-----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, OEUU/KNIxBAOCFqKqDIjaVnvgwwXj+6gQZFjPCbHBgwJO7yzreRwODB85Sf9yi2i vR3doWiNOnbGd8tAoLRPkQ== 0000950135-95-002420.txt : 19951120 0000950135-95-002420.hdr.sgml : 19951120 ACCESSION NUMBER: 0000950135-95-002420 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENZYME CORP CENTRAL INDEX KEY: 0000732485 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 061047163 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-14680 FILM NUMBER: 95593053 BUSINESS ADDRESS: STREET 1: ONE KENDALL SQUARE 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 GENZYME CORPORATION 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-Q --------- (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1995 _________________________________ OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from______________ to ________ 0-14680 Commission file number________________________________________ GENZYME CORPORATION ________________________________________________________________________________ (Exact name of registrant as specified in its charter) Massachusetts 06-1047163 ________________________________________________________________________________ (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) One Kendall Square, Cambridge, Massachusetts 02139 ________________________________________________________________________________ (Address of principal executive offices) (zip code) (617) 252-7500 ________________________________________________________________________________ (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- The number of shares outstanding of each of the issuer's classes of common stock as of October 31, 1995:
Class Outstanding at October 31, 1995: ----- -------------------------------- General Division Common Stock, $0.01 par value ("General Division Stock") 30,964,056 Tissue Repair Division Common Stock, $0.01 par value ("TR Stock") 12,010,873
Total number of pages in document - 34 Exhibit index located on page - 29 2 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, SEPTEMBER 30, 1995 TABLE OF CONTENTS
, PAGE NO. -------- PART I. FINANCIAL INFORMATION ITEM 1. Unaudited Financial Statements GENZYME CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 1995 and 1994........... 3 Consolidated Balance Sheets as of September 30, 1995 and December 31, 1994........................................ 5 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1995 and 1994..................... 6 Notes to Unaudited Consolidated Financial Statements.............. 7 Management's Discussion and Analysis of Financial Condition and Results of Operations......................................... 9 GENZYME GENERAL DIVISION Combined Statements of Operations for the Three and Nine Months Ended September 30, 1995 and 1994........... 12 Combined Balance Sheets as of September 30, 1995 and December 31, 1994........................................ 14 Combined Statements of Cash Flows for the Nine Months Ended September 30, 1995 and 1994 .................... 15 Notes to Unaudited Combined Financial Statements.................. 16 Management's Discussion and Analysis of Financial Condition and Results of Operations......................................... 18 GENZYME TISSUE REPAIR DIVISION Combined Statements of Operations for the Three and Nine Months Ended September 30, 1995 and 1994....... 21 Combined Balance Sheets as of September 30, 1995 and December 31, 1994........................................ 22 Combined Statements of Cash Flows for the Nine Months Ended September 30, 1995 and 1994..................... 23 Notes to Unaudited Combined Financial Statements.................. 24 Management's Discussion and Analysis of Financial Condition and Results of Operations......................................... 25 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 27 PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K............................. 27 Signatures.............................................................. 28
-2- 3 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended (Dollars in thousands) September 30, September 30, - -------------------------------------------------------------------------------------- 1995 1994 1995 1994 ---- ---- ---- ---- Revenues: Net product sales............................ $78,484 $62,514 $223,086 $173,499 Net service sales............................ 11,196 11,181 35,461 38,188 Revenues from research and development contracts - related parties................ 6,239 5,485 19,166 16,153 ------- ------- -------- -------- 95,919 79,180 277,713 227,840 Operating costs and expenses: Cost of products sold........................ 28,919 24,705 85,893 65,530 Cost of services sold........................ 7,576 7,583 23,353 24,600 Selling, general and administrative.......... 27,549 21,328 79,442 64,250 Research and development (including research and development related to contracts)....... 17,205 13,444 50,931 39,460 ------- ------- -------- -------- 81,249 67,060 239,619 193,840 ------- ------- -------- -------- Operating income............................... 14,670 12,120 38,094 34,000 Other income and (expenses): Minority interest in net loss of subsidiaries................................ 742 599 1,608 1,216 Equity in net income (loss) of unconsolidated affiliate.................................. 535 - (1,207) - Investment income............................ 1,566 1,529 4,628 7,305 Interest expense............................. (512) (815) (732) (1,658) ------- ------- -------- -------- 2,331 1,313 4,297 6,863 ------- ------- -------- -------- Income before income taxes..................... 17,001 13,433 42,391 40,863 Provision for income taxes..................... (6,291) (4,427) (15,685) (14,302) ------- ------- -------- -------- Net income..................................... $10,710 $ 9,006 $ 26,706 $ 26,561 ======= ======= ======== ========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. -3- 4 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED) (Unaudited)
Three Months Ended Nine Months Ended (In thousands, except per share amounts) September 30, September 30, - -------------------------------------------------------------------------------------------- 1995 1994 1995 1994 ---- ---- ---- ---- APPLICABLE TO GENZYME GENERAL DIVISION: Net income...................................... $13,877 $ 9,631 $ 35,180 $28,333 Allocated tax benefit generated by Genzyme Tissue Repair Division......................... 2,215 434 5,877 1,231 ------- ------- ------- ------- Net income attributable to General Division Stock............................... $16,092 $10,065 $ 41,057 $29,564 ======= ======= ======== ======= Per common and common equivalent share: Net income (1)................................ $0.53 $0.38 $1.42 $1.13 ===== ===== ===== ===== Average shares outstanding.................... 30,279 26,374 28,816 26,117 ====== ====== ====== ====== Per common share assuming full dilution: Net income (1)................................ $0.49 $0.35 $1.30 $1.05 ===== ===== ===== ===== Average fully diluted shares outstanding ...... 32,896 28,570 31,671 28,109 ====== ====== ====== ====== APPLICABLE TO GENZYME TISSUE REPAIR DIVISION: Net loss attributable to TR Stock............... $(5,382) $(1,059) $(14,351) $(3,003) ======= ======= ======== ======= Per common share: Net loss...................................... $(0.59) $(0.32) $(1.62) $(0.91) ====== ====== ====== ====== Average shares outstanding..................... 9,171 3,302 8,871 3,291 ===== ===== ===== ===== (1) General Division 1994 net income per share is pro forma.
The accompanying notes are an integral part of these unaudited, consolidated financial statements. -4- 5 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands) September 30, December 31, - ---------------------------------------------------------------------------------- 1995 1994 ---- ---- ASSETS Current Assets: Cash and cash equivalents................................. $ 98,583 $ 63,542 Short-term investments.................................... 8,026 13,073 Accounts receivable, less allowance for doubtful accounts.................................... 84,094 78,127 Inventories............................................... 46,385 36,840 Prepaid expenses and other current assets................. 12,279 11,074 Deferred tax assets - current............................. 4,072 4,072 -------- -------- Total current assets.................................. 253,439 206,728 Property, plant and equipment, net........................ 321,520 296,802 Other Assets: Long-term invesments...................................... 57,873 76,845 Note receivable - related party........................... 1,429 3,572 Intangibles, net of accumulated amortization.............. 26,257 29,303 Deferred tax assets - noncurrent.......................... 28,473 28,473 Other noncurrent assets................................... 27,901 16,685 -------- -------- 141,933 154,878 -------- -------- $716,892 $658,408 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable........................................... $ 11,422 $ 21,387 Accrued expenses........................................... 37,340 30,986 Income taxes payable....................................... 3,393 6,523 Deferred revenue........................................... 2,016 2,604 Current portion of long-term debt and capital lease obligations................................. 888 41,357 -------- -------- Total current liabilities................................ 55,059 102,857 Noncurrent Liabilities: Long-term debt and capital lease obligations............... 126,258 126,729 Other noncurrent liabilities............................... 8,834 7,548 -------- -------- 135,092 134,277 Minority interest in subsidiaries........................... 1,510 2,310 Stockholders' Equity: General Division Stock, $.01 par value..................... 272 264 TR Stock, $.01 par value................................... 120 87 Treasury Stock - at cost................................... (881) (755) Additional paid-in capital................................. 540,386 470,826 Accumulated deficit........................................ (12,102) (38,808) Other equity adjustments................................... (2,564) (12,650) -------- -------- 525,231 418,964 -------- -------- $716,892 $658,408 ======== ========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. -5- 6 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands) Nine Months Ended September 30, --------------------------------------------------------------------------- 1995 1994 ---- ---- OPERATING ACTIVITIES: Net income......................................... $ 26,706 $ 26,561 Reconciliation of net income to net cash from operating activities: Depreciation and amortization.................... 16,840 12,995 Provision for bad debts.......................... 3,453 3,139 (Gain)/loss on sale of investments............... 110 (1,444) Accrued interest/amortization on bonds........... 731 (2,327) Minority interest in net loss of subsidiaries.... (1,608) (1,217) Equity in net loss of unconsolidated affiliate... 1,208 - Other ........................................... 1,285 77 Decrease in cash from working capital: Accounts receivable............................. (8,075) (14,900) Inventories..................................... (8,842) (7,654) Prepaid expenses and other current assets....... (1,126) (622) Accounts payable, accrued expenses and deferred revenue........................... (7,911) (795) -------- -------- Net cash from operating activities.............. 22,771 13,813 -------- -------- INVESTING ACTIVITIES: Investment in unconsolidated affiliate............. (4,000) -- Loans to related parties........................... (1,857) -- Purchases of investments........................... (21,571) (220,295) Sales and maturities of investments................ 50,029 255,855 Property, plant and equipment...................... (36,013) (85,703) Other noncurrent assets............................ (563) (2,353) -------- -------- Net cash from investing activities............... (13,975) (52,496) -------- -------- FINANCING ACTIVITIES: Issuance of common stock........................... 68,132 5,691 Issuance of common stock by subsidiaries........... 479,258 258 Issuance of debt................................... 77 21,803 Payments of debt and capital lease obligations..... (41,295) (4,566) -------- -------- Net cash from financing activities............... 27,393 23,186 -------- -------- Effect of exchange rate changes on cash.............. (1,148) (807) -------- -------- Decrease in cash and cash equivalents................ 35,041 (16,304) Cash and cash equivalents, beginning of period....... 63,542 22,975 -------- -------- Cash and cash equivalents, end of period............. $ 98,583 $ 6,671 ======== ======== Supplemental Cash Flow Information: Cash paid during the period for: Interest......................................... $ 5,879 $ 5,472 Income taxes..................................... 19,260 9,910 Supplemental Disclosure of Non-Cash Transactions: Additional Investment in unconsolidated affiliate -- Note 6 Acquisition of Minority Interest in IG Laboratories, Inc. -- Note 8
The accompanying notes are an integral part of these unaudited, consolidated financial statements. -6- 7 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation: ---------------------- These unaudited consolidated financial statements should be read in conjunction with the Annual Report on Form 10-K/A of Genzyme Corporation ("Genzyme" or the "Company") for the fiscal year ended December 31, 1994 and the financial statements and footnotes included therein. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to the Securities and Exchange Commission rules and regulations. Certain items in the 1994 financial statements have been reclassified to conform with the 1995 presentation. The financial statements for the three and nine months ended September 30, 1995 and 1994 are unaudited but include, in the Company's opinion, all adjustments (consisting only of normally recurring accruals) necessary for a fair presentation of the results for the periods presented. 2. Accounting Policies: -------------------- The accounting policies underlying the quarterly financial statements are those set forth in Note A of the financial statements included in the Company's Annual Report on Form 10-K/A for the year ended December 31, 1994. 3. Investments: ------------ As of September 30, 1995, the Company's investment portfolio, consisting primarily of debt securities classified as available for sale, was adjusted to market value. As a result, gross unrealized holding gains of approximately $5,000 and gross unrealized holding losses totaling approximately $521,000 were recorded in a separate component of Stockholders' Equity. As of September 30, 1995, the carrying values of the Company's investments in Aronex Pharmaceuticals, Inc. (formerly Argus Pharmaceuticals, Inc.), Celtrix Pharmaceuticals, Inc. and Univax Biologics, Inc., included in Other noncurrent assets in the unaudited, consolidated balance sheet, were adjusted to their respective market values. Gross unrealized holding gains of approximately $966,000 and gross unrealized holding losses of approximately $428,000 were recorded in a separate component of Stockholders' Equity. 4. Inventories: ------------
September 30, 1995 December 31, 1994 ------------------ ----------------- Raw materials ............ $12,965,000 $14,572,000 Work-in-process .......... 13,904,000 9,247,000 Finished products ........ 19,516,000 13,021,000 ----------- ----------- $46,385,000 $36,840,000 =========== ===========
5. Provision for Income Taxes: --------------------------- The tax provision for the quarter ended September 30, 1995 varies from the U.S. statutory tax rate because of the provision for state income taxes, losses of subsidiaries which generate no current tax benefit, tax credits and taxes on foreign earnings. The effective tax rate was 37% for the three and nine months ended September 30, 1995, as compared to 33% and 35%, respectively, for the corresponding periods in 1994. The increase was due primarily to the expiration of the Orphan Drug Credit effective December 31, 1994. -7- 8 6. Additional Investments in Unconsolidated Affiliate: --------------------------------------------------- On July 3, 1995, Genzyme Transgenics Corporation ("GTC") acquired Biodevelopment Laboratories, Inc. ("BDL"). As part of the transaction, the Company issued approximately 34,000 shares of General Division Common Stock to former stockholders of BDL in exchange for approximately 475,000 shares of newly issued GTC common stock. In total, GTC issued approximately 1,207,000 shares in the transaction, resulting in a decrease in the Company's interest in GTC to 48.2%. Also as part of the BDL transaction, the Company guaranteed a $7,500,000 line of credit to GTC from a commercial bank in return for warrants to purchase 145,000 shares of GTC common stock. 7. Issuance of Stock: ------------------ On September 22, 1995, Genzyme Tissue Repair Division ("GTR") sold 3,000,000 shares of its common stock to the public for $15.00 per share. Net proceeds from the offering after underwriting discounts and commissions were $42,360,000. 8. Subsequent Events: ------------------ Acquisition of Minority Interest in IG Laboratories, Inc.: On October 2, 1995, Genzyme Corporation acquired, using General Division Stock, the publicly-held minority interest in IG Laboratories, Inc. ("IG") by issuing .1201 of one share of General Division Common Stock for each share of IG common stock. In the aggregate, approximately 385,000 shares of General Division Stock, valued at approximately $22,754,000 were issued. The acquisition was accounted for as a purchase. The excess of the purchase price over the fair market value of the net assets acquired, was approximately $18,600,000, of which $10,000,000 allocated to in-process research and development and charged to operations in the fourth quarter, and $8,600,000 to Goodwill to be amortized over 20 years. Issuance of Stock: On October 12, 1995, the General Division sold 2,875,000 shares of its common stock to the public for $51.25 per share. Net proceeds from the offering after underwriting discounts and commissions were $141,450,000. Submission of Pre-Market Approval Application for Seprafilm[TM]: On October 30, 1995 the Company submitted a Pre-Market Approval Application to the U.S. Food and Drug Administration for approval to market Seprafilm[TM] bioresorbable membrane in the United States for abdominal and gynecological surgey applications. The Company also has begun test marketing Seprafilm[TM] in the Netherlands and expects to launch the product in the European Community in 1996. The Company believes that substantial additional funds will be required to commercialize Seprafilm[TM] in the United States and the European Community. -8- 9 GENZYME CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995 RESULTS OF OPERATIONS Revenue ------- Total revenues for the three and nine months ended September 30, 1995 were $95.9 million and $277.7 million, respectively, an increase of 21% and 22%, respectively, over the corresponding periods in 1994. Product and service revenues combined were $89.7 million and $258.5 million, respectively, each a 22% increase over the same period in 1994. Product revenues increased 26% to $78.5 million for the third quarter, and 29% to $223.1 million for the nine months ended September 30, 1995, reflecting sales increases in the Therapeutics, Diagnostic Products, and Pharmaceutical businesses of 22%, 26% and 30%, respectively, for the third quarter and 26%, 22% and 44%, respectively, for the nine months ended September 30, 1995. The increase in sales of Therapeutic products resulted primarily from increased shipments of Ceredase(R)/Cerezyme(R) enzyme, for which the rate of new patient accruals more than offset dosage reductions. The increase in Diagnostic Products sales resulted from sales increases across most product lines including a doubling in revenues from sales of Direct LDL tests. Pharmaceutical sales for the third quarter increased 30% due primarily from increased sales of Melatonin. For the nine months ended September 30, 1995, Pharmaceutical sales increased 44% resulting primarily to a full nine months of revenue in 1995 for operations acquired in the third quarter of 1994 and an increase in sales of Melatonin in the third quarter of 1995. Service revenues for the third quarter increased slightly to $11.2 million. GTR revenues for the three and nine months ended September 30, 1995 were $1,435,000 and $3,712,000, respectively. For the nine months ended September 30, 1995, service revenues declined 7% to $35.5 million, resulting primarily from a decline in identity testing revenues, a reduction in unit price per test and the divestiture of two small genetic diagnostic laboratories. International sales represented approximately 41% of total product sales for the third quarter and nine months ended September 30, 1995 compared with approximately 39% and 36%, respectively, for the corresponding periods in 1994. The increase was due primarily to increases of 38% and 52%, for the third quarter and nine months ended September 30, 1995, respectively, in the international sales of Ceredase(R)/Cerezyme(R) enzyme combined as well as favorable exchange rates. Revenues from research and development contracts increased 14% to $6.2 million for the third quarter and 19% to $19.2 million for the nine months ended September 30, 1995. Revenues from Neozyme II Corporation ("Neozyme II") for the third quarter and nine months ended September 30, 1995 increased 30% to $5.6 million and 37% to $17.3 million, respectively, due primarily to increased activity relating to collaborations with third parties and to production of clinical trial materials. In the first nine months of 1994, consolidation of the operations of GTC provided $2.1 million of reported revenues from research and development contracts. Beginning in the fourth quarter of 1994, the Company accounts for GTC using the equity method of accounting and, accordingly, no longer reports GTC's revenue from research and development contracts. Margins and Operating Expenses ------------------------------ Total gross margins for the quarter and nine months ended September 30, 1995 were 59% and 58%, respectively, as compared to 56% and 57%, respectively, for the -9- 10 same periods in 1994. Genzyme provides a broad range of health care products and services, resulting in a range of gross margins depending on the particular market conditions of each product or service. Product margins for the third quarter were 63% compared to 60% in the third quarter of 1994. All product lines experienced higher margins in the quarter due to revenue increases, product mix and manufacturing efficiencies. For the nine months ended September 30, 1995 and 1994, product margins were 61% and 62%, respectively. Service margins for the three months ended September 30, 1995 and 1994 were 32%. For the nine months ended September 30, 1995 and 1994, service margins declined to 34% from 36%, respectively, due to a decline in identity testing revenues. Selling, general and administrative expenses for the three and nine months ended September 30, 1995 were $27.5 million and $79.4 million, respectively, compared to $21.3 million and $64.2 million, respectively, for the same periods in 1994. The increase was due primarily to increased sales, increased staffing in support of the growth in several product lines, a full nine months of expenses for operations acquired in the third quarter of 1994 and to the operations of BioSurface Technology, Inc. ("BioSurface"), acquired in December 1994. As a percentage of total revenues, selling, general and administrative expenses were 29% for the third quarter and nine months ended September 30, 1995 compared to 27% and 28%, respectively, for the corresponding periods in 1994. Research and development expenses for the three and nine months ended September 30, 1995 were $17.2 million and $50.9 million, compared to $13.4 million and $39.5 million, respectively, for the same periods in 1994, due to increased efforts on behalf of Neozyme II and increased spending on internal programs. Other Income and Expenses ------------------------- Other income for the third quarter includes a one-time gain of approximately $950,000 representing the sale of certain assets by GTC. Investment income for the quarter and nine months ended September 30, 1995 totaled $1.6 million and $4.6 million, respectively, compared with $1.5 million and $7.3 million, respectively, for the same periods in 1994. Investment income for the nine month period ended September 30, 1995 included losses on the sales of securities of approximately $110,000 as compared to losses of $162,000 and gains of $1.6 million, respectively, on the sales of securities for the corresponding period in 1994. Excluding the effect of these realized gains and losses, investment income for the nine months ended September 30, 1995 decreased 20% due to lower average cash and investment balances. Interest expense for the quarter and nine months ended September 30, 1995 was $512,000 and $732,000, respectively, net of capitalized interest on construction in progress of $2.1 million and $6.9 million, respectively. Interest relating to Genzyme's 6 3/4% convertible subordinated notes was $1.7 million and $5.1 million, equal to the amounts incurred in the same periods in 1994. The Company also incurred interest expense for the three and nine months ended September 30, 1995 of $0.4 million and $1.2 million, respectively, related to a $21.5 million mortgage note issued in the third quarter of 1994, $0.1 million and $0.3 million, respectively, related to a deferred liability established to acquire the remaining shares of a Swiss company acquired, in part, in July 1994 and the remainder related to interest on capitalized leases. The tax provision for the quarter ended September 30, 1995 varies from the U.S. statutory tax rate because of the provision for state income taxes, losses of subsidiaries which generate no current tax benefit, tax credits and taxes on foreign earnings. The effective tax rate for the three and nine months ended September 30, 1995 was 37% as compared to 33% and 35%, respectively, for the corresponding periods in 1994. The increase was due primarily to the expiration of the Orphan Drug Credit effective December 31, 1994. LIQUIDITY AND CAPITAL RESOURCES -10- 11 As of September 30, 1995, Genzyme had cash, cash equivalents and investments in marketable securities totaling $164.5 million, an increase of $11.0 million from December 31, 1994. The Company repaid a $39.0 million term loan in January 1995. In the nine months ended September 30, 1995, Genzyme spent $36.0 million on increased manufacturing capacity and invested an additional $4.0 million in GTC, an unconsolidated affiliate. These expenditures were financed partially by operations, $22.8 million, the public offering of TR Stock, $42.4 million, and by the issuance of common stock through exercises of stock options and warrants, $25.0 million. As of September 30, 1995, the Company had accounts receivable of $84.1 million, an increase of $6.0 million from December 31, 1994, due primarily to increased sales. Inventories increased $9.5 million, or 26%, to $46.4 million as of September 30, 1995 as compared to December 31, 1994. The increase was due primarily to improved Ceredase[R] yields and management's efforts to build Ceredase[R] /Cerezyme[R] enzyme inventories, support of increased business operations and to exchange rate fluctuations. In January 1995, the Company renewed its commitment to continue funding, until March 1, 1996, the development of the hyaluronic acid-based anti-adhesion products on behalf of the Surgical Aids Partnership the remaining available funds of which were fully expended in the first quarter of 1994. SUBSEQUENT EVENTS Acquisition of Minority Interest of IG Laboratories, Inc.: On October 2, 1995, the General Division acquired the publicly-held minority interest in IG Laboratories, Inc. ("IG") by issuing .1201 of one share of General Division Stock for each share of IG common stock. In the aggregate, approximately 385,000 shares of General Division Stock, valued at approximately $22,754,000, were issued. The acquisition was accounted for as a purchase. The excess of the purchase price over the fair market value of the net assets acquired, was approximately $18,600,000, of which $10,000,000 will be allocated to in-process research and development and charged to operations in the fourth quarter and $8,600,000 to Goodwill to be amortized over 20 years. Issuance of Stock: On October 12, 1995, the General Division sold 2,875,000 shares of its common stock to the public for $51.25 per share. Net proceeds from the offering after underwriting discounts and commissions were $141,450,000. Submission of Pre-Market Approval Application for Seprafilm[TM]: On October 30, 1995 the Company submitted a Pre-Market Approval Application to the U.S. Food and Drug Administration for approval to market Seprafilm[TM] bioresorbable membrane in the United States for abdominal and gynecological surgery applications. The Company also has begun test marketing Seprafilm[TM] in the Netherlands and expects to launch the product in the European Community in 1996. The Company believes that substantial additional funds will be required to commercialize Seprafilm[TM] in the United States and the European Community. -11- 12 GENZYME GENERAL DIVISION COMBINED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended (Dollars in thousands) September 30, September 30, - --------------------------------------------------------------------------------------- 1995 1994 1995 1994 ---- ---- ---- ---- Revenues: Net product sales.......................... $77,049 $62,514 $219,374 $173,499 Net service sales.......................... 11,196 11,181 35,461 38,188 Revenues from research and development contracts - related parties.............. 6,239 5,485 19,166 16,153 ------- ------- -------- -------- 94,484 79,180 274,001 227,840 Operating costs and expenses: Cost of products sold...................... 27,569 24,705 82,938 65,530 Cost of services sold...................... 7,576 7,583 23,353 24,600 Selling, general and administrative........ 24,456 21,116 72,056 63,649 Research and development (including research and development related to contracts)................................ 14,675 12,597 42,472 37,058 ------- ------- -------- -------- 74,276 66,001 220,819 190,837 ------- ------- -------- -------- Operation income............................. 20,208 13,179 53,182 37,003 Other income and (expenses) Minority interest in net loss of subsidiaries.............................. 742 599 1,608 1,216 Equity in net income (loss) of unconsolidated affiliate.................. 535 - (1,207) - Investment income.......................... 1,410 1,529 3,891 7,305 Interest expense........................... (512) (815) (732) (1,658) ------- ------- -------- -------- 2,175 1,313 3,560 6,863 ------- ------- -------- -------- Income before income taxes.................. 22,383 14,492 56,742 43,866 Provision for income taxes.................. (8,506) (4,861) (21,562) (15,533) ------- ------- -------- -------- Net income.................................. 13,877 9,631 35,180 28,333 Allocated tax benefit generated by Tissue Repair Division.................... 2,215 434 5,877 1,231 ------- ------- -------- -------- Net income attributable to Genzyme General Division Stock.................... $16,092 $10,065 $ 41,057 $ 29,564 ======= ======= ======== ======== The accompanying notes are an integral part of these unaudited, combined financial statements.
-12- 13 GENZYME GENERAL DIVISION COMBINED STATEMENTS OF OPERATIONS (CONTINUED) (Unaudited)
Three Months Ended Nine Months Ended (In thousands, except per share amounts) September 30, September 30, - ----------------------------------------------------------------------------------- 1995 1994 1995 1994 ---- ---- ---- ---- Net income attributable to Genzyme General Division Stock............... $16,092 $10,065 $41,057 $29,564 ======= ======= ======= ======= Income per General Division Common and common equivalent share: Net income (1)...................... $0.53 $0.38 $1.42 $1.13 ===== ===== ===== ===== Average shares outstanding........... 30,279 26,374 28,816 26,117 ====== ====== ====== ====== Income per General Division Common Share assuming full dilution: Net income (1).................... $0.49 $0.35 $1.30 $1.05 ===== ===== ===== ===== Average fully diluted shares outstanding...................... 32,896 28,570 31,671 28,109 ====== ====== ====== ====== (1) Pro forma for 1994. The accompanying notes are an integral part of these unaudited, combined financial statements.
-13- 14 GENZYME GENERAL DIVISION COMBINED BALANCE SHEETS (Unaudited)
(Dollars in thousands) September 30, December 31, - ------------------------------------------------------------------------------- 1995 1994 ---- ---- ASSETS Current Assets: Cash and cash equivalents.............................. $52,955 $ 46,549 Short-term investments................................. 1,925 7,155 Accounts receivable, less allowance for doubtful accounts................................ 82,696 76,641 Inventories............................................ 46,155 36,764 Prepaid expenses and other current assets.............. 12,114 10,790 Due from Genzyme Tissue Repair Division................ 545 171 Deferred tax assets - current.......................... 4,072 4,072 ------- ------- Total current assets................................ 200,462 182,142 Property, plant and equipment, net.................... 320,435 295,346 Other Assets: Long-term investments.................................. 55,870 74,948 Note receivable - related party........................ 1,429 3,572 Intangibles, net of accumulated amortization........... 26,257 29,303 Deferred tax assets - noncurrent....................... 28,473 28,473 Other noncurrent assets................................ 27,576 16,360 -------- -------- 139,605 152,656 -------- -------- $660,502 $630,144 ======== ======== LIABILITIES AND DIVISION EQUITY Current Liabilities: Accounts payable....................................... $ 10,167 $ 20,859 Accrued expenses....................................... 35,498 27,766 Income taxes payable................................... 3,393 6,523 Deferred revenue....................................... 2,016 2,604 Current portion of long-term debt and capital lease obligations............................ 645 41,076 -------- -------- Total current liabilities........................... 51,719 98,828 Noncurrent Liabilities: Long-term debt and capital lease obligations........... 126,258 126,555 Other noncurrent liabilities........................... 8,101 6,800 -------- -------- 134,359 133,355 Minority interest in subsidiaries........................ 1,510 2,310 Division equity.......................................... 472,914 395,651 -------- -------- $660,502 $630,144 ======== ======== The accompanying notes are an integral part of these unaudited, combined financial statements.
-14- 15 GENZYME GENERAL DIVISION COMBINED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands) Nine Months Ended September 30, - -------------------------------------------------------------------------------- 1995 1994 ---- ---- OPERATING ACTIVITIES: Net income......................................... $ 41,057 $ 29,564 Reconciliation of net income to net cash from operating activities: Depreciation and amortization................... 16,210 12,995 Provision for bad debts......................... 3,453 3,139 (Gain)/loss on sale of investments.............. 110 (1,444) Accrued interest/amortization on bonds.......... 841 (2,327) Minority interest in net loss of subsidiaries... (1,608) (1,217) Equity in net loss of unconsolidated affiliate.. 1,208 - Other........................................... 1,285 77 Decrease in cash from working capital: Accounts receivable.......................... (8,163) (14,900) Inventories.................................. (8,688) (7,654) Prepaid expenses and other current assets..... (1,245) (622) Accounts payable, accrued expenses and deferred revenue........................ (7,260) (795) Due from Genzyme Tissue Repair Division....... (374) - -------- ------- Net cash from operating activities........... 36,826 16,816 -------- ------- INVESTING ACTIVITIES: Investment in unconsolidated affiliate............. (4,000) - Loans to related parties ......................... (1,857) - Purchases of investments.......................... (10,614) (220,295) Sales and maturities of investments............... 39,035 255,855 Property, plant and equipment..................... (35,754) (85,703) Other noncurrent assets........................... (563) (2,353) -------- ------- Net cash from investing activities........ (13,753) (52,496) -------- ------- FINANCING ACTIVITIES: Issuance of General Division Common Stock ........ 24,994 5,691 Issuance of Commmon Stock by subsidiaries.......... 479 258 Issuance of debt................................... 77 21,803 Payments of debt and capital lease obligations..... (41,069) (4,566) Net cash to Genzyme................................ - (3,003) -------- --------- Net cash from financing activities........... (15,519) 20,183 -------- --------- Effect of exchange rate changes on cash............... (1,148) (807) -------- --------- Decrease in cash and cash equivalents................. 6,406 (16,304) Cash and cash equivalents, beginning of period........ 46,549 22,975 -------- --------- Cash and cash equivalents, end of period.............. $ 52,955 $ 6,671 ======== ========= Supplemental Cash Flow Information: Cash paid during the period for: Interest....................................... $ 5,846 $ 5,472 Income taxes................................... 19,260 9,910 Supplemental Disclosure of Non-Cash Transactions: Additional investment in unconsolidated affiliate -- Note 6 Acquisition of Minority Interest of IG Laboratories, Inc. -- Note 7 The accompanying notes are an integral part of these unaudited, combined financial statements.
-15- 16 GENZYME GENERAL DIVISION NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS 1. Basis of Presentation: ---------------------- These unaudited combined financial statements should be read in conjunction with the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1994 and the financial statements and footnotes for Genzyme General Division included therein. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to the Securities and Exchange Commission rules and regulations. Certain items in the 1994 financial statements have been reclassified to conform with the 1995 presentation. The financial statements for the three and nine months ended September 30, 1995 and 1994 are unaudited but include, in the Division's opinion, all adjustments (consisting only of normally recurring accruals) necessary for a fair presentation of the results for the periods presented. 2. Accounting Policies: -------------------- The accounting policies underlying the quarterly financial statements are those set forth in Note A of the General Division's financial statements included in the Company's Annual Report on Form 10-K/A for the year ended December 31, 1994. 3. Investments: ------------ As of September 30, 1995, the General Division's investment portfolio, consisting primarily of debt securities classified as available for sale, was adjusted to market value. As a result, gross unrealized holding gains of approximately $5,000 and gross unrealized holding losses totaling approximately $483,000 were recorded as a net decrease to Division equity. As of September 30, 1995, the carrying values of the General Division's investments in Aronex Pharmaceuticals, Inc. (formerly Argus Pharmaceuticals, Inc.), Celtrix Pharmaceuticals, Inc. and Univax Biologics, Inc., included in Other noncurrent assets in the unaudited, combined balance sheet, were adjusted to their respective market values. Gross unrealized holding gains of approximately $966,000 and gross unrealized holding losses of approximately $428,000 were recorded as a net increase to Division equity. 4. Inventories: ------------
September 30, 1995 December 31, 1994 ------------------ ----------------- Raw materials ............ $12,863,000 $14,517,000 Work-in-process .......... 13,776,000 9,226,000 Finished products ........ 19,516,000 13,021,000 ----------- ----------- $46,155,000 $36,764,000 =========== ===========
5. Provision for Income Taxes: --------------------------- The tax provision for the quarter ended September 30, 1995 varies from the U.S. statutory tax rate because of the provision for state income taxes, losses of subsidiaries which generate no current tax benefit, tax credits and taxes on foreign earnings. The effective tax rate was 38% for the three and nine months ended September 30, 1995 as compared to 34% and 35%, respectively, for the corresponding periods in 1994. The increase was due primarily to the expiration of the Orphan Drug Credit effective December 31, 1994. The allocated tax benefit generated by GTR of $2.2 million and $5.9 million, respectively, reduced the General Division's tax rate to 28% for the quarter and nine months ended September 30, 1995. -16- 17 6. Additional Investments in Unconsolidated Affiliate: --------------------------------------------------- On July 3, 1995, Genxyme Transgenics Corporation ("GTC") acquired Biodevelopment Laboratories, Inc. ("BDL"). As part of the transaction, the General Division issued approximately 34,000 shares of General Division Common Stock to former stockholders of BDL in exchange for approximately 475,000 shares of newly issued GTC common stock. In total, GTC issued approximately 1,207,000 shares in the transaction, resulting in a decrease in the Division's interest in GTC to 48.2%. Also as part of the BDL transaction, the Company guaranteed a $7,500,000 line of credit to GTC from a commercial bank in return for warrants to purchase 145,000 shares of GTC common stock. 7. Subsequent Events: ------------------ Acquisition of Minority Interest in IG Laboratories, Inc.: On October 2, 1995, the Company acquired, using General Division Stock, the publicly-held minority interest in IG Laboratories, Inc. ("IG") by issuing .1201 of one share of General Division Stock for each share of IG common stock. In the aggregate, approximately 385,000 shares of General Division Stock, valued at approximately $22,754,000, were issued. The acquisition was accounted for as a purchase. The excess of the purchase price over the fair market value of the net assets acquired, was approximately $18,600,000, of which $10,000,000 will be allocated to in-process research and development and charged to operations in the fourth quarter and $8,600,000 to Goodwill to be amortized over 20 years. Issuance of Stock: On October 12, 1995, the General Division sold 2,875,000 shares of its common stock to the public for $51.25 per share. Net proceeds from the offering after underwriting discounts and commissions were $141,450,000. Submission of Pre-Market Approval Application for Seprafilm[TM]: On October 30, 1995 the Company submitted a Pre-Market Approval Application to the U.S. Food and Drug Administration for approval to market Seprafilm[TM] bioresorbable membrane in the United States for abdominal and gynecological surgery applications. The Company also has begun test marketing Seprafilm[TM] in the Netherlands and expects to launch the product in the European Community in 1996. The Company believes that substantial additional funds will be required to commercialize Seprafilm[TM] in the United States and the European Community. -17- 18 GENZYME GENERAL DIVISION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995 The following discussion is a summary of the key factors affecting the General Division's results of operations, liquidity and capital resources. This discussion should be read in conjunction with the financial statements and related notes of Genzyme and Management's Discussion and Analysis of Financial Condition and Results of Operations for Genzyme on pages 3 through 11 of this Report. RESULTS OF OPERATIONS Revenue ------- Total revenues for the three and nine months ended September 30, 1995 were $94.5 million and $274.0 million, respectively, compared to $79.2 million and $227.8 million, respectively, for the corresponding periods in 1994. Product and service revenues combined were $88.2 million and $254.8 million, respectively, each an increase of 20%, over the same period in 1994. Product revenues increased 23% to $77.0 million for the third quarter, and 26% to $219.4 million for the nine months ended September 30, 1995, reflecting sales increases in the Therapeutics, Diagnostic Products, and Pharmaceutical businesses of 22%, 26% and 30%, respectively, for the third quarter and 26%, 22% and 44%, respectively, for the nine months ended September 30, 1995. The increase in sales of Therapeutic products resulted primarily from increased shipments of Ceredase(R)/Cerezyme(R) enzyme, for which the rate of new patient accruals more than offset dosage reductions. The increase in Diagnostic Products sales resulted from sales increases across most product lines, including a doubling in revenues from sales of Direct LDL tests. Pharmaceutical sales for the third quarter increased 30% due primarily to increased sales of Melatonin. For the nine months ended September 30, 1995, Pharmaceutical sales increased 44% resulting primarily from a full nine months of revenue in 1995 for operations acquired in the third quarter of 1994 and an increase in sales of Melatonin in the third quarter of 1995. Service revenues for the third quarter increased slightly to $11.2 million and for the nine months ended September 30, 1995, declined 7% to $35.5 million, a resulting primarily from a decline in identity testing revenues, a reduction in unit price per test and the divestiture of two small genetic diagnostic laboratories. International product sales represented approximately 41% of total product sales for the third quarter and nine months ended September 30, 1995 compared with approximately 39% and 36%, respectively, for the corresponding periods in 1994. The increase was due primarily to increases of 38% and 52%, respectively, for the three and nine months ended September 30, 1995 in the international sales of Ceredase(R)/Cerezyme(R) enzyme combined as well as favorable exchange rates. Revenues from research and development contracts increased 14% to $6.2 million for the third quarter and 19% to $19.2 million for the nine months ended September 30, 1995. Revenues from Neozyme II Corporation ("Neozyme II") for the three and nine months ended September 30, 1995 increased 30% to $5.6 million and 37% to $17.3 million, respectively, due primarily to increased activity relating to collaborations with third parties and to production of clinical trial materials. In the first nine months of 1994, consolidation of the operations of GTC provided $2.1 million of reported revenues from research and development contracts. Beginning in the fourth quarter of 1994, the Division accounts for GTC using the equity method of accounting and, accordingly, no longer reports GTC's revenue from research and development contracts. -18- 19 Margins and Operating Expenses ------------------------------ Total gross margins for the three and nine months ended September 30, 1995 were 60% and 58%, respectively, compared to 56% and 57%, respectively, for the corresponding periods in 1994. The General Division provides a broad range of health care products and services, resulting in a range of gross margins depending on the particular market conditions of each product or service. Product margins for the third quarter were 64% compared to 60% for the third quarter of 1994. All product lines experienced higher margins in the quarter due to revenue increases, product mix and manufacturing efficiencies. For the nine months ended September 30, 1995 and 1994, product margins were 62%. Service margins for the three months ended September 30, 1995 and 1994 were 32%. For the nine months ended September 30, 1995 and 1994, service margins declined to 34% from 36%, respectively, due to a decline in identity testing revenues. Selling, general and administrative expenses for the three and nine months ended September 30, 1995 were $24.5 million and $72.1 million, respectively, compared to $21.1 million and $63.6 million for the same periods in 1994. The increase was due primarily to increased staffing in support of the growth in several product lines and a full nine months of expenses in 1995 for operations acquired in the third quarter of 1994. As a percentage of total revenues, selling, general and administrative expenses for the three and nine months ended September 30, 1995 were 26%, compared to 27% and 28%, respectively, for the corresponding periods in 1994. Research and development expenses for the three and nine months ended September 30, 1995 were $14.7 million and $42.5 million, respectively, compared to $12.6 million and $37.1 million, respectively, for the same periods in 1994, due to increased efforts on behalf of Neozyme II and increased spending on internal programs. Other Income and Expenses ------------------------- Other income for the third quarter includes a one-time gain of approximately $950,000 representing the sale of certain assets by GTC. Investment income for the quarter and nine months ended September 30, 1995 totaled $1.4 million and $3.9 million, respectively, compared with $1.5 million and $7.3 million, respectively, for the same periods in 1994. Investment income for the nine month period ended September 30, 1995 includes losses on the sales of securities of approximately $110,000, as compared to losses of $162,000 and gains of $1.6 million, respectively, on the sales of securities for the corresponding period in 1994. Excluding the effect of these realized gains and losses, investment income for the nine months ended September 30, 1995 decreased 32% due to lower average cash and investment balances. Interest expense for the quarter and nine months ended September 30, 1995 was $512,000 and $732,000, respectively, net of capitalized interest on construction in progress of $2.1 million and $6.9 million, respectively. Interest relating to Genzyme's 6 3/4% convertible subordinated notes was $1.7 million and $5.1 million, equal to the amounts incurred in the same periods in 1994. The General Division also incurred interest expense for the three and nine months ended September 30, 1995 of $0.4 million and $1.2 million, respectively, related to a $21.5 million mortgage note issued in the third quarter of 1994, $0.1 million and $0.3 million, respectively, related to a deferred liability established to acquire the remaining shares of a Swiss company acquired, in part, in July 1994 and the remainder related to interest on capitalized leases. The tax provision for the quarter and nine months ended September 30, 1995 varies from the U.S. statutory tax rate because of the provision for state income taxes, losses of subsidiaries which generate no current tax benefit, tax credits and taxes on foreign earnings. The effective tax rate was 38% for the three and nine months ended September 30, 1995 as compared to 34% and 35% for the corresponding periods in 1994. The increase was due primarily to the expiration of the Orphan Drug Credit effective December 31, 1994. The allocated tax benefit generated by GTR -19- 20 of $2.2 million and $5.9 million, respectively, reduced the General Division's tax rate to 28% for the quarter and nine months ended September 30, 1995. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 1995, the General Division had cash, cash equivalents and investments in marketable securities totaling $110.8 million, a decrease of $17.9 million from December 31, 1994. The General Division repaid a $39.0 million term loan in January 1995. In the nine months ended September 30, 1995, the General Division spent $35.8 million on increased manufacturing capacity and invested an additional $4.0 million in GTC, an unconsolidated affiliate. These expenditures were financed primarily by operations, $36.8 million, and by the issuance of common stock through exercises of stock options and warrants, $25.0 million. As of September 30, 1995, the General Division had accounts receivable of $82.7 million, an increase of $6.1 million from December 31, 1994, due primarily to increased sales. Inventories increased $9.4 million, or 26%, to $46.2 million as of September 30, 1995 from December 31, 1994. The increase was due primarily to improved Ceredase[R] yields and management's efforts to build Ceredase[R], Cerezyme[R] enzyme inventories, support of increased business operations and to exchange rate fluctuations. In January 1995, the General Division renewed its commitment to continue funding, until March 1, 1996, the development of the hyaluronic acid-based anti-adhesion products on behalf of the Surgical Aids Partnership, the remaining available funds of which were fully expended in the first quarter of 1994. SUBSEQUENT EVENTS Acquisition of Minority Interest of IG Laboratories, Inc.: On October 2, 1995, the General Division acquired the publicly- held minority interest in IG Laboratories, Inc. ("IG") by issuing .1201 of one share of General Division Stock for each share of IG common stock. In the aggregate, approximately 385,000 shares of General Division Stock, valued at approximately $22,754,000 were issued. The acquisition was accounted for as a purchase. The excess of the purchase price over the fair market value of the net assets acquired, was approximately $18,600,000, of which $10,000,000 will be allocated to in-process research and development and charged to operations in the fourth quarter and $8,600,000 to Goodwill to be amortized over 20 years. Issuance of Stock: On October 12, 1995, the General Division sold 2,875,000 shares of its common stock to the public for $51.25 per share. Net proceeds from the offering after underwriting discounts and commissions were $141,450,000. Submission of Pre-Market Approval Application of Seprafilm[TM]: On October 30, 1995 the Company submitted a Pre-Market Approval Application to the U.S. Food and Drug Administration for approval to market Seprafilm[TM] bioresorbable membrane in the United States for abdominal and gynecological surgery applications. The Company also has begun test marketing Seprafilm[TM] in the Netherlands and expects to launch the product in the European Community in 1996. The Company believes that substantial additional funds will be required to commercialize Seprafilm[TM] in the United States and the European Community. -20- 21 GENZYME TISSUE REPAIR DIVISION COMBINED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended Nine Months Ended (In thousands, except per share amounts) September 30, September 30, - ------------------------------------------------------------------------------------------------ 1995 1994 1994 1994 ---- ----- ---- ---- Revenues: Net service sales.............................. $ 1,435 $ - $ 3,712 $ - Operating costs and expenses: Cost of service sold............................ 1,350 - 2,955 - Selling, general and administrative............. 3,093 212 7,386 601 Reseach and Development......................... 2,530 847 8,459 2,402 ------- ------- -------- ------- 6,973 1,059 18,800 3,003 ------- ------- -------- ------- Operating loss.................................... (5,538) (1,059) (15,088) (3,003) Investment income................................. 156 - 737 - ------- ------- -------- ------- Net loss.......................................... $(5,382) $(1,059) $(14,351) $(3,003) ======= ======= ======== ======= Per Tissue Repair Division Common share: Net loss....................................... $ (0.59) $ (0.32) $ (1.62) $ (0.91) ======= ======= ======== ======= Average shares outstanding..................... 9,171 3,302 8,871 3,291 ======= ======= ======== ======= The accompanying notes are an integral part of these unaudited, combined financial statements.
-21- 22 GENZYME TISSUE REPAIR DIVISION COMBINED BALANCE SHEETS (Unaudited)
(Dollars in Thousands) September 30, December 31, - ----------------------------------------------------------------------------------- 1995 1994 ---- ---- ASSETS Current Assets: Cash and cash equivalents.............................. $45,628 $16,993 Short-term investments................................. 6,101 5,918 Accounts receivable, less allowance for doubtful accounts................................. 1,398 1,486 Inventories............................................ 230 76 Prepaid expenses and other current assets.............. 165 284 ------- ------- Total current assets................................. 53,522 24,757 Property, plant and equipment, net....................... 1,085 1,456 Other Assets: Long-term investments.................................. 2,003 1,897 Other noncurrent....................................... 325 325 ------- ------- 2,328 2,222 ------- ------- $56,935 $28,435 ======= ======== LIABILITIES AND DIVISION EQUITY Current Liabilities: Accounts payable....................................... $ 1,255 $ 528 Accrued expenses....................................... 1,842 3,220 Payable to Genzyme General Division.................... 545 171 Current portion of capital lease obligations........... 243 281 ------- ------- Total current liabilities............................ 3,885 4,200 Noncurrent Liabilities: Capital lease obligations.............................. - 174 Other noncurrent liabilities........................... 733 748 ------- ------ 733 922 Division equity.......................................... 52,317 23,313 ------- ------- $56,935 $28,435 ======= ======= The accompanying notes are an integral part of these unaudited, combined financial statements.
-22- 23 GENZYME TISSUE REPAIR DIVISION COMBINED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in Thousands) Nine Months Ended September 30, - --------------------------------------------------------------------------- 1995 1994 ---- ----- OPERATING ACTIVITIES: Net loss........................................... $(14,351) $(3,003) Reconciliation of net loss to net.................. cash from operating activities: Depreciation and amortization.................... 630 - Accrued interest/amortization on bonds........... (110) - Increase (decrease) in cash from working capital: Accounts receivable........................... 88 - Inventories................................... (154) - Prepaid expenses and other current assets..... 119 - Accounts payable, accrued expenses and deferred revenue......................... (651) - Due to Genzyme General Division................ 374 - -------- ------- Net cash from operating activities............ (14,055) (3,003) -------- ------- INVESTING ACTIVITIES: Purchases of investments............................ (10,957) - Sales and maturities of investments................. 10,994 - Property, plant and equipment....................... (259) - -------- ------- Net cash from investing activities............ (222) - -------- ------- FINANCING ACTIVITIES: Issuance of TR stock............................... 43,138 - Payments of capital lease obligations.............. (211) - Net cash from Genzyme.............................. - 3,003 Other.............................................. (15) - -------- ------- Net cash from financing activities............ 42,912 3,003 -------- ------- Increase (decrease) in cash and cash equivalents.......................................... 28,635 - Cash and cash equivalents, beginning of period........ 16,993 - -------- ------- Cash and cash equivalents, end of period.............. $ 45,628 $ - ======== ======= Supplemental cash flow information: Cash paid during the period for interest........... $ 33 $ - The accompanying notes are an integral part of these unaudited, combined financial statements.
-23- 24 GENZYME TISSUE REPAIR DIVISION NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS 1. Basis of Presentation: --------------------- These unaudited combined financial statements should be read in conjunction with the Company's Annual Report on form 10-K/A for the fiscal year ended December 31, 1994 and the financial statements and footnotes for Genzyme Tissue Repair Division ("GTR") included therein. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to the Securities and Exchange Commission rules and regulations. Certain items in the 1994 financial statements have been reclassified to conform with the 1995 presentation. The financial statements for the three and nine months ended September 30, 1995 and 1994 are unaudited but include, in GTR's opinion, all adjustments (consisting only of normally recurring accruals) necessary for a fair presentation of the results for the periods presented. 2. Accounting Policies: ------------------- The accounting policies underlying the quarterly financial statements are those set forth in Note A of GTR's financial statements included in the Company's Annual Report on form 10-K/A for the year ended December 31, 1994. 3. Investments: ----------- As of September 30, 1995, GTR's investment portfolio, consisting primarily of debt securities classified as available for sale, was adjusted to market value. As a result, gross unrealized holding losses totaling approximately $38,000 were recorded in a separate component of Division equity. 4. Inventories: -----------
September 30, 1995 December 31, 1994 ------------------- ----------------- Raw materials.............. $102,000 $55,000 Work-in-process............ 128,000 21,000 -------- ------- $230,000 $76,000
======== ======= 5. Issuance of Stock: On September 22, 1995, GTR sold 3,000,000 shares of common stock to the public for $15.00 per share. Net proceeds from the offering after underwriting discounts and commissions were $42,360,000. -24- 25 GENZYME TISSUE REPAIR DIVISION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995 The following discussion is a summary of the key factors affecting the Tissue Repair Division's results of operations, liquidity and capital resources. This discussion should be read in conjunction with the financial statements and related notes of Genzyme and Management's Discussion and Analysis of Operations for Genzyme on pages 3 through 11 of this Report. RESULTS OF OPERATIONS Revenue ------- Service revenues for the three and nine months ended September 30, 1995 were $1,435,000 and $3,712,000, respectively. Revenues consisted primarily of sales of Epicel[SM] skin grafts which are dependent upon numerous factors, many of which are not in GTR's control. As a result, GTR expects sales of Epicel[SM] skin grafts to fluctuate from period to period. Revenues also included $120,000 and $160,000, respectively, for the three and nine months ended September 30, 1995, from the sales of CARTICEL[SM] service, GTR's cartilage repair service, which commenced in the first quarter of 1995. Margins and Operating Expenses ------------------------------ Gross margins for the quarter and nine months ended September 30, 1995 were 6% and 20%, respectively. The lower margins in the quarter were due to increased scale-up efforts for the CARTICEL[SM] Service. GTR incurs direct selling, general and administrative expenses as well as a selling, general and administrative charge, based on actual amounts incurred, from the General Division for work performed by the General Division on behalf of GTR. Selling, general and administrative expenses for the three and nine months ended September 30, 1995 were $3,093,000 and $7,386,000, respectively, compared to $212,000 and $601,000, respectively, for the corresponding periods in 1994. The increase was due to increased support of GTR by the General Division and as a result of the acquisition of BioSurface Technology, Inc., ("BioSurface") in the fourth quarter of 1994. GTR incurs direct research and development expenses, as well as a charge, based on actual amounts incurred, for research and development work performed by the General Division on behalf of GTR. Research and development expenses for the three and nine months ended September 30, 1995 were $2,530,000 and $8,459,000, respectively, compared to $847,000 and $2,402,000, respectively, for the corresponding periods in 1994. Research and development expenses related to work performed directly by GTR were $1,466,000 and $4,956,000, respectively, for the quarter and nine months ended September 30, 1995. Excluding the effect of GTR direct efforts, research and development expenses for work performed by the General Division on behalf of GTR increased 26% and 46%, respectively, for the quarter and nine months ended September 30, 1995 due primarily to increased outside clinical trials and manufacturing support related to the Vianain[R] programs. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 1995, GTR had approximately $53.7 million of cash, cash equivalents and investments in marketable securities, an increase of $28.9 million from December 31, 1994. The increase was due primarily to the net proceeds of GTR's public stock offering, $42.4 million, partially offset by GTR's net loss and working capital requirements, $14.1 million. -25- 26 GTR anticipates that available funds plus revenues generated from the CARTICEL[SM] Service and from sales of Epicel[SM] skin grafts will be sufficient to fund GTR's operations through the end of 1996. Significant additional funds will be required to complete commercialization and clinical testing of GTR's products and services. There can be no assurance that such funds will be available on attractive terms, if at all. -26- 27 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, SEPTEMBER 30, 1995 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for Genzyme, the General Division and the Tissue Repair Division on the pages listed in the Index on Page 2 of this report. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 11 Computation of weighted average shares used in computing earnings per share amounts. Filed herewith. 27 Financial Data Schedules for Genzyme General Division and Genzyme Tissue Repair Division (EDGAR filing only). (b) Reports on Form 8-K On September 21, 1995, the Company filed a current report on Form 8-K to provide certain pro forma financial information as of December 31, 1994 for Genzyme, the General Division, and GTR. -27- 28 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, SEPTEMBER 30, 1995 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: November 14, 1995 By: /s/David J. McLachlan ----------------------- David J. McLachlan Duly Authorized Officer and Chief Financial Officer -28- 29 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, SEPTEMBER 30, 1995 EXHIBIT INDEX
Exhibit No. Description Page No. ------- ----------- -------- 11 Computation of weighted average shares used in computing earnings per share amounts. Filed herewith. 30 27 Financial Data Schedules for Genzyme General Division and Genzyme Tissue Repair Division (EDGAR filing only). 33
-29- EX-11 2 COMPUTATION OF WEIGHTED AVERAGE SHARES 1 EXHIBIT 11 - COMPUTATION OF WEIGHTED AVERAGE SHARES USED IN COMPUTING INCOME PER SHARE AMOUNTS (Unaudited, in thousands)
Three Months Ended --------------------------------------------- September 30, 1995 September 30, 1994 --------------------- --------------------- Common Common and Common Assuming and Common Assuming Equivalent Full Equivalent Full Share Dilution Share Dilution ---------- -------- ---------- -------- Applicable to General Division Stock: Common stock outstanding, beginning of period...... 26,755 26,755 24,412 24,412 Weighted average common stock issued during the period........................................ 479 851 51 51 Weighted average common stock assuming exercise of options.............................. 1,747 1,945 603 754 Weighted average common stock assuming exercise of warrants.............................. 1,298 1,454 1,308 1,462 Weighted average common stock assuming conversion of 6 3/4% Convertible Subordinated Notes.......... (A) 1,891 (A) 1,891 ------ ------ ------ ------ Weighted average number of shares outstanding...... 30,279 32,896 26,374 28,570 ====== ====== ====== ====== Nine Months Ended --------------------------------------------- September 30, 1995 September 30, 1994 --------------------- --------------------- Common Common and Common Assuming and Common Assuming Equivalent Full Equivalent Full Share Dilution Share Dilution ---------- -------- ---------- -------- Applicable to General Division Stock: Common stock outstanding, beginning of period...... 26,447 26,447 24,292 24,292 Weighted average common stock issued during the period........................................ 347 1,214 87 87 Weighted average common stock assuming exercise of options............................... 1,219 1,338 540 590 Weighted average common stock assuming exercise of warrants.............................. 803 871 1,198 1,249 Weighted average common stock assuming conversion of 6 3/4% Convertible Subordinated Notes.......... (A) 1,891 (A) 1,891 ------ ------ ------ ------ Weighted average number of shares outstanding...... 28,816 31,671 26,117 28,109 ====== ====== ====== ====== (A) These securities are "other potentially dilutive" securities which effect is included, to the extent such effect is dilutive, in the determination of weighted average shares assuming full dilution.
2 EXHIBIT 11 - COMPUTATION OF WEIGHTED AVERAGE SHARES USED IN COMPUTING INCOME PER SHARE AMOUNTS (continued) (Unaudited, in thousands)
Three Months Ended ---------------------------------------------- September 30, 1995 September 30, 1994 --------------------- --------------------- Common Common and Common Assuming and Common Assuming Equivalent Full Equivalent Full Share Dilution Share Dilution ---------- -------- ---------- -------- Applicable to TR Stock: Common stock outstanding, beginning of period............... 8,818 3,296 Weighted average common stock issued during the period...... 353 6 Weighted average common stock assuming exercise of options........................................ (B) (B) Weighted average common stock assuming exercise of warrants....................................... (B) (B) Weighted average common stock assuming conversion of 6 3/4% Convertible Subordinated Notes...................... (A) (A) ------ ------ Weighted average number of shares outstanding............... 9,171 3,302 ====== ======
Nine Months Ended -------------------------------------------------- September 30, 1995 September 30, 1994 --------------------- --------------------- Common Common and Common Assuming and Common Assuming Equivalent Full Equivalent Full Share Dilution Share Dilution ---------- -------- ---------- -------- Applicable to TR Stock: Common stock outstanding, beginning of period............... 8,675 3,279 Weighted average common stock issued during the period...... 196 12 Weighted average common stock assuming exercise of options........................................ (B) (B) Weighted average common stock assuming exercise of warrants....................................... (B) (B) Weighted average common stock assuming conversion of 6 3/4% Convertible Subordinated Notes...................... (A) (A) ------ ------ Weighted average number of shares outstanding............... 8,871 3,291 ====== ====== (A) These securities are "other potentially dilutive" securities which effect is included, to the extent such effect is dilutive, in the determination of weighted average shares assuming full dilution. (B) The effect of assumed conversion is antidilutive.
EX-27.1 3 FINANCIAL DATA SCHEDULE - GENERAL DIVISION WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMBINED FINANCIAL STATEMENTS OF GENZYME CORPORATION GENERAL DIVISION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS 9-MOS DEC-31-1995 JAN-01-1995 SEP-30-1995 1 52,955 1,925 89,871 7,175 46,155 200,462 382,992 62,557 660,502 51,719 126,903 272 0 0 472,642 660,502 254,835 274,001 106,291 204,609 1,207 16,210 732 56,742 15,685 41,057 0 0 0 41,057 1.42 1.30
EX-27.2 4 FINANCIAL DATA SCHEDULE - TISSUE REPAIR DIVISION
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMBINED FINANCIAL STATEMENTS OF GENZYME CORPORATION TISSUE REPAIR DIVISION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS 9-MOS DEC-31-1995 JAN-01-1995 SEP-30-1995 1 45,628 6,101 1,723 325 230 53,522 1,742 657 56,935 3,885 243 120 0 0 52,197 56,935 3,712 3,712 2,955 18,800 0 0 33 (14,351) 0 (14,351) 0 0 0 (14,351) (1.62) 0.00
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