocation of Genzyme's ownership interest in Diacrin/Genzyme LLC from Genzyme Tissue Repair to Genzyme General in May 1999. Interest income increased in the three months ended March 31, 2000 as a result of higher average cash balances during the period. Interest expense decreased in the three months ended March 31, 2000 as a result of the completion of the conversion of Genzyme Tissue Repair's 5% convertible subordinated note in the fourth quarter of 1999. B. LIQUIDITY AND CAPITAL RESOURCES GENZYME CORPORATION At March 31, 2000, we had cash, cash-equivalents, and short- and long-term investments of $686.6 million, an increase of $33.6 million from December 31, 1999. We generated $46.4 million in cash from our operations for the three months ended March 31, 2000. Our investing activities utilized $67.4 million in cash for the three months ended March 31, 2000. Investing activities used: - $51.4 million for our net purchases of investments; - $13.6 million to fund capital expenditures; and - $6.0 million to fund our investments in joint ventures; During the three months ended March 31, 2000, we received $16.6 million in cash from exercises of stock options and the issuance of stock under our employee stock purchase plan. In November 1999, we refinanced our $225.0 million revolving credit facility with a $50.0 million revolving credit facility that matures in November 2000 and a $100.0 million revolving credit facility that matures in November 2002. At March 31, 2000, $23.0 million was outstanding in the credit facility that matures in November 2002. We believe that our available cash, investments and cash flow from operations will be sufficient to fund our planned operations and capital requirements for the foreseeable future. Although we currently have substantial cash resources and positive cash flow, we intend to use substantial portions of our available cash for: - product development and marketing; - expanding facilities; - working capital; and - strategic business initiatives. Our cash reserves will be further reduced to pay principal and interest on the following debt: - $21.2 million in principal under our 5% convertible subordinated debentures due August 2003, which are convertible into GENZ Stock; and - $250.0 million in principal under our 5 1/4% convertible subordinated notes due June 2005, which are convertible into GENZ Stock, GZMO and GZSP Stock. Our cash reserves will also be reduced if we exercise our option to purchase the limited partnership interests in Genzyme Development Partners, L.P. and use cash to pay all or a portion of the approximately $26.0 million advance payment to the limited partners. This option will be exercisable during the ninety day period beginning August 31, 2000. Genzyme Development Partners is a Delaware limited partnership that was formed in 1989 to develop, produce and derive income from the sale of Sepra products. Its general partner is a wholly-owned subsidiary of Genzyme. If we use cash to pay or redeem this debt, including the interest due on it, our cash reserves will be diminished. In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon completion of the acquisition, we will form a new operating division called Genzyme Biosurgery and create a new series of common stock to reflect its value and track its performance. We refer to this stock as "GZBX Stock." In connection with the merger, the assets of Genzyme Tissue Repair will become part of Genzyme Biosurgery. In addition, upon shareholder approval, GZSP Stock and GZTR Stock will be exchanged for GZBX Stock. We will account for the acquisition of Biomatrix as a purchase. Biomatrix stockholders will have the option of receiving $37.00 in cash or one share of GZBX Stock for each share of Biomatrix common stock they hold. The merger agreement provides, however, that Genzyme will pay cash for up to 28.38% of the outstanding shaes of Biomatrix common stock that receive merger consideration, or up to approximately $245.0 million. Holders of GZSP Stock will receive 0.6060 share of GZBX Stock for each share of GZSP Stock they hold and holders of GZTR Stock will receive 0.3352 share of GZBX Stock for each share of GZTR Stock they hold. For more information about the merger and the merger consideration, we encourage you to carefully read the Registration Statement on Form S-4 filed with the SEC on April 18, 2000, as it may be amended. The acquisition, which we expect to complete in the second quarter of 2000, is subject to: - approval by Biomatrix's shareholders; - approval by our shareholders, including separate approval of the holders of GZSP Stock and GZTR Stock; - clearance under federal antitrust laws; and - other customary closing conditions. To satisfy these and other commitments, we may have to obtain additional financing. We cannot guarantee that we will be able to obtain any additional financing, extend any existing financing arrangement, or obtain either on favorable terms. GENZYME GENERAL At March 31, 2000, Genzyme General had cash, cash-equivalents, and short- and long-term investments of $560.6 million, an increase of $46.7 million from December 31, 1999. Genzyme General generated $64.2 million in cash from its operations for the three months ended March 31, 2000. Genzyme General's investing activities utilized $81.6 million in cash for the three months ended March 31, 2000. Investing activities used: - $63.2 million for Genzyme General's net purchases of investments; - $14.5 million to fund capital expenditures; and - $6.0 million to fund Genzyme General's investments in joint ventures. During the three months ended March 31, 2000, Genzyme General received $12.7 million in cash from exercise of stock options and the issuance of stock under our employee stock purchase plan. In 1998, our board of directors made $30.0 million of Genzyme General's cash available to Genzyme Molecular Oncology under an equity line of credit. Under the terms of this equity line, Genzyme Molecular Oncology may draw down funds as needed in exchange for GZMO designated shares. GZMO designated shares are shares of GZMO Stock that are not issued and outstanding, but which our board of directors may issue, sell or distribute without allocating the proceeds to Genzyme Molecular Oncology. In April 2000, Genzyme Molecular Oncology drew $15.0 million of cash from this equity line to meets its financing needs. We have included more information about this draw below under the heading "Subsequent Events - Genzyme Molecular Oncology Equity Line of Credit," which we incorporate into this discussion by reference. The amount remaining available for Genzyme Molecular Oncology to draw under the equity line is $15.0 million. In 1998, our board of directors also made $50.0 million of Genzyme General's cash available to Genzyme Tissue Repair under an equity line of credit. Under the terms of this equity line, Genzyme Tissue Repair may draw down funds as needed each quarter in exchange for GZTR designated shares. In February 1999, Genzyme Tissue Repair made a $5.0 million draw under the line. In May 1999, the amount available under this equity line was reduced by $25.0 million to $20.0 million in connection with the reallocation of our ownership interest in Diacrin/Genzyme LLC from Genzyme Tissue Repair to Genzyme General. In March 2000, Genzyme Tissue Repair made a $5.0 million draw on this equity line in exchange for 765,169 GZTR designated shares. As of March 31, 2000, $15.0 million of cash remained available to Genzyme Tissue Repair under this equity line. Genzyme General, together with our other operating divisions, has access to Genzyme's revolving credit facilities. At March 31, 2000, $50.0 million was available under a facility that matures in November 2000 and $77.0 million was available under a facility that matures in November 2002. We believe that Genzyme General's available cash, investments and cash flow from operations will be sufficient to fund its planned operations and capital requirements for the foreseeable future. Although Genzyme General currently has substantial cash resources and positive cash flow, it intends to use substantial portions of its available cash for: - product development and marketing; - expanding facilities; - working capital; and - strategic business initiatives. Genzyme General's cash reserves will be further reduced to pay principal and interest on the following debt: - $21.2 million in principal under our 5% convertible subordinated debentures due August 2003, which are convertible into GENZ Stock; and - $250.0 million in principal under our 5 1/4% convertible subordinated notes due June 2005, which are convertible into GENZ Stock. If Genzyme General uses cash to pay or redeem any of this debt, including the interest due on it, its cash reserves will be diminished. In addition, Genzyme General's cash resources will be reduced to the extent that the liabilities of Genzyme Molecular Oncology, Genzyme Surgical Products or Genzyme Tissue Repair affect our consolidated results of operations. To satisfy these and other commitments, Genzyme General may have to obtain additional financing. We cannot guarantee that Genzyme General will be able to obtain any additional financing, extend any existing financing arrangement, or obtain either on favorable terms. GENZYME MOLECULAR ONCOLOGY At March 31, 2000, Genzyme Molecular Oncology had cash and cash equivalents of $1.5 million, a decrease of $2.0 million from December 31, 1999. During the first quarter of 2000, Genzyme Molecular Oncology used $3.3 million of cash for operations. Financing activities provided $1.2 million of cash proceeds from exercises of stock options and the issuance of stock under our employee stock purchase plan. In 1998, our board of directors made $30.0 million of Genzyme General's cash available to Genzyme Molecular Oncology under an equity line of credit. Under the terms of this equity line, Genzyme Molecular Oncology may draw down funds as needed in exchange for GZMO designated shares. GZMO designated shares are shares of GZMO Stock that are not issued and outstanding, but which our board of directors may issue, sell, or distribute without allocating the proceeds to Genzyme Molecular Oncology. In April 2000, Genzyme Molecular Oncology drew $15.0 million of cash from this equity line to meets its financing needs. We have included more information about this draw below under the heading "Subsequent Events - Genzyme Molecular Oncology Equity Line of Credit," which we incorporate into this discussion by reference. The amount remaining available for Genzyme Molecular Oncology to draw under the equity line is $15.0 million. In March 2000, we filed with the SEC a Prospectus pursuant to Rule 424(b)(5) of the Securities Act of 1933, as amended, covering the offering of 3,000,000 shares of GZMO Stock (including 450,000 shares issuable upon exercise of the underwriters' over-allotment option). The proceeds of the offering were to be used by Genzyme Molecular Oncology to fund research, pre-clinical and clinical development programs, to repay existing indebtedness, and for working capital and general corporate purposes. In April 2000, in light of recent market volatility and current market conditions, we withdrew the offering of shares of GZMO Stock contemplated by the Prospectus. Genzyme Molecular Oncology, together with our other operating divisions, has access to Genzyme's revolving credit facilities. At March 31, 2000, $50.0 million was available under a facility that matures in November 2000 and $77.0 million was available under a facility that matures in November 2002. We anticipate that Genzyme Molecular Oncology's current cash resources, together with amounts available from the following sources, will be sufficient to fund its operations through 2000. - the $15.0 million remaining on the equity line of credit from Genzyme General; - our revolving credit facilities; - revenues generated from the SAGE-TM- gene expression technology; and - revenues from license agreements. We expect Genzyme Molecular Oncology to have significant operating losses for the next several years. Genzyme Molecular Oncology plans to spend substantial amounts of money on, among other things: - research and development; - preclinical and clinical testing; and - pursuing regulatory approvals. Genzyme Molecular Oncology's cash needs may differ from those planned as a result of many factors, including the: - results of research and development efforts and clinical testing; - achievement of milestones under existing licensing arrangements; - ability to establish and maintain additional strategic alliances and licensing arrangements; - enforcement of patent and other intellectual property rights; - development of competitive products and services; and - ability to satisfy regulatory requirements of the FDA and other government authorities. Genzyme Molecular Oncology may require significant additional financing to continue operations. We cannot guarantee that Genzyme Molecular Oncology will be able to obtain any additional financing or find it on favorable terms. If Genzyme Molecular Oncology has insufficient funds or is unable to raise additional funds, it may delay, reduce or eliminate certain of its programs. Genzyme Molecular Oncology may also have to give rights to third parties to attempt to commercialize technologies or products that it would otherwise commercialize itself. GENZYME SURGICAL PRODUCTS At March 31, 2000, Genzyme Surgical Products had cash, cash equivalents, and short- and long-term investments of $116.0 million, a decrease of $10.1 million from December 31, 1999. Genzyme Surgical Products used $11.3 million in cash for operations in the first three months of 2000. This is primarily due to Genzyme Surgical Products' net loss of $10.0 million for the three months ended March 31, 2000. Genzyme Surgical Products' investing activities in the first three months of 2000 generated $11.9 million in cash from its investments, and used $0.9 million to fund capital expenditures. During the three months ended March 31, 2000, Genzyme Surgical Products received $0.9 million in cash from exercises of stock options and the issuance of stock under our employee stock purchase plan. In June 1999, Genzyme General transferred $150.0 million in cash, cash equivalents, investments and certain other assets to Genzyme Surgical Products in connection with the creation of Genzyme Surgical Products as a separate division of Genzyme. In exchange for this transfer, approximately 14.8 million shares of GZSP Stock were issued and distributed as a dividend to holders of GENZ Stock. In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon completion of the acquisition, we will form a new operating division called Genzyme Biosurgery and create a new series of common stock to reflect its value and track its performance. We refer to this stock as "GZBX Stock." In connection with the merger, the assets of Genzyme Surgical Products and Genzyme Tissue Repair will become part of Genzyme Biosurgery. In addition, upon shareholder approval, GZSP Stock and GZTR Stock will be exchanged for GZBX Stock. We will account for the acquisition of BioMatrix as a purchase. Biomatrix stockholders will have the option of receiving $37.00 in cash or one share of GZBX Stock for each share of Biomatrix common stock they hold. The merger agreement provides, however, that Genzyme will pay cash for up to 28.38% of the outstanding shares of Biomatrix common stock that receive merger consideration, or approximately $245.0 million. Holders of GZSP Stock will receive 0.6060 share of GZBX Stock for each share of GZSP Stock they hold and holders of GZTR Stock will receive 0.3352 share of GZBX Stock for each share of GZTR Stock they hold. To the extent Genzyme Surgical Products uses cash to complete the acquisition, its cash reserves will be diminished. We expect to complete the acquisition in the second quarter of 2000. For more information about the merger and the merger consideration, we encourage you to carefully read the Registration Statement on Form S-4 filed with the SEC on April 18, 2000, as it may be amended. Genzyme Surgical Products, together with our other operating divisions, has access to our revolving credit facilities. At March 31, 2000 $50.0 million was available under a facility that matures in November 2000 and $77.0 million was available under a facility that matures in November 2002. In April 2000, Focal Inc. exercised its First Option under the Genzyme/Focal Stock Purchase Agreement. Under the terms of this agreement, Genzyme Surgical Products was required to purchase $5.0 million worth of Focal common stock, or 614,250 shares at a price of $8.14 per share. We are committed, at Focal's option, to make future equity investments of up to $10.0 million subject to certain conditions. We anticipate that Genzyme Surgical Products' current cash resources, together with revenues generated from its products and distribution agreements, will be sufficient to fund its operations through 2001. However, its cash needs may differ from those planned because of many factors, including: - the ability to become profitable; - the results of research and development efforts; - the ability to establish strategic collaborations and licensing arrangements for research and development programs; - the achievement of milestones under strategic collaborations; - the ability to establish and maintain additional distribution arrangements; - the enforcement of patent and other intellectual property rights; - market acceptance of novel approaches and therapies; - the development of competitive products; and - the ability to satisfy regulatory requirements of the FDA and other government authorities. In addition, if Genzyme Surgical Products exercises its option to purchase the limited partnership interests in Genzyme Development Partners, L.P. and uses cash to pay all or a portion of the approximately $26.0 million advance payment to the limited partners, Genzyme Surgical Products' cash resources will be diminished. Genzyme Development Partners is a Delaware limited partnership that was formed in 1989 to develop, produce and derive income from the sale of Sepra products. Its general partner is a wholly-owned subsidiary of Genzyme. Genzyme Surgical Products may require significant additional financing to continue operations at anticipated levels. We cannot guarantee that it will be able to obtain any additional financing or find it on favorable terms. If Genzyme Surgical Products has insufficient funds or is unable to raise additional funds, it may have to delay, reduce or eliminate some of its programs. Genzyme Surgical Products may also have to give third parties rights to commercialize technologies or products that it would otherwise have sought to commercialize itself. GENZYME TISSUE REPAIR At March 31, 2000, Genzyme Tissue Repair had cash and cash equivalents of $8.4 million, a decrease of $0.9 million from December 31, 1999. During the first quarter of 2000, Genzyme Tissue Repair used $7.1 million of cash for operations. This is primarily due to Genzyme Tissue Repair's net loss of $5.0 million during the period. Genzyme Tissue Repair used $0.1 million for investing activities in the three months ended March 31, 2000 primarily for the purchase of property, plant and equipment. Financing activities provided Genzyme Tissue Repair with $6.3 million of cash. This includes $5.0 million drawn by Genzyme Tissue Repair under its equity line from Genzyme General and $0.4 million of cash from the issuance of stock under employee stock plans. In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon completion of the acquisition, we will form a new operating division called Genzyme Biosurgery and create a new series of common stock to reflect its value and track its performance. We refer to this stock as "GZBX Stock." In connection with the merger, the assets of Genzyme Surgical Products and Genzyme Tissue Repair will become part of Genzyme Biosurgery. In addition, upon shareholder approval, GZSP Stock and GZTR Stock will be exchanged for GZBX Stock. We will account for the acquisition of BioMatrix as a purchase. We have included more information about the proposed acquisition of Biomatrix, Inc. and proposed formation of Genzyme Biosurgery as a new division of Genzyme above under the heading "Liquidity and Capital Resources - - Genzyme Surgical Products," which we incorporate into this discussion by reference. Genzyme Tissue Repair, together with our other operating divisions, has access to our revolving credit facilities. At March 31, 2000, $50.0 million was available under a facility that matures in November 2000 and $77.0 million was available under a facility that matures in November 2002. At March 31, 2000, $18.0 million of funds outstanding under our revolving credit facility were allocated to Genzyme Tissue Repair. In 1998, our board of directors also made $50.0 million of Genzyme General's cash available to Genzyme Tissue Repair under an equity line of credit. Under the terms of this equity line, Genzyme Tissue Repair may draw down funds as needed each quarter in exchange for GZTR designated shares. GZTR designated shares are shares of GZTR Stock that are not issued and outstanding, but which our board of directors may issue, sell or distribute without allocating the proceeds to Genzyme Tissue Repair. In February 1999, Genzyme Tissue Repair made a $5.0 million draw under the line. In May 1999, the amount available under this equity line was reduced by $25.0 million to $20.0 million in connection with the reallocation of our ownership interest in Diacrin/Genzyme LLC from Genzyme Tissue Repair to Genzyme General. In March 2000, Genzyme Tissue Repair made a $5.0 million draw on this equity line in exchange for 765,169 GZTR designated shares. As of March 31, 2000, $15.0 million of cash remained available to Genzyme Tissue Repair under this equity line. We anticipate that Genzyme Tissue Repair's current cash resources, together with the $15.0 million that remains available under the GZTR equity line from Genzyme General, will be sufficient to fund its operations through the end of 2000. Genzyme Tissue Repair's cash needs may differ from those planned as a result of various factors, including the: - ability to satisfy regulatory requirements of the FDA and other government agencies; - results of research and development and clinical testing; - enforcement of patent and other intellectual property rights; and - development of competitive products and services. In addition, in 1999, Genzyme Tissue Repair received $25.0 million in cash from Genzyme General in connection with the transfer from, Genzyme Tissue Repair to Genzyme General of our interest in our joint venture with Diacrin, Inc. If the joint venture does not initiate a Phase III clinical trial of NeuroCell-TM--PD by June 30, 2000, Genzyme Tissue Repair will be required to pay to Genzyme General $20.0 million plus accrued interest at an annual rate of 13.5%. If a Phase II clinical trial is initiated by June 30, 2000 but NeuroCell-PD-TM- does not receive final marketing approval from the FDA by June 30, 2004, Genzyme Tissue Repair will be required to pay Genzyme General $15.0 million plus accrued interest at an annual rate of 13.5%. Genzyme Tissue Repair may repay these amounts in cash, GZTR designated shares, or combination of both, at its option. If these milestones are not achieved, and Genzyme Tissue Repair elects to repay Genzyme General in cash, its cash reserves will be substantially diminished or depleted in their entirety. If Genzyme Tissue Repair elects to repay Genzyme General in GZTR designated shares, this would substantially dilute the rights of the holders of GZTR Stock and could significantly affect the market price of GZTR Stock. Genzyme Tissue Repair will require substantial additional funds in order to continue operations at current levels beyond 2000. We cannot guarantee that Genzyme Tissue Repair will be able to obtain any additional financing or find it on favorable terms. If Genzyme Tissue Repair has insufficient funds or is unable to raise additional funds, it may be required to delay, scale back or eliminate certain of its programs. Genzyme Tissue Repair may also have to give rights to third parties to commercialize technologies or products that it would otherwise commercialize itself. EURO-THE EUROPEAN CURRENCY Since December 31, 1999, there have been no material changes related to our outstanding derivatives and forward contracts, or any other material contracts as a result of the euro conversion, nor have there been any material changes in our competitive position as a result of the conversion. We incorporate our disclosure related to the euro conversion set forth under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations - Euro - the New European Currency" in Exhibit 13.5 to our 1999 Form 10-K by reference into this discussion. YEAR 2000 There have been no material changes in our Year 2000 compliance program or our potential Year 2000 exposures since December 31, 1999. We incorporate our disclosure related to our Year 2000 compliance program and potential year 2000 exposures set forth under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations - Year 2000" in Exhibit 13.5 to our 1999 Form 10-K by reference into this discussion. MARKET RISK There have been no material changes in our market risk since December 31, 1999. We incorporate our disclosure related to our market risk set forth under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations - Market Risk" in Exhibit 13.5 to our l999 Form 10-K by reference into this discussion. NEW ACCOUNTING PRONOUNCEMENTS In March 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation--an interpretation of Accounting Principles Board Opinion No. 25" ("FIN-44"). FIN-44 will be effective on July 1, 2000, but certain conclusions in FIN-44 cover specific events that occurred after either December 15, 1998 or January 12, 2000. In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101") which summarizes the staff's view in applying generally accepted accounting principles to selected revenue recognition issues. SAB 101 will be effective beginning in fiscal year 2001. We are currently evaluating the guidance provided in FIN-44 and SAB 101. We do not expect the application of either FIN-44 or SAB 101 to have a material effect on our financial statements. SUBSEQUENT EVENTS SETTLEMENT OF LAWSUIT In April, 2000, Genzyme General received net proceeds of approximately $5.1 million in connection with a settlement of a lawsuit. The lawsuit, initiated in 1993, pertained to an accidental spill of Ceredase-R- at a fill facility operated by a contractor to Genzyme General. GENZYME MOLECULAR ONCOLOGY EQUITY LINE OF CREDIT In April 2000, Genzyme Molecular Oncology drew $15.0 million of Genzyme General's cash under a $30.0 million equity line of credit set up in August 1998 in exchange for 676,254 designated shares of GZMO Stock. As required by our charter, the draw is priced at the average closing price of the GZMO Stock for the 20 trading days beginning on the thirtieth trading day before the draw. These funds will be used for Genzyme Molecular Oncology's operating needs. ADDITIONAL INVESTMENT IN FOCAL, INC. In April 2000, Focal Inc. exercised its First Option under the Genzyme/Focal Stock Purchase Agreement. Under the terms of this agreement, Genzyme Surgical Products was required to purchase $5.0 million worth of Focal common stock, or 614,250 shares at a price of $8.14 per share. We are committed, at Focal's option, to make future equity investments of up to $10.0 million subject to certain conditions. ITEM 3. QUANTITATIVE AND QUALITATIVE ANALYSIS OF MARKET RISK We are exposed to potential loss from financial market risks that may occur as a result of changes in interest rates, equity prices and foreign exchange rates. Our exposure to these risks has not materially changed since December 31, 1999. We incorporate our disclosure related to market risk which is set forth under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations - Market Risk" in Exhibit 13.5 to our 1999 Form 10-K by reference into this discussion. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedule for the three month period ended March 31, 2000 (for EDGAR filing purposes only). Filed herewith. (b) Reports on Form 8-K On March 23, 2000, we filed a Current Report on Form 8-K relating to board authorization of an amendment to our charter for the purpose of updating the terms of our tracking stock to include the types of rights and other terms contained in more recently introduced tracking stocks of other companies. On March 15, 2000, we filed a Current Report on Form 8-K relating to the execution of an Agreement and Plan of Merger pursuant to which we will effect a business combination through the merger of Biomatrix, Inc. with and into a wholly- owned subsidiary of Genzyme. On January 10, 2000, we filed a Current Report on Form 8-K relating to the conversion of Genzyme Tissue Repair's $13.0 million 5% convertible subordinated note. GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, MARCH 31, 2000 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GENZYME CORPORATION DATE: May 15, 2000 By: /S/ MICHAEL S. WYZGA --------------------------- Michael S. Wyzga Senior Vice President Finance, Chief Financial Officer and Chief Accounting Officer GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, MARCH 31, 2000 EXHIBIT INDEX 27 Financial Data Schedule for the three month period ended March 31, 2000 (for EDGAR filing purposes only). Filed herewith. EX-27.1 2 EX-27.1
5 This schedule contains summary financial information extracted from (a) the Unaudited, Consolidated Financial Statements of Genzyme Corporation and Subsidiaries for the three months ended March 31, 2000 and is qualified in its entirety by reference to such, (b) financial statements as included in the form 10-Q for Genzyme Corporation dated March 31, 2000. 1,000 U.S. DOLLARS 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 1 112,194 574,424 186,967 23,731 117,991 712,030 582,583 195,740 1,916,042 145,725 0 0 0 1,421 1,475,398 1,916,042 205,387 208,130 48,259 60,110 96,069 4,340 3,939 43,672 11,854 31,818 0 0 0 31,818 0.61 0.57 Genzyme Corporation reports earnings per share for each of its four series of common stock. The earnings per share information presented on this schedule represents the earnings per share data for net income attributable to Genzyme General Division Common Stock. For the period presented, net income attributable to Genzyme General was $51,637. For the period presented, net loss attributable to Genzyme Molecular Oncology was $(5,057) or $(0.37) per basic and diluted share of Genzyme Molecular Oncology Common Stock, net loss attributable to Genzyme Surgical Products was $(10,043) or $(0.68) per basic and diluted share of Genzyme Surgical Products Division Common Stock, and net loss attributable to Genzyme Tissue Repair was $(4,971) or $(0.17) per basic and diluted share of Genzyme Tissue Repair Division Common Stock.
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