-----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, AXZ6avmvGaWR+Bchi2YvwEwJbghYSsIGEwm/b8Du8hUx1fMw7LPVvToXZcRCf/X5 Z4aZv9oxJ7u8uTh4Om0+wQ== 0000950135-98-003292.txt : 19980515 0000950135-98-003292.hdr.sgml : 19980515 ACCESSION NUMBER: 0000950135-98-003292 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980514 SROS: NASD 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: 98620788 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 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 March 31, 1998 -------------------------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to _______________ Commission file number 0-14680 ---------------------------------------------- GENZYME CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Massachusetts 06-1047163 - -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) One Kendall Square, Cambridge, Massachusetts 02139 - -------------------------------------------------------------------------------- (Address of principal executive offices) (zip code) (617) 252-7500 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares outstanding of each of the issuer's classes of common stock as of April 30, 1998: Series ------ Genzyme General Division Common Stock ("GGD Stock") 78,456,119 Genzyme Tissue Repair Division Common Stock ("GTR Stock") 20,150,026 Genzyme Molecular Oncology Division Common Stock ("GMO Stock") 3,928,572 2 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, MARCH 31, 1998 NOTE REGARDING FORWARD-LOOKING STATEMENTS: This report on Form 10-Q for Genzyme Corporation ("Genzyme" or the "Company") contains forward-looking statements concerning, among other things, the Company's future revenues, operations and expenditures. All such forward-looking statements are necessarily only estimates of future results and the actual results may differ materially from these projections due to a number of factors, including (i) the Company's ability to successfully complete preclinical and clinical development and obtain timely regulatory approval and patent and other proprietary rights protection of its products and services, (ii) the content and timing of decisions made by the U.S. Food and Drug Administration (the "FDA") regarding the indications for which the Company's products may be approved, (iii) the accuracy of the Company's estimates of the size and characteristics of markets to be addressed by the Company's products and services, (iv) market acceptance of the Company's products and services, (v) the Company's ability to obtain reimbursement for its products from third-party payers, where appropriate, (vi) the accuracy of the Company's information concerning the products and resources of competitors and potential competitors and (vii) the risks and uncertainties described under the heading "Factors Affecting Future Operating Results" in the sections entitled (a) "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations" and "Management's Discussion and Analysis of Genzyme General's Financial Condition and Results of Operations" in the Genzyme General Annual Report for the fiscal year ended December 31, 1997 (the "1997 Genzyme General Annual Report"), (b) "Management's Discussion and Analysis of Genzyme Tissue Repair's Financial Condition and Results of Operations" in the Genzyme Tissue Repair Annual Report for the fiscal year ended December 31, 1997 (the "1997 GTR Annual Report") and (c) "Management's Discussion and Analysis of Genzyme Molecular Oncology's Financial Condition and Results of Operations" in the Genzyme Molecular Oncology Annual Report for the fiscal year ended December 31, 1997 (the "1997 GMO Annual Report"). The 1997 Genzyme General Annual Report, the 1997 GTR Annual Report and the 1997 GMO Annual Report were filed as Exhibits 13.1, 13.2 and 13.3, respectively, to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, as amended on Form 10-K/A (the "1997 Genzyme 10-K/A"). 2 3 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, MARCH 31, 1998 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION
PAGE NO. -------- ITEM 1. Financial Statements GENZYME GENERAL Unaudited, Combined Balance Sheets as of March 31, 1998 and December 31, 1997.................................. 4 Unaudited, Combined Statements of Operations for the Three Months Ended March 31, 1998 and 1997................ 5 Unaudited, Combined Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997................ 6 Notes to Unaudited, Combined Financial Statements.............................................................. 7 GENZYME TISSUE REPAIR Unaudited, Combined Balance Sheets as of March 31, 1998 and December 31, 1997.................................. 9 Unaudited, Combined Statements of Operations for the Three Months Ended March 31, 1998 and 1997................ 10 Unaudited, Combined Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997................ 11 Notes to Unaudited, Combined Financial Statements.............................................................. 12 GENZYME MOLECULAR ONCOLOGY Unaudited, Combined Balance Sheets as of March 31, 1998 and December 31, 1997.................................. 13 Unaudited, Combined Statements of Operations for the Three Months Ended March 31, 1998 and 1997................ 14 Unaudited, Combined Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997................ 15 Notes to Unaudited, Combined Financial Statements.............................................................. 16 GENZYME CORPORATION AND SUBSIDIARIES Unaudited, Consolidated Balance Sheets as of March 31, 1998 and December 31, 1997.............................. 17 Unaudited, Consolidated Statements of Operations for the Three Months Ended March 31, 1998 and 1997........... 18 Unaudited, Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997............ 20 Notes to Unaudited, Consolidated Financial Statements.......................................................... 21 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 25 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.................................................. 31 PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K ........................................................................... 31 Signatures........................................................................................................... 32
3 4 PART I. FINANCIAL INFORMATION Item 1. Financial Statements GENZYME GENERAL COMBINED BALANCE SHEETS
MARCH 31, DECEMBER 31, (UNAUDITED, AMOUNTS IN THOUSANDS) 1998 1997 - ------------------------------------------------------------------------------------------------------------------ ASSETS Current assets: Cash and cash equivalents ............................................... $ 83,465 $ 66,276 Short-term investments .................................................. 37,111 35,294 Accounts receivable, net ................................................ 120,109 116,056 Inventories ............................................................. 133,115 137,708 Prepaid expenses and other current assets ............................... 21,143 15,941 Due from Genzyme Molecular Oncology ..................................... 5,173 5,434 Due from Genzyme Tissue Repair .......................................... 1,484 1,213 Deferred tax assets - current ........................................... 27,959 27,601 ---------- ---------- Total current assets ................................................ 429,559 405,523 Property, plant and equipment, net ....................................... 366,101 365,337 Long-term investments .................................................... 99,336 91,627 Notes receivable - related parties ....................................... 2,621 4,601 Intangibles, net ......................................................... 246,600 243,071 Deferred tax assets - noncurrent ......................................... 36,029 35,988 Investments in equity securities ......................................... 31,531 30,047 Other .................................................................... 26,592 26,862 ---------- ---------- Total assets ........................................................ $1,238,369 $1,203,056 ========== ========== LIABILITIES AND DIVISION EQUITY Current liabilities: Accounts payable ........................................................ $ 16,975 $ 18,409 Accrued expenses ........................................................ 59,644 66,865 Income taxes payable .................................................... 18,647 11,157 Deferred revenue - related parties and unaffiliated entities ............ 366 217 Current portion of long-term debt and capital lease obligations ......... 2,099 887 ---------- ---------- Total current liabilities ........................................... 97,731 97,535 Noncurrent liabilities: Long-term debt and capital lease obligations ............................ 117,233 117,978 Other ................................................................... 6,694 6,667 ---------- ---------- Total liabilities ................................................... 221,658 222,180 Division equity .......................................................... 1,016,711 980,876 ---------- ---------- Total liabilities and division equity ............................... $1,238,369 $1,203,056 ========== ==========
The accompanying notes are an integral part of these unaudited, combined financial statements. 4 5 GENZYME GENERAL COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, ---------------------------------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 - ----------------------------------------------------------------- ---------------------------------- Revenues: Net product sales ............................................. $139,370 $128,156 Net service sales ............................................. 13,700 14,756 Revenues from research and development contracts .............. 1,053 1,694 -------- -------- Total revenues ............................................ 154,123 144,606 Operating costs and expenses: Cost of products sold ......................................... 46,350 46,512 Cost of services sold ......................................... 8,127 9,316 Selling, general and administrative ........................... 45,111 40,872 Research and development ...................................... 16,163 17,324 Amortization of intangibles ................................... 3,199 3,196 -------- -------- Total operating costs and expenses ........................ 118,950 117,220 -------- -------- Operating income ................................................ 35,173 27,386 Other income (expenses): Equity in net loss of unconsolidated affiliates ............... (4,296) (70) Investment income ............................................. 2,920 2,318 Interest expense .............................................. (1,990) (2,281) -------- -------- Total other income (expenses) ............................. (3,366) (33) -------- -------- Income before income taxes ...................................... 31,807 27,353 Provision for income taxes ...................................... (12,510) (10,626) -------- -------- Net income ...................................................... 19,297 16,727 Tax benefit allocated from Genzyme Molecular Oncology ........... 1,235 - Tax benefit allocated from Genzyme Tissue Repair ................ 4,406 4,511 -------- -------- Net income ...................................................... $ 24,938 $ 21,238 ======== ======== Per Genzyme General common share: Net income per Genzyme General common share - basic ............ $ 0.32 $ 0.28 ======== ======== Weighted average shares outstanding ............................. 78,760 75,648 ======== ======== Net income per Genzyme General common and common equivalent share - diluted ................................... $ 0.31 $ 0.27 ======== ======== Adjusted weighted average shares outstanding .................... 81,200 78,237 ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. 5 6 GENZYME GENERAL COMBINED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED (UNAUDITED, AMOUNTS IN THOUSANDS) MARCH 31, - -------------------------------------------------------------------------------------------------------- 1998 1997 ---- ---- OPERATING ACTIVITIES: Net income ............................................................ $19,297 $ 16,727 Reconciliation of net income to net cash provided by operating activities: Depreciation and amortization ....................................... 13,798 9,324 Non-cash compensation expense ....................................... 20 159 Accrued interest/amortization on bonds .............................. (108) 651 Provision for bad debts and inventory ............................... 1,494 2,045 Equity in net loss of unconsolidated affiliates, net ................ 4,296 70 Other ............................................................... 113 286 Increase (decrease) in cash from working capital changes: Accounts receivable ............................................... (6,417) (6,913) Inventories ....................................................... 4,574 (5,961) Prepaid expenses and other current assets ......................... (5,277) (2,837) Accounts payable, accrued expenses, income taxes payable and deferred revenue ................................................. 5,634 1,983 Due from Genzyme Tissue Repair .................................... (271) 112 Due from Genzyme Molecular Oncology ............................... 261 - ------- --------- Net cash provided by operating activities ......................... 37,414 15,646 INVESTING ACTIVITIES: Purchases of investments .............................................. (39,547) (25,425) Sales and maturities of investments ................................... 30,071 44,502 Acquisitions of property, plant and equipment .......................... (11,831) (4,184) Sale of equipment ..................................................... 584 - Investment in unconsolidated affiliates ............................... (4,093) - Acquisitions, net of acquired cash and assumed liabilities ............ (6,190) - Repayment of loans by related parties.................................. 2,019 - Other ................................................................. (444) (2,189) ------- --------- Net cash provided (used) by investing activities .................. (29,431) 12,704 FINANCING ACTIVITIES: Proceeds from issuance of common stock ................................ 10,356 91,824 Proceeds from issuance of debt ........................................ 666 - Payments of debt and capital lease obligations ........................ (452) (104,510) Net cash allocated to Genzyme Tissue Repair ........................... 76 (1,802) Other ................................................................. (381) - ------- --------- Net cash provided (used) by financing activities .................. 10,265 (14,488) Effect of exchange rate changes on cash ................................. (1,059) (2,837) ------- --------- Increase in cash and cash equivalents ................................... 17,189 11,025 Cash and cash equivalents at beginning of period ........................ 66,276 77,220 ------- --------- Cash and cash equivalents at end of period .............................. $83,465 $ 88,245 ======= =========
The accompanying notes are an integral part of these unaudited, combined financial statements. 6 7 GENZYME GENERAL NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION These unaudited, combined financial statements should be read in conjunction with the 1997 Genzyme 10-K/A and the financial statements and footnotes for both Genzyme General Division ("Genzyme General") and Genzyme Corporation and Subsidiaries ("Genzyme" or the "Company") included therein. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Certain items in the 1997 financial statements have been reclassified to conform with the 1998 presentation. The financial statements for the three months ended March 31, 1998 and 1997 are unaudited but include, in management's opinion, all adjustments (consisting only of normally recurring accruals) necessary for a fair presentation of the results for the periods presented. 2. FINANCIAL INFORMATION Financial information specific to Genzyme General is presented in these Genzyme General unaudited, combined financial statements. Accounting policies and financial information relevant to Genzyme, Genzyme General, Genzyme Tissue Repair Division ("GTR") and Genzyme Molecular Oncology Division ("GMO"), collectively, are presented in the unaudited, consolidated financial statements of Genzyme. 3. NEW ACCOUNTING PRONOUNCEMENTS For a discussion of new accounting pronouncements, see Note 2., "New Accounting Pronouncements", to Genzyme Corporation and Subsidiaries' Unaudited, Consolidated Financial Statements (the "Unaudited, Consolidated Financial Statements") which is incorporated herein by reference. 4. INVENTORIES (IN THOUSANDS)
March 31, 1998 December 31, 1997 -------------- ----------------- Raw materials................................... $ 53,514 $ 48,149 Work-in-process................................. 28,145 30,264 Finished products............................... 51,456 59,295 -------- -------- $133,115 $137,708 ======== ========
5. REVOLVING CREDIT FACILITY The disclosures related to amounts borrowed by Genzyme General under Genzyme's $225.0 million revolving credit facility with a syndicate of commercial banks (the "Revolving Credit Facility") are included in Note 4., "Revolving Credit Facility", to the Unaudited, Consolidated Financial Statements which is incorporated herein by reference. 6. PROVISION FOR INCOME TAXES The tax provisions for the three months ended March 31, 1998 vary from the U.S. statutory tax rate because of the provision for state income taxes, the Foreign Sales Corporation, nondeductible amortization of intangibles, tax credits and Genzyme General's share of the losses of unconsolidated subsidiaries. The effective tax rate was 39.3% for the three months ended March 31, 1998, a slight increase over the 38.8% effective rate for the corresponding period in 1997. For the three months ended March 31, 1998, tax benefits allocated from GTR and GMO of $4.4 million and $1.2 million, respectively, reduced Genzyme General's tax rate to 21.6%. In the three months ended March 31, 1997, tax benefits allocated from GTR reduced Genzyme General's tax rate to 22.4%. 7 8 GENZYME GENERAL NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS 7. NET INCOME PER SHARE The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
Three Months Ended March 31, --------------------------- 1998 1997 ---- ---- Genzyme General: Net income attributable to GGD Stock-basic and diluted .................................................. $24,938 $21,238 ======= ======= Shares used in net income per common share-basic .............. 78,760 75,648 Effect of dilutive securities: Stock options .............................................. 2,432 2,579 Warrants ................................................... 8 10 ------- ------- Dilutive potential common shares .............................. 2,440 2,589 ------- ------- Shares used in net income per common share-diluted ............ 81,200 78,237 ======= ======= Net income per common share - basic ........................... $ 0.32 $ 0.28 ======= ======= Net income per common share - diluted ......................... $ 0.31 $ 0.27 ======= =======
Options to purchase 3,859,733 and 4,093,682 shares of GGD Stock as of March 31, 1998 and 1997, respectively, were outstanding during the periods then ended but were not included in the calculation of diluted income per share for such periods because the options' exercise prices were greater than the average market price of GGD Stock during those periods. Warrants to purchase 80,000 shares of GGD Stock exercisable as of March 31, 1998 were not included in the calculation of diluted income per share for such period because the exercise price of the warrants was greater than the average market price of GGD Stock during the period. 8. COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for the reporting and display of comprehensive income and its components. Components of comprehensive income are net income and all other nonowner changes in equity such as the change in the cumulative translation adjustment. SFAS 130 requires that an enterprise: (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. SFAS 130 is effective for financial statements issued for periods beginning after December 15, 1997, which for Genzyme General is the first quarter of 1998. Presentation of comprehensive income for earlier periods is provided for comparative purposes. Comprehensive income for the three months ended March 31, 1998 and 1997 is as follows (in thousands):
Three Months Ended March 31, ----------------------- 1998 1997 Net income .................................... $24,938 $21,238 Cumulative translation adjustment ............. (698) (8,871) Unrealized gain (loss) on investments ......... 1,327 (665) ------- ------- Comprehensive income .......................... $25,567 $11,702 ======= =======
8 9 GENZYME TISSUE REPAIR COMBINED BALANCE SHEETS
(UNAUDITED, AMOUNTS IN THOUSANDS) MARCH 31, DECEMBER 31, - ------------------------------------------------------------------------------------------------------------------- 1998 1997 ---- ---- ASSETS Current assets: Cash and cash equivalents...................................................... $10,903 $21,120 Short-term investments......................................................... 10,808 10,795 Accounts receivable, net....................................................... 2,285 2,221 Inventories.................................................................... 2,443 1,973 Prepaid expenses and other current assets...................................... 1,179 732 ------- ------- Total current assets......................................................... 27,618 36,841 Property, plant and equipment, net................................................ 18,991 19,524 Other ............................................................................ 403 453 ------- ------- Total assets................................................................. $47,012 $56,818 ======= ======= LIABILITIES AND DIVISION EQUITY Current liabilities: Accounts payable............................................................... $ 1,659 $ 1,378 Accrued expenses............................................................... 2,454 2,816 Due to Genzyme General......................................................... 1,484 1,213 ------- ------- Total current liabilities.................................................... 5,597 5,407 Long-term debt.................................................................... 18,000 18,000 Convertible debenture, net........................................................ 13,211 12,681 Other............................................................................. 490 527 ------- ------- Total liabilities............................................................ 37,298 36,615 Division equity................................................................... 9,714 20,203 ------- ------- Total liabilities and division equity........................................ $47,012 $56,818 ======= =======
The accompanying notes are an integral part of these unaudited, combined financial statements. 9 10 GENZYME TISSUE REPAIR COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) THREE MONTHS ENDED MARCH 31, - -------------------------------------------------------------------------------------------------------- 1998 1997 ---- ---- Revenues: Net service sales .................................................. $ 3,611 $ 1,987 Operating costs and expenses: Cost of services sold .............................................. 3,234 2,856 Selling, general and administrative ................................ 6,313 6,454 Research and development ........................................... 3,086 2,768 -------- -------- Total operating costs and expenses ............................... 12,633 12,078 -------- -------- Operating loss ........................................................ (9,022) (10,091) Other income (expenses): Equity in loss of joint venture .................................... (1,931) (1,589) Interest income .................................................... 447 186 Interest expense ................................................... (814) (377) -------- -------- Total other income (expenses) .................................... (2,298) (1,780) -------- -------- Net loss .............................................................. $(11,320) $(11,871) ======== ======== Basic and diluted net loss per Genzyme Tissue Repair Common Share: Net loss............................................................ $ (0.57) $ (0.90) ======== ======== Weighted average shares outstanding ................................... 20,002 13,178 ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. 10 11 GENZYME TISSUE REPAIR COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED, AMOUNTS IN THOUSANDS) THREE MONTHS ENDED MARCH 31, - ------------------------------------------------------------------------------------------------------------------- 1998 1997 ---- ---- OPERATING ACTIVITIES: Net loss .................................................................... $(11,320) $(11,871) Reconciliation of net loss to net cash used by operating activities: Depreciation and amortization ............................................. 569 572 Non-cash compensation expense ............................................. 59 38 Provision for bad debt..................................................... 182 42 Accretion of debt conversion feature ...................................... 321 102 Equity in loss of joint venture ........................................... 1,931 1,589 Increase (decrease) in cash from working capital: Accounts receivable ..................................................... (249) (2) Inventories ............................................................. (470) 42 Prepaid expenses and other current assets ............................... (447) 105 Accounts payable and accrued expenses ................................... 81 297 Due to Genzyme General .................................................. 271 (112) -------- -------- Net cash used by operating activities ................................. (9,072) (9,198) INVESTING ACTIVITIES: Sales and maturities of investments ......................................... - 318 Investment in joint venture ................................................. (1,888) (1,843) Acquisitions of property, plant and equipment ............................... (33) (133) Sales of property, plant and equipment ...................................... 35 202 Other ....................................................................... 6 (613) -------- -------- Net cash used by investing activities ................................. (1,880) (2,069) FINANCING ACTIVITIES: Proceeds from issuance of common stock, net ................................. 848 118 Proceeds from issuance of convertible debentures ............................ - 13,000 Cash allocated (to) from Genzyme General .................................... (76) 1,802 Other ....................................................................... (37) - -------- -------- Net cash provided by financing activities ............................. 735 14,920 -------- -------- Increase (decrease) in cash and cash equivalents ............................... (10,217) 3,653 Cash and cash equivalents at beginning of period ............................... 21,120 15,912 -------- -------- Cash and cash equivalents at end of period ..................................... $ 10,903 $ 19,565 ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. 11 12 GENZYME TISSUE REPAIR NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION These unaudited, combined financial statements should be read in conjunction with the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1997 and the financial statements and footnotes for both GTR and Genzyme included therein. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The financial statements for the three months ended March 31, 1998 and 1997 are unaudited but include, in management's opinion, all adjustments (consisting only of normally recurring accruals) necessary for a fair presentation of the results for the periods presented. 2. FINANCIAL INFORMATION Financial information specific to GTR is presented in these GTR unaudited, combined financial statements. Accounting policies and financial information relevant to Genzyme, Genzyme General, GTR and GMO, collectively, are presented in the Unaudited, Consolidated Financial Statements of Genzyme. 3. NEW ACCOUNTING PRONOUNCEMENTS For a discussion of new accounting pronouncements, see Note 2., "New Accounting Pronouncements", to the Unaudited, Consolidated Financial Statements which is incorporated herein by reference. 4. INVENTORIES (In thousands)
March 31, 1998 December 31, 1997 -------------- ----------------- Raw materials............................................... $ 445 $ 243 Work-in-process............................................. 1,998 1,730 ------ ------ $2,443 $1,973 ====== ======
5. REVOLVING CREDIT FACILITY The disclosures related to amounts borrowed by GTR under Genzyme's Revolving Credit Facility are included in Note 4., "Revolving Credit Facility", to the Unaudited, Consolidated Financial Statements which is incorporated herein by reference. 6. NET INCOME (LOSS) PER SHARE Note 6., "Net Income (Loss) per Share", to the Unaudited, Consolidated Financial Statements is incorporated herein by reference. 7. COMPREHENSIVE INCOME In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income". SFAS 130 establishes standards for the reporting and display of comprehensive income and its components. Components of comprehensive income are net income and all other nonowner changes in equity such as the change in the cumulative translation adjustment. SFAS 130 requires that an enterprise: (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a balance sheet. SFAS 130 is effective for financial statements issued for periods beginning after December 15, 1997 which for GTR is the first quarter of 1998. Presentation of comprehensive income for earlier periods provided for comparative purposes is required. Comprehensive loss for GTR for the three months ended March 31, 1998 and 1997 is the same as GTR's net loss. 12 13 GENZYME MOLECULAR ONCOLOGY COMBINED BALANCE SHEETS
MARCH 31, DECEMBER 31, (UNAUDITED, AMOUNTS IN THOUSANDS) 1998 1997 - --------------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents ............................................ $ 6,851 $15,010 Short-term investments ............................................... 6,708 5,170 Other ................................................................ 504 688 ------- ------- Total current assets ............................................. 14,063 20,868 Equipment, net .......................................................... 444 487 Long-term investments ................................................... - 1,049 Intangibles, net ........................................................ 27,169 30,688 Investment in joint venture ............................................. 294 574 Other ................................................................... 188 135 ------- ------- Total assets ..................................................... $42,158 $53,801 ======= ======= LIABILITIES AND DIVISION EQUITY Current liabilities: Accrued expenses ..................................................... $ 2,086 $ 2,015 Due to Genzyme General ............................................... 5,173 5,434 Deferred revenue ..................................................... 1,353 1,583 Other ................................................................ 18 18 ------- ------- Total current liabilities ........................................ 8,630 9,050 Noncurrent liabilities: Long-term debt ....................................................... - 5,000 Convertible debentures, net .......................................... 18,074 17,024 Note payable to Genzyme General ...................................... 2,621 2,582 Deferred tax liability ............................................... 5,847 6,509 Other ................................................................ 27 170 ------- ------- Total liabilities ................................................ 35,199 40,335 Division equity ......................................................... 6,959 13,466 ------- ------- Total liabilities and division equity ............................ $42,158 $53,801 ======= =======
The accompanying notes are an integral part of these unaudited, combined financial statements. 13 14 GENZYME MOLECULAR ONCOLOGY COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, --------------------------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 - ----------------------------------------------------------------------------------------------------------------- Revenues: Service sales ................................................................. $ 933 $ - Revenues from research and development contracts .............................. 1,350 - Revenues from research and development contracts - related party .............. 534 - ------- ------ Total revenues ............................................................ 2,817 - Operating costs and expenses: Cost of services sold ......................................................... 469 - Cost of research and development revenue ...................................... 267 - Cost of research and development revenue - related party ...................... 485 - Selling, general and administrative ........................................... 1,152 109 Research and development ...................................................... 3,295 518 Amortization of intangibles ................................................... 3,025 - ------- ------ Total operating costs and expenses ........................................ 8,693 627 ------- ------ Operating loss ................................................................... (5,876) (627) Other income (expenses): Equity in loss of joint venture ............................................... (444) - Interest income ............................................................... 280 - Interest expense .............................................................. (1,162) - ------- ------ Total other income (expenses) ............................................. (1,326) - ------- ------ Loss before income taxes ......................................................... (7,202) (627) Tax benefit ...................................................................... 662 - ------- ------ Net loss ......................................................................... $(6,540) $ (627) ======= ====== Basic and diluted net loss per Genzyme Molecular Oncology common share: Net loss....................................................................... $ (1.66) ======= Weighted average shares outstanding............................................... 3,929 ======= Pro forma basic and diluted net loss per Genzyme Molecular Oncology common share: Pro forma net loss ............................................................ $(0.16) ====== Pro forma shares outstanding ..................................................... 3,929 ======
The accompanying notes are an integral part of these unaudited, combined financial statements. 14 15 GENZYME MOLECULAR ONCOLOGY COMBINED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED (UNAUDITED, AMOUNTS IN THOUSANDS) MARCH 31, - -------------------------------------------------------------------------------------------------------------- 1998 1997 ---- ---- OPERATING ACTIVITIES: Net loss ................................................................. $(6,540) $(627) Reconciliation of net loss to net cash used by operating activities: Depreciation and amortization ...................................... 3,607 - Deferred income tax benefit ........................................ (662) - Accretion of debt conversion feature ............................... 706 - Equity in loss of joint venture .................................... 444 - Accrued interest/amortization of marketable securities ............. (94) - Non-cash compensation expense ...................................... 28 - Increase (decrease) in cash from working capital changes: Other current assets ............................................. 184 - Accrued expenses and deferred revenue ............................ 16 - Due to Genzyme General ........................................... (261) - ------- ----- Net cash used by operating activities ............................ (2,572) (627) INVESTING ACTIVITIES: Purchases of investments ................................................. (1,439) - Maturities of investments ................................................ 1,049 - Acquisitions of equipment ................................................ (1) - Other .................................................................... (53) - ------- ----- Net cash used in investing activities ............................ (444) - FINANCING ACTIVITIES: Repayment of debt ........................................................ (5,000) - Parent company investment, Genzyme General ............................... - 627 Other .................................................................... (143) - ------- ----- Net cash provided (used) by financing activities ................. (5,143) 627 ------- ----- Decrease in cash and cash equivalents ....................................... (8,159) - Cash and cash equivalents at beginning of period ............................ 15,010 - ------- ----- Cash and cash equivalents at end of period .................................. $ 6,851 $ - ======= =====
The accompanying notes are an integral part of these unaudited, combined financial statements. 15 16 GENZYME MOLECULAR ONCOLOGY NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION These unaudited, combined financial statements should be read in conjunction with the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1997 and the financial statements and footnotes for both GMO and Genzyme included therein. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Certain items in the 1997 financial statements have been reclassified to conform to the 1998 presentation. The financial statements for the three months ended March 31, 1998 and 1997 are unaudited but include, in management's opinion, all adjustments (consisting only of normally recurring accruals) necessary for a fair presentation of the results for the periods presented. 2. FINANCIAL INFORMATION Financial information specific to GMO is presented in these GMO unaudited, combined financial statements. Accounting policies and financial information relevant to Genzyme, Genzyme General, GTR and GMO, collectively, are presented in the Unaudited, Consolidated Financial Statements of Genzyme. 3. NEW ACCOUNTING PRONOUNCEMENTS For a discussion of new accounting pronouncements see Note 2., "New Accounting Pronouncements", to the Unaudited, Consolidated Financial Statements which is incorporated herein by reference. 4. REVOLVING CREDIT FACILITY In March 1998, GMO repaid the full $5.0 million allocated to it under the Revolving Credit Facility. See Note 4., "Revolving Credit Facility", to the Unaudited, Consolidated Financial Statements which is incorporated herein by reference. 5. NET LOSS PER SHARE Note 6., "Net Income (Loss) Per Share", to the Unaudited, Consolidated Financial Statements is incorporated herein by reference. 6. COMPREHENSIVE INCOME In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income". SFAS 130 establishes standards for the reporting and display of comprehensive income and its components. Components of comprehensive income are net income and all other nonowner changes in equity such as the change in the cumulative translation adjustment. SFAS 130 requires that an enterprise: (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a balance sheet. SFAS 130 is effective for financial statements issued for periods beginning after December 15, 1997 which for GMO is the first quarter of 1998. Presentation of comprehensive income for earlier periods is provided for comparative purposes. Comprehensive loss for the three months ended March 31, 1998 and 1997 is as follows (in thousands):
Three Months Ended March 31, -------------------- 1998 1997 ---- ---- Net loss ........................................... $(6,540) $(627) Unrealized gain on investments ..................... 5 - ------- ----- Comprehensive loss ................................. $(6,535) $(627) ======= =====
7. SUBSEQUENT EVENT In April 1998, GMO filed with the Securities and Exchange Commission a registration statement (which has not yet become effective) on Form S-3 covering the initial public offering of 3,450,000 shares of GMO Stock (including 450,000 shares issuable upon exercise of the underwriters' over-allotment option). 16 17 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(UNAUDITED, AMOUNTS IN THOUSANDS) MARCH 31, DECEMBER 31, - ------------------------------------------------------------------------------------------------------------------------- 1998 1997 ---- ---- ASSETS Current assets: Cash and cash equivalents ..................................................... $ 101,219 $ 102,406 Short-term investments ........................................................ 54,627 51,259 Accounts receivable, net....................................................... 122,394 118,277 Inventories ................................................................... 135,558 139,681 Prepaid expenses and other current assets ..................................... 22,826 17,361 Deferred tax assets - current ................................................. 27,959 27,601 ---------- ---------- Total current assets ........................................................ 464,583 456,585 Property, plant and equipment, net ............................................... 385,536 385,348 Long-term investments ............................................................ 99,336 92,676 Note receivable-related party .................................................... - 2,019 Intangibles, net ................................................................. 271,537 271,275 Deferred tax assets - noncurrent, net ............................................ 30,182 29,479 Investments in equity securities ................................................. 31,531 30,047 Other ............................................................................ 27,477 28,024 ---------- ---------- Total assets ................................................................ $1,310,182 $1,295,453 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable .............................................................. $ 18,634 $ 19,787 Accrued expenses .............................................................. 64,184 71,696 Income taxes payable .......................................................... 18,204 11,168 Deferred revenue .............................................................. 1,719 1,800 Current portion of long-term debt and capital lease obligations ............... 2,117 905 ---------- ---------- Total current liabilities ................................................... 104,858 105,356 Long-term debt and capital lease obligations .................................. 135,233 140,978 Convertible debentures, net ................................................... 31,285 29,705 Other ......................................................................... 7,211 7,364 ---------- ---------- Total liabilities ........................................................... 278,587 283,403 Stockholders' equity: Genzyme General Division Common Stock, $.01 par value ......................... 784 777 Genzyme Tissue Repair Division Common Stock, $.01 par value ................... 201 199 Genzyme Molecular Oncology Division Common Stock, $.01 par value .............. 39 39 Treasury Stock - at cost ...................................................... (901) (901) Additional paid-in capital - Genzyme General .................................. 905,601 895,340 Additional paid-in capital - Genzyme Tissue Repair ............................ 171,259 170,430 Additional paid-in capital - Genzyme Molecular Oncology ....................... 34,545 34,517 Accumulated deficit ........................................................... (68,562) (76,346) Foreign currency translation adjustments ...................................... (13,147) (12,449) Unrealized net gains on investments ........................................... 1,776 444 ---------- ---------- Total stockholders' equity .................................................. 1,031,595 1,012,050 ---------- ---------- Total liabilities and stockholders' equity .................................. $1,310,182 $1,295,453 ========== ==========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. 17 18 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, ---------------------------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 - ----------------------------------------------------------------------------------------------------- Revenues: Net product sales .............................................. $139,370 $128,156 Net service sales .............................................. 18,244 16,743 Revenues from research and development contracts ............... 2,937 1,694 -------- -------- Total revenues .............................................. 160,551 146,593 Operating costs and expenses: Cost of products sold .......................................... 46,350 46,512 Cost of services sold .......................................... 11,830 12,172 Selling, general and administrative ............................ 52,576 47,326 Research and development ....................................... 23,296 20,092 Amortization of intangibles .................................... 5,972 3,196 -------- -------- Total operating costs and expenses .......................... 140,024 129,298 -------- -------- Operating income .................................................. 20,527 17,295 Other income (expenses): Equity in net loss of unconsolidated affiliates ................ (6,671) (1,659) Investment income .............................................. 3,647 2,504 Interest expense ............................................... (3,966) (2,658) -------- -------- Total other income (expenses) ............................... (6,990) (1,813) -------- -------- Income before income taxes ......................................... 13,537 15,482 Provision for income taxes ......................................... (5,753) (6,115) -------- -------- Net income ......................................................... $ 7,784 $ 9,367 ======== ========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. 18 19 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
THREE MONTHS ENDED MARCH 31, ----------------------------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 - -------------------------------------------------------------------------------------------------------------------- Attributable to Genzyme General: Net income .................................................................. $ 19,297 16,727 Tax benefit allocated from Genzyme Molecular Oncology ....................... 1,235 - Tax benefit allocated from Genzyme Tissue Repair ............................ 4,406 4,511 -------- -------- Net income attributable to GGD Stock ........................................ $ 24,938 $ 21,238 ======== ======== Per Genzyme General common share - basic: Net income ................................................................ $ 0.32 $ 0.28 ======== ======== Weighted average shares outstanding ......................................... 78,760 75,648 ======== ======== Per Genzyme General common and common equivalent share - diluted: Net income ................................................................ $ 0.31 $ 0.27 ======== ======== Adjusted weighted average shares outstanding ................................ 81,200 78,237 ======== ======== Attributable to Genzyme Tissue Repair: Net loss attributable to GTR Stock .......................................... $(11,320) $(11,871) ======== ======== Basic and diluted net loss per Genzyme Tissue Repair common share: Net loss .................................................................. $ (0.57) $ (0.90) ======== ======== Weighted average shares outstanding ......................................... 20,002 13,178 ======== ======== Attributable to Genzyme Molecular Oncology: Net loss attributable to GMO Stock .......................................... $ (6,540) $ (627) ======== ======== Basic and diluted net loss per Genzyme Molecular Oncology common share: Net loss .................................................................. $ (1.66) ======== Weighted average shares outstanding ......................................... 3,929 ======== Pro forma basic and diluted net loss per Genzyme Molecular Oncology common share: Pro forma net loss ......................................................... $ (0.16) ======== Pro forma weighted average shares outstanding ................................ 3,929 ========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. 19 20 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, AMOUNTS IN THOUSANDS) FOR THE THREE MONTHS ENDED MARCH 31, - -------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: 1998 1997 ---- ---- Net income .................................................................. $ 7,784 $ 9,367 Reconciliation of net income to net cash provided by operating activities: Depreciation and amortization ............................................ 17,722 9,896 Non-cash compensation expense ............................................ 107 197 Accrued interest/amortization on bonds ................................... (202) 651 Provision for bad debts and inventory .................................... 1,676 2,087 Deferred income tax benefit .............................................. (662) - Equity in net loss of unconsolidated affiliates .......................... 6,671 1,659 Accretion of debt conversion feature ..................................... 1,027 102 Other .................................................................... 113 286 Increase (decrease) in cash from working capital changes: Accounts receivable ................................................... (6,666) (6,915) Inventories ........................................................... 4,104 (5,919) Prepaid expenses and other current assets ............................. (5,540) (2,732) Accounts payable, accrued expenses, income taxes payable and deferred revenue ................................................ (364) (2,231) --------- --------- Net cash provided by operating activities ............................. 25,770 6,448 INVESTING ACTIVITIES: Purchases of investments .................................................... (40,986) (25,425) Sales and maturities of investments ......................................... 31,120 44,820 Acquisitions of property, plant and equipment ............................... (11,865) (4,317) Sales of property, plant, and equipment ..................................... 619 202 Acquisitions, net of acquired cash and assumed liabilities .................. (6,190) - Investment in joint venture ................................................. (5,981) (1,843) Repayment of loans by affiliates ............................................ 2,019 - Other ....................................................................... (491) (2,802) --------- --------- Net cash (used in) provided by investing activities ................... (31,755) 10,635 FINANCING ACTIVITIES: Proceeds from issuance of common stock ...................................... 11,204 91,942 Proceeds from issuance of debt .............................................. 666 13,000 Payments of debt and capital lease obligations .............................. (5,452) (104,510) Other ....................................................................... (561) - --------- --------- Net cash provided by financing activities ............................. 5,857 432 Effect of exchange rate changes on cash ......................................... (1,059) (2,837) --------- --------- Increase (decrease) in cash and cash equivalents ................................ (1,187) 14,678 Cash and cash equivalents at beginning of period ................................ 102,406 93,132 --------- --------- Cash and cash equivalents at end of period ...................................... $ 101,219 $ 107,810 ========= =========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. 20 21 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 1997 Genzyme 10-K/A and the financial statements and footnotes for Genzyme included therein. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Certain items in the 1997 financial statements have been reclassified to conform to the 1998 presentation. The financial statements for the three months ended March 31, 1998 and 1997 are unaudited but include, in management's opinion, all adjustments (consisting only of normally recurring accruals) necessary for a fair presentation of the results for the periods presented. 2. NEW ACCOUNTING PRONOUNCEMENTS In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 is effective for fiscal years beginning after December 15, 1997. Genzyme has not assessed the impact of SFAS 132 on its financial statement disclosures. In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants (the "AICPA") issued Statement of Position 98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 was issued to address diversity in practice regarding whether and under what conditions the costs of internal-use software should be capitalized. Genzyme has not assessed the impact of SOP 98-1 on its financial statement disclosures. In April 1998, the Accounting Standards Executive Committee of the AICPA issued Statement of Position 98-5 "Accounting for the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires all costs of start-up activities (as defined by SOP 98-5) to be expensed as incurred. Genzyme has not assessed the impact of SOP 98-5 on its financial statement disclosures. 3. INVENTORIES (IN THOUSANDS)
March 31, 1998 December 31, 1997 -------------- ----------------- Raw materials................................... $ 53,959 $ 48,392 Work-in-process................................. 30,143 31,994 Finished products............................... 51,456 59,295 -------- -------- Total................................ $135,558 $139,681 ======== ========
4. REVOLVING CREDIT FACILITY Genzyme has a Revolving Credit Facility with a syndicate of commercial banks administered by Fleet National Bank in the amount of $225.0 million. Amounts drawn under this facility may be allocated to either Genzyme General, GTR or GMO. In March 1998, GMO repaid the full $5.0 million of borrowings allocated to it under the Revolving Credit Facility. As of March 31, 1998, the Company had $113.0 million of debt outstanding under the Revolving Credit Facility, $95.0 million of which was allocated to Genzyme General and $18.0 million of which was allocated to GTR. 5. PROVISION FOR INCOME TAXES The tax provisions for the three months ended March 31, 1998 and 1997 vary from the U.S. statutory tax rate because of the provision for state income taxes, nondeductible interest, the Foreign Sales Corporation, nondeductible amortization of intangibles, tax credits and Genzyme's share of the losses of unconsolidated subsidiaries. The effective tax rate increased to 42.5% for the three months ended March 31, 1998, from 39.5% for the corresponding period in 1997 due to higher nondeductible intangible amortization and losses from unconsolidated subsidiaries. 21 22 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS 6. NET INCOME (LOSS) PER SHARE The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
Three Months Ended March 31, ---------------------------- 1998 1997 ---- ---- Genzyme General: Net income attributable to GGD Stock-basic and diluted ............................................. $24,938 $21,238 ======= ======= Shares used in net income per common share-basic ......... 78,760 75,648 Effect of dilutive securities: Employee and director stock options ................... 2,432 2,579 Warrants .............................................. 8 10 ------- ------- Dilutive potential common shares ......................... 2,440 2,589 ------- ------- Shares used in net income per common share-diluted ....... 81,200 78,237 ======= ======= Net income per common share - basic ...................... $ 0.32 $ 0.28 ======= ======= Net income per common share - diluted .................... $ 0.31 $ 0.27 ======= =======
Options to purchase 3,859,733 and 4,093,682 shares of GGD Stock as of March 31, 1998 and 1997, respectively, were outstanding during the periods then ended but were not included in the calculation of Genzyme General's diluted income per share for such periods because the options' exercise prices were greater than the average market price of GGD Stock during those periods. Warrants to purchase 80,000 shares of GGD Stock exercisable as of March 31, 1998 were not included in the calculation of diluted income per share for such period because the exercise price of the warrants was greater than the average market price of GGD Stock during the period. Genzyme Tissue Repair: Basic net loss per Genzyme Tissue Repair common share is the same as diluted net loss per Genzyme Tissue Repair common share for the three months ended March 31, 1998 and 1997, respectively. Certain securities were not included in the computation of GTR's diluted earnings per share for the three months ended March 31, 1998 and 1997, respectively because they would have an anti-dilutive effect due to GTR's net loss for each such period. These securities include: (i) options to purchase 2,711,188 and 2,495,038 shares, respectively, of GTR Stock with a price range in both periods of $3.19 - $25.75 per share; (ii) 833,774 and 1,958,300 shares, respectively, of GTR Stock which are not outstanding but are issuable from time to time for the benefit of Genzyme General or its stockholders ("GTR Designated Shares"); and (iii) 2,577,245 shares of GTR Stock reserved for issuance upon conversion of a 5% convertible note due February 27, 2000 (the "GTR Note"). 22 23 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS 6. NET INCOME (LOSS) PER SHARE (CONTINUED) Genzyme Molecular Oncology: Historical loss per share information is presented for GMO for the three months ended March 31, 1998 but is omitted for the three months ended March 31, 1997 as there were no shares of GMO Stock outstanding prior to June 18, 1997. Pro forma net loss per share is disclosed for GMO for the three months ended March 31, 1997. The pro forma shares outstanding represent the shares issued to effect the merger of PharmaGenics, Inc. ("PharmaGenics") with and into Genzyme in June 1997. Basic net loss per Genzyme Molecular Oncology common share is the same as diluted net loss per Genzyme Molecular Oncology common share for the three months ended March 31, 1998. Pro forma basic net loss per Genzyme Molecular Oncology common share is the same as pro forma diluted net loss per share for the three months ended March 31, 1997. Certain securities were not included in the computation of GMO's diluted and pro forma diluted earnings per share for the three months ended March 31, 1998 and 1997, respectively, because they would have an anti-dilutive effect due to GMO's net loss for each such period. These securities include: (i) options to purchase 870,305 shares of GMO Stock at $7.00 per share; (ii) warrants to purchase 9,563 shares of GMO Stock at $8.04 per share; (iii) 3,475,915 shares of GMO Stock reserved for issuance upon conversion of a 6% convertible note due August 29, 2002 (the "GMO Debentures"); and (iv) 6,000,000 shares of GMO Stock which are not outstanding but are issuable for the benefit of Genzyme General or its stockholders ("GMO Designated Shares"). 7. COMPREHENSIVE INCOME In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income". SFAS 130 establishes standards for the reporting and display of comprehensive income and its components. Components of comprehensive income are net income and all other nonowner changes in equity such as the change in the cumulative translation adjustment. SFAS 130 requires that an enterprise: (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a balance sheet. SFAS 130 is effective for financial statements issued for periods beginning after December 15, 1997 which for Genzyme is the first quarter of 1998. Presentation of comprehensive income for earlier periods is provided for comparative purposes. Comprehensive loss for GTR for the three months ended March 31, 1998 and 1997 is the same as GTR's net loss. Comprehensive income (loss) for Genzyme, Genzyme General and GMO for the three months ended March 31, 1998 and 1997 is as follows (in thousands):
Three Months Ended March 31, --------------------------- 1998 1997 ---- ---- Genzyme (consolidated): Net income.......................................... $ 7,784 $ 9,367 Cumulative translation adjustment .................. (698) (8,871) Unrealized gain (loss) on investments .............. 1,332 (665) ------- ------- Comprehensive income (loss) ........................ $ 8,418 $ (169) ======= ======= Genzyme General: Net income ......................................... $24,938 $21,238 Cumulative translation adjustment .................. (698) (8,871) Unrealized gain (loss) on investments .............. 1,327 (665) ------- ------- Comprehensive income ............................... $25,567 $11,702 ======= =======
23 24 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS 7. COMPREHENSIVE INCOME (CONTINUED)
Three Months Ended March 31, -------------------------- 1998 1997 -------- -------- Genzyme Molecular Oncology: Net loss ..................................... $ (6,540) $ (627) Unrealized gain on investments ............... 5 - -------- -------- Comprehensive loss ........................... $ (6,535) $ (627) ======== ========
8. SUBSEQUENT EVENT GENZYME MOLECULAR ONCOLOGY In April 1998, GMO filed with the Securities and Exchange Commission a registration statement (which has not yet become effective) on Form S-3, covering the initial public offering of 3,450,000 shares of GMO Stock (including 450,000 shares issuable upon exercise of the underwriters' over-allotment option). 24 25 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 The following discussion is a summary of the key factors management considers relevant to an assessment of the Company's results of operations, liquidity and capital resources. GENZYME CORPORATION AND SUBSIDIARIES Since the operating results of Genzyme and its subsidiaries reflect the combined operations of Genzyme General, GTR and GMO, this discussion summarizes the key factors management considers relevant to an assessment of Genzyme's consolidated results of operations. Detailed discussion and analysis of each division's results of operations are provided below under separate headings. RESULTS OF OPERATIONS GENZYME CORPORATION AND SUBSIDIARIES REVENUES Total revenues for the three months ended March 31, 1998 increased 10% to $160.6 million from $146.6 million in the three months ended March 31, 1997. Product and service revenues increased 9% to $157.6 million for the three months ended March 31, 1998 as compared to $144.9 million for the corresponding period of 1997. Product revenues consist of sales by Genzyme General. Product revenues for the three months ended March 31, 1998 increased 9% to $139.4 million from $128.2 million in the comparable period of 1997 due primarily to increased sales of Cerezyme[R] enzyme. Service revenues consist primarily of genetic testing services by Genzyme General, sales of GTR's Carticel[TM] autologous cultured chondrocytes ("Carticel[TM] AuCC") and Epicel[SM] services as well as sales of GMO's SAGE[TM] differential gene expression technology ("SAGE[TM]") services. For the three months ended March 31, 1998, service revenues increased 9% to $18.2 million from $16.7 million in the three months ended March 31, 1997 due primarily to a 120% increase in GTR's sales of Carticel[TM] AuCC and the addition of sales of GMO's SAGE[TM] services, offset in part by a 7% reduction in genetic testing service revenue. GMO added $0.9 million of service revenue in the three months ended March 31, 1998 for which there were no comparable amounts in the three months ended March 31, 1997. International sales as a percentage of total product and service sales for the three months ended March 31, 1998 increased to 41% from 37% for the three months ended March 31, 1997 due primarily to a 32% increase in combined international sales of Cerezyme[R] enzyme and Ceredase[R] enzyme and increased European sales of Carticel[TM] AuCC. Revenues from research and development contracts are attributable to Genzyme General and GMO and increased 73% to $2.9 million for the three months ended March 31, 1998 from $1.7 million in the corresponding period of 1997. The increase was due primarily to $1.9 million of revenues from GMO in the three months ended March 31, 1998, for which there were no comparable amounts in the same period in 1997, offset in part by a decrease in Genzyme General's research and development revenues. MARGINS AND OPERATING EXPENSES Gross margins for the three months ended March 31, 1998 were 63%, compared to 60% for the three months ended March 31, 1997. 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 three months ended March 31, 1998 were 67% compared to 64% for the three months ended March 31, 1997. The increase in product margins in 1998 is primarily due to increased sales volume of Cerezyme[R] enzyme. Service margins for the three months ended March 31, 1998 were 35% compared to 27% for the three months ended March 31, 1997. The increase in service margins resulted primarily from the continued consolidation of facilities and services in genetic testing. Selling, general and administrative ("SG&A") expenses and amortization of intangibles for the three months ended March 31, 1998 were $58.5 million compared to $50.5 million for the three months ended March 31, 1997, an increase of 16%. The increase was due primarily to increased staffing in support of the growth in several product lines, and GMO's amortization of intangibles of $3.0 million for which there was no comparable amount in the same period of last year. Research and development expenses for the three months ended March 31, 1998 were $23.3 million compared to $20.1 million for the three months ended March 31, 1997, an increase of 16%, due primarily to increased spending on GMO's SAGE[TM] services, gene therapy and drug discovery programs, partially offset by a decrease in Genzyme General's research and development spending. OTHER INCOME AND EXPENSES Other income and expenses for the three months ended March 31, 1998 was a net expense of $7.0 million compared to a net expense of $1.8 million in the three months ended March 31, 1997. The increase is primarily due to increased losses from unconsolidated affiliates. Equity in net loss of Genzyme's unconsolidated affiliates increased from $1.7 million for the three months ended March 31, 1997 to $6.7 million for the three months ended March 31, 1998. The change is primarily due to (i) increased losses from Genzyme's 42% owned affiliate, Genzyme Transgenics Corporation ("GTC"), (ii) losses resulting from Genzyme's joint venture with GelTex Pharmaceuticals, Inc. ("GelTex") for the development and commercialization of RenaGel[TM] non-absorbed phosphate binder, and (iii) losses resulting from Genzyme's joint venture with GTC for the development and commercialization of transgenic recombriant human antithrombin III ("ATIII"). The joint ventures with GelTex and GTC were established after the quarter ended March 31, 1997. 25 26 The tax provisions for the three months ended March 31, 1998 and 1997 vary from the U.S. statutory tax rate because of the provision for state income taxes, nondeductible interest, nondeductible amortization of intangibles, Genzyme's share of the losses of unconsolidated affiliates, the Foreign Sales Corporation and tax credits. The effective tax rate was 42.5% for the three months ended March 31, 1998, compared to 39.5% in the corresponding period of last year. The increase in the tax rate was due to higher nondeductible intangible amortization and losses from unconsolidated subsidiaries. GENZYME GENERAL REVENUES Total revenues for the three months ended March 31, 1998 increased 7% to $154.1 million from $144.6 million in the three months ended March 31, 1997. Product and service revenues increased 7% to $153.1 million for the three months ended March 31, 1998 as compared to $142.9 million for the corresponding period of 1997. Product revenues for the three months ended March 31, 1998 increased 9% to $139.4 million from $128.2 million in the comparable period of 1997. Sales of Therapeutic products consisted primarily of sales of Cerezyme[R] enzyme and Ceredase[R] enzyme and totaled $95.6 million for the three months ended March 31, 1998 as compared to $78.6 million in the corresponding period of last year, an increase of 22%. The increase was due to strong international sales and the market launch of Cerezyme[R] enzyme in Japan. Genzyme General's results of operations are highly dependent on sales of Cerezyme[R] enzyme and Ceredase[R] enzyme, which together represented 67% of combined product sales for the three months ended March 31, 1998, compared to 60% in the corresponding period of last year. The increase in Cerezyme[R] enzyme and Ceredase[R] enzyme sales was offset, in part, by decreased sales in the Surgical Products business unit. Surgical Products' revenues declined 11% to $25.6 million in the three months ended March 31, 1998 compared to $28.6 million reported in the corresponding period of last year. The primary reason for this decline was a milestone payment of $2.0 million recorded last year from Genzyme General's Japanese marketing partner, Kaken Pharmaceuticals Co., Ltd., for Seprafilm[R] bioresorbable membrane and no comparable amount was recorded in 1998. For the three months ended March 31, 1998, service revenues decreased 7% to $13.7 million from $14.8 million in the three months ended March 31, 1997 due primarily to a reduction in the Diagnostics business unit's sales of genetic testing services. International sales as a percentage of total product and service sales for the three months ended March 31, 1998 increased to 42% from 37% for the three months ended March 31, 1997 due primarily to a 32% increase in combined international sales of Cerezyme[R] enzyme and Ceredase[R] enzyme. MARGINS AND OPERATING EXPENSES Gross margins for the three months ended March 31, 1998 were 64%, compared to 61% in the corresponding period of last year. Genzyme General provides a broad range of health care products and services, resulting in a range of gross margins depending on the particular market conditions of each product or service. Product margins for the three months ended March 31, 1998 were 67% compared to 64% in the corresponding period of last year. The increase in product margins is primarily due to increased sales volume of Cerezyme[R] enzyme. Service margins for the three months ended March 31, 1998 were 41% compared to 37% for the corresponding period of last year. The increase in service margins resulted primarily from the continued consolidation of facilities and services in genetic testing. SG&A expenses and amortization of intangibles for the three months ended March 31, 1998 were $48.3 million compared to $44.1 million for the three months ended March 31, 1997, an increase of 10%. The increase was due primarily to increased support of the growth in several product lines. Research and development expenses for the three months ended March 31, 1998 were $16.2 million compared to $17.3 million for the three months ended March 31, 1997, a decrease of 7%. The decrease was primarily due to Genzyme General no longer classifying costs related to the development of ATIII as research and development expenses. These amounts are now part of equity in net loss of unconsolidated affiliates due to the formation of the joint venture with GTC to develop and commercialize ATIII. OTHER INCOME AND EXPENSES Other income and expenses for the three months ended March 31, 1998 was a net expense of $3.4 million compared to a net expense of $33,000 for the corresponding time period of last year. The increase is primarily due to increased losses from unconsolidated affiliates. Equity in net loss of unconsolidated affiliates increased from $70,000 for the three months ended March 31, 1997 to $4.3 million for the three months ended March 31, 1998. The change is primarily due to (i) increased losses from GTC, (ii) losses resulting from Genzyme's joint venture with GelTex, and (iii) losses resulting from Genzyme's joint venture with GTC. The joint ventures with GelTex and GTC were established after the quarter ended March 31, 1997. 26 27 The tax provisions for the three months ended March 31, 1998 and 1997 vary from the U.S. statutory tax rate because of the provision for state income taxes, nondeductible interest, nondeductible amortization of intangibles, Genzyme General's share of the losses of unconsolidated affiliates, the foreign sales corporation and tax credits. The effective tax rate was 39.3% for the three months ended March 31, 1998, compared to 38.8% in the corresponding period of last year. The increase in the tax rate was due to higher nondeductible intangible amortization and losses from unconsolidated subsidiaries. For the three months ended March 31, 1998, tax benefits allocated from GTR and GMO of $4.4 million and $1.2 million, respectively, reduced Genzyme General's tax rate to 21.6%. In the three months ended March 31, 1997, tax benefits allocated from GTR reduced Genzyme General's tax rate to 22.4%. GENZYME TISSUE REPAIR REVENUES Service revenues for the three months ended March 31, 1998 and 1997 were $3.6 million and $2.0 million, respectively, an increase of 82%. Sales of Carticel[TM] AuCC were $2.5 million for the three months ended March 31, 1998 as compared to $1.1 million for the comparable period in 1997, an increase of 120%. The growth in Carticel[TM] AuCC sales is primarily attributable to increased market penetration and the number of orthopedic surgeons trained in the technique as well as an increase in reimbursement and policy coverage by insurance companies following issuance by the FDA of a biologics license (the "BLA") to GTR in August 1997 for Carticel[TM] AuCC. Sales of the Epicel[SM] service increased 31% to $1.1 million in the three months ended March 31, 1998 from $0.9 million in the same period of 1997 due to a slight increase in the number of burn incidents requiring the service. MARGINS AND OPERATING EXPENSES GTR's gross margin for the first quarter of 1998 was 10%, as compared to the first quarter of 1997 when cost of services sold exceeded revenue by 44%. This improvement in service margins is primarily attributable to the higher sales volume and efficiencies gained in the manufacturing process. SG&A expenses were $6.3 million for the three months ended March 31, 1998 as compared to $6.5 million in the comparable period of last year, a decrease of 2%. The decrease is due to a decrease in expenses related to the marketing of Carticel[TM] AuCC. GTR incurs direct SG&A charges as well as an SG&A charge, based on actual amounts incurred, from Genzyme General for SG&A work performed by Genzyme General on behalf of GTR. In the first quarter of 1998, $1.6 million of SG&A services were provided by Genzyme General as compared to $2.4 million in the first quarter of 1997. This change was due to a decrease in expenses incurred in connection with the marketing of Carticel[TM] AuCC and the costs incurred in the first quarter of 1997 related to filing of the BLA for Carticel[TM] AuCC. Research and development expenses were $3.1 million and $2.8 million for the three months ended March 31, 1998 and 1997, respectively, an increase of 11%. The increase was primarily due to spending on Carticel[TM] AuCC. In the first quarter of 1998, $2.2 million of research and development services were provided to GTR by Genzyme General, compared to $1.9 million in the first quarter of 1997. OTHER INCOME AND EXPENSES Interest income increased to $0.4 million in the first quarter of 1998 from $0.2 million in the same period of 1997, due primarily to higher average cash balances. Interest expense was $0.8 million and $0.4 million for the three months ended March 31, 1998 and 1997, respectively. Interest expense increased in the first quarter of 1998 as a result of interest related to the addition of $13.0 million of debt from the GTR Note. On October 1, 1996, Diacrin/Genzyme LLC was established as a joint venture between GTR and Diacrin, Inc. to develop and commercialize products and processes using porcine fetal cells for the treatment of Parkinson's disease and Huntington's disease in humans. Under the terms of the joint venture agreement, GTR will provide 100% of the initial $10.0 million of the funding requirements and 75% of the next $40.0 million of funding requirements for products to be developed by the joint venture. Thereafter, all costs will be shared equally by the two parties. In the three months ending March 31, 1998 and 1997, GTR provided $1.9 million and $1.8 million, respectively, of funding to, and realized a net loss of $1.9 million and $1.6 million, respectively, from the joint venture. The increased funding and additional net losses from the joint venture are primarily due to increased research and development expenses incurred by the joint venture. GENZYME MOLECULAR ONCOLOGY REVENUES GMO recorded $2.8 million of total revenue for the three months ended March 31, 1998 as compared to no revenue for the corresponding period in 1997 during which GMO was a development stage enterprise. Research and development revenue of $1.9 million consisted primarily of revenues from research and development contracts with strategic partners and includes work performed for the joint venture ("StressGen/Genzyme LLC") with StressGen Biotechnologies Corporation ("StressGen"). GMO recorded service revenue of $0.9 million, which consists of sales of SAGE[TM] 27 28 services. SAGE[TM] is a high-speed, differential gene identification technology that was acquired upon the merger of PharmaGenics with and into Genzyme in June 1997. MARGINS AND OPERATING EXPENSES GMO's cost of revenues for the first three months of 1998 were $1.2 million. There were no similar amounts in the same period in 1997. Cost of revenues consisted of work performed related to the development of gene therapies on behalf of StressGen/Genzyme LLC and pursuant to service contracts with strategic partners, as well as efforts in the development of SAGE[TM] services performed in connection with a third party service contract. For the three months ended March 31, 1998, GMO incurred $1.2 million of SG&A expenses, as compared to $0.1 million for the first three months of 1997. The increase is due to increased administrative support corresponding to the growth of GMO's business in the areas of gene therapy and drug discovery, as well as legal expenses related to patents. GMO's research and development costs were $3.3 million compared to $0.5 million for the three months ended March 31, 1998 and 1997, respectively. The increase in research and development costs relate to increases in research personnel and related expenses pertaining to GMO's SAGE[TM] services, gene therapy and drug discovery programs. GMO's amortization expense of $3.0 million for the three months ended March 31, 1998 was attributable to certain intangible assets acquired in connection with the PharmaGenics merger. GMO incurred no similar amounts for the same period of 1997. OTHER INCOME AND EXPENSES Interest income and interest expense were $0.3 million and $1.2 million, respectively, for the three months ended March 31, 1998. There were no similar amounts for the comparable period in 1997. The interest income results from higher average cash balances due to the issuance of the GMO Debentures. The interest expense consists of interest and related accretion of the conversion feature of the GMO Debentures. On July 31, 1997, StressGen/Genzyme LLC was established as a joint venture among Genzyme, StressGen and the Canadian Medical Discoveries Fund to develop stress gene therapies for the treatment of cancer. GMO recorded an equity in net loss of the joint venture of $0.4 million for the period ended March 31, 1998. GMO recorded a tax benefit of $0.7 million for the three months ended March 31, 1998 from amortization of the deferred tax liability established upon the acquisition of PharmaGenics. LIQUIDITY AND CAPITAL RESOURCES GENZYME CORPORATION AND SUBSIDIARIES As of March 31, 1998, Genzyme had cash, cash equivalents, and short- and long-term investments of $255.2 million, an increase of $8.8 million from December 31, 1997. Operating and financing activities provided $25.8 million and $5.9 million of cash, respectively, investing activities used $31.8 million and fluctuations in exchange rates caused a reduction in cash of $1.1 million. In the three months ended March 31, 1998, financing activities provided $11.2 million of cash proceeds from the exercise of stock options and $0.7 million from the issuance of debt, and used $5.5 million for the repayment of debt and capital lease obligations. At March 31, 1998, $113.0 million was outstanding under the Revolving Credit Facility, of which $95.0 million was allocated to Genzyme General and $18.0 million was allocated to GTR. In the three months ended March 31, 1998, investing activities provided $2.0 million of cash from the repayment of loans by affiliates. Investing activities used $9.9 million of cash for the investment portfolio; $11.9 million of cash to finance capital expenditures; $6.0 million of cash to fund Genzyme's investments in joint ventures; $6.2 million of cash to fund acquisitions for the Diagnostics business unit's genetic testing services group and $0.5 million to fund other noncurrent assets. GENZYME GENERAL At March 31, 1998, Genzyme General had cash, cash equivalents, and short- and long-term investments of $219.9 million compared to $193.2 million at December 31, 1997, an increase of $26.7 million. Operating and financing activities provided $37.4 million and $10.3 million of cash, respectively, investing activities used $29.4 million of cash, and fluctuations in exchange rates caused a reduction in cash of $1.1 million. In the three months ended March 31, 1998, financing activities provided $10.4 million of cash proceeds from the exercise of stock options and $0.7 million from the issuance of debt, and used $0.5 million for the repayment of debt and capital lease obligations. In the three months ended March 31, 1998, investing activities provided $2.0 million of cash from the repayment loans by affiliates. Investing activities used $9.5 million of cash for the investment portfolio; $11.8 million to finance capital expenditures; $4.1 million to fund Genzyme General's investments in joint ventures; $6.2 million of cash to fund acquisitions for the Diagnostics business unit's genetic testing services group and $0.4 million to fund other non current assets. 28 29 Management of Genzyme General believes that its available cash, investments and cash flow from product and service sales will be sufficient to finance its planned operations and capital requirements for the foreseeable future. Although Genzyme General currently has substantial cash resources, it has committed to utilize a portion of its resources for certain purposes, such as completing the market introduction of Seprafilm[R] bioresorbable membrane in the United States and Europe and developing other products on behalf of a joint venture between Genzyme and Genzyme Development Partners, L.P. ("GDP"), and for making certain payments to third parties in connection with strategic collaborations. Genzyme General's cash resources will also be diminished upon repayment of amounts borrowed, plus accrued interest, under the Revolving Credit Facility and if Genzyme exercises its option to acquire the partnership interests in GDP using cash to pay some or all of the exercise price. In addition to these commitments, Genzyme historically has pursued strategic acquisitions and collaborations with complementary businesses as opportunities become available and expects to seek additional acquisitions and collaborations in the future. Further, to the extent the liabilities or contingencies of GTR and GMO affect Genzyme's resources or financial condition, such liabilities or contingencies could affect the financial condition or results of operations of Genzyme General. As a result of the foregoing, Genzyme may have to obtain additional financing. There can be no assurance that such financing will be available on terms reasonably acceptable to Genzyme, if at all. GENZYME TISSUE REPAIR As of March 31, 1998, GTR had cash, cash equivalents and short-term investments of $21.7 million, a decline of $10.2 million from December 31, 1997. In the three months ended March 31, 1998, GTR used $9.1 million of cash for operations and $1.9 million for investing activities to fund GTR's investment in Diacrin/Genzyme LLC. Financing activities provided $0.7 million of cash which consisted of $0.8 million of cash proceeds from the exercise of stock options, offset by $0.1 million of cash which was allocated from GTR to Genzyme General. 29 30 As of March 31, 1998, $18.0 million of funds allocated to GTR in December 1996 under the Revolving Credit Facility remained outstanding. Management of GTR believes its available cash and investments will be sufficient to finance planned operations and capital requirements through the end of 1998. GTR must raise significant additional capital in order to continue operations at current levels beyond 1998. GTR's plans to raise additional capital include the consideration of the sale of additional equity securities, additional borrowings, strategic alliances with third parties to fund further development and marketing of Carticel(TM) AuCC and other business transactions that would generate capital resources to assure continuation of GTR's operations and research programs. If these initiatives are not successful, GTR may be required to delay, scale back or eliminate certain of its programs, or to license third parties to commercialize technologies or products that GTR would otherwise undertake itself. GENZYME MOLECULAR ONCOLOGY As of March 31, 1998, GMO had cash, cash equivalents and short- and long-term investments of $13.6 million, a decline of $7.7 million from December 31, 1997. For the three months ended March 31, 1998, GMO used $2.6 million for operations and $0.4 million for investing activities. In the period ended March 31, 1998, GMO used $1.4 million for the purchase of short-term marketable securities, while the maturity of long-term investments provided $1.0 million of cash. For the period ended March 31, 1998, GMO used $5.1 million of cash for financing activities, $5.0 million of which was related to the repayment of amounts borrowed under the Revolving Credit Facility. In April 1998, GMO filed with the Securities and Exchange Commission a registration statement (which has not yet become effective) on Form S-3 covering the initial public offering of 3,450,000 shares of GMO Stock (including 450,000 shares issuable upon exercise of the underwriters' over-allotment option). Management of GMO currently believes that the proceeds of this offering, together with existing cash balances, revenues generated from SAGE[TM] agreements and committed research funding from collaborators will enable GMO to maintain its current and planned operations through the end of 1999. Substantial additional funds will be required to complete development and commercialization of GMO's products and services (other than SAGE[TM] services). In addition, GMO's cash requirements may vary materially from those now planned as a result of numerous factors, including progress of GMO's research and development programs, achievement of milestones under strategic alliance arrangements, the ability of GMO to establish and maintain additional strategic alliances and licensing arrangements, the progress of development efforts of GMO's strategic partners, competing technological and market developments, the costs involved in enforcing patent claims and other intellectual property rights and the cost and timing of regulatory approvals. Insufficient funds may require GMO to delay, scale back or eliminate certain of its programs or to license third parties to commercialize technologies or products that GMO would otherwise undertake itself. 30 31 NEW ACCOUNTING PRONOUNCEMENTS In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 is effective for fiscal years beginning after December 15, 1997. Genzyme has not assessed the impact of SFAS 132 on its financial statement disclosures. In March 1998, the Accounting Standards Executive Committee of the AICPA issued Statement of Position 98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 was issued to address diversity in practice regarding whether and under what conditions the costs of internal-use software should be capitalized. Genzyme has not assessed the impact of SOP 98-1 on its financial statement disclosures. In April 1998, the Accounting Standards Executive Committee of the AICPA issued Statement of Position 98-5 ("SOP 98-5"), "Accounting for the Costs of Start-Up Activities". SOP 98-5 requires all costs of start-up activities (as defined by SOP 98-5) to be expensed as incurred. Genzyme has not assessed the impact of SOP 98-5 on its financial statement disclosures. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK Not applicable. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits See Exhibit Index following this signature page to this Form 10-Q. (b) Report on Form 8-K On January 8, 1998, the Company filed a Current Report on Form 8-K to announce that it would take pre-tax charges of $29.2 million in the fourth quarter of 1997, due primarily to certain strategic changes in Genzyme General's pharmaceuticals and surgical products business units. 31 32 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, MARCH 31, 1998 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GENZYME CORPORATION DATE: May 14, 1998 By: /s/ David J. McLachlan ------------------------ David J. McLachlan Duly Authorized Officer and Executive Vice President, Finance; Chief Financial Officer 32 33 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, MARCH 31, 1998 EXHIBIT INDEX Exhibit No. Description Page No. ------- ----------- -------- 27.1 Financial Data Schedules for Genzyme for the three months ended March 31, 1998 (for EDGAR filing purposes only). Filed herewith. 27.2 Financial Data Schedules for Genzyme for the three months ended March 31, 1997 (for EDGAR filing purposes only). Filed herewith. 33 EX-27.1 2 FINANCIAL DATA SCHEDULE THREE MONTHS ENDED 3/31/98
5 EXHIBIT 27.1 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR GENZYME CORPORATION FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND AS OF MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AS INCLUDED IN THE FORM 10-Q FOR GENZYME CORPORATION DATED MARCH 31, 1998. 1,000 U.S. DOLLARS 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 1 101,219 54,827 137,615 17,918 135,558 464,583 506,665 111,379 1,310,182 104,858 0 0 0 1,024 1,030,571 1,310,182 157,614 160,551 46,350 58,180 87,069 1,446 3,966 13,537 5,753 7,784 0 0 0 7,784 0.27 0.27 THE EARNINGS PER SHARE FIGURES PRESENTED ON THIS SCHEDULE REPRESENT EPS DATA FOR NET INCOME ATTRIBUTABLE TO GENZYME GENERAL DIVISION COMMON STOCK ("GGD STOCK"). GENZYME CORPORATION REPORTS EARNINGS BASED ON ITS THREE TRACKING STOCKS, GGD STOCK, GENZYME TISSUE REPAIR COMMON STOCK ("GTR STOCK") AND GENZYME MOLECULAR ONCOLOGY COMMON STOCK ("GMO STOCK") THEREFORE, CONSOLIDATED EARNINGS PER SHARE DATA IS NOT APPLICABLE. FOR THE THREE MONTHS ENDED MARCH 31, 1998, GENZYME GENERAL HAD NET INCOME OF $24,938 AND NET INCOME PER SHARE OF GGD STOCK - -- BASIC AND DILUTED OF $0.32 AND $0.31, RESPECTIVELY. NET LOSS FOR GTR FOR THE THREE MONTHS ENDED MARCH 31, 1998 WAS $(11,320) OR $(0.57) PER SHARE OF GTR STOCK -- BASIC AND DILUTED. NET LOSS FOR GMO FOR THE THREE MONTHS ENDED MARCH 31, 1998 WAS $(6,540) OR $(1.66) PER SHARE OF GMO STOCK -- BASIC AND DILUTED.
EX-27.2 3 FINANCIAL DATA SCHEDULE THREE MONTHS ENDED 3/31/97
5 EXHIBIT 27.2 THIS SCHEDULE CONTAINS RESTATED SUMMARY CONSOLIDATED FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR GENZYME CORPORATION AND SUBSIDIARIES FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND AS OF MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AS INCLUDED IN THE FORM 10-Q FOR GENZYME CORPORATION DATED MARCH 31, 1997. 1,000 U.S. DOLLARS 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 1 107,810 74,196 137,615 17,918 129,586 432,120 394,735 7,162 1,183,073 109,735 0 0 0 890 907,687 1,183,073 144,899 146,593 46,512 58,684 70,863 1,410 2,658 15,482 6,115 9,367 0 0 0 9,367 0.28 0.27 GENZYME CORPORATION HAS TWO CLASSES OF COMMON STOCK-GENZYME GENERAL DIVISION COMMON STOCK ("GGD STOCK") AND GENZYME TISSUE REPAIR DIVISION COMMON STOCK ("GTR STOCK"). EARNINGS (LOSS) PER SHARE IS REPORTED SEPARATELY FOR EACH CLASS OF TRACKING STOCK. CONSOLIDATED EPS IS NOT PRESENTED FOR GENZYME. NET INCOME PER SHARE FOR GGD STOCK FOR THE THREE MONTHS ENDED MARCH 31, 1997 HAS BEEN RESTATED TO CONFORM TO SFAS 128. NET INCOME PER SHARE ATTRIBUTABLE TO GGD STOCK FOR THE THREE MONTHS ENDED MARCH 31, 1997 COMPUTED UNDER THE PROVISIONS OF APB 15 WAS HISTORICALLY REPORTED AS $0.27 PER SHARE FOR BOTH PRIMARY AND FULLY DILUTED DPS. NET LOSS ATTRIBUTABLE TO GTR STOCK FOR THE THREE MONTHS ENDED MARCH 31, 1997 COMPUTED TO CONFORM TO SFAS 128 IS THE SAME AS NET LOSS PER SHARE OF GTR STOCK AS COMPUTED UNDER APB 15 AS THE INCLUSION OF CERTAIN POTENTIALLY DILUTIVE SHARES IN THE DILUTIVE LOSS PER SHARE CALCULATION FOR GTR STOCK WOULD HAVE BEEN ANTIDILUTIVE. NET LOSS ATTRIBUTABLE TO GTR STOCK FOR THE THREE MONTHS ENDED MARCH 31, 1997 WAS $(0.90) PER SHARE.
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