-----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, IqOGbTkzD1ZSjh5pBhLU5SngZJWJQL++8vbyhMgwEMK25SlQaGen0rLXX/95zRv5 gD5+PCCYkrAum8Ai6csejQ== 0000950135-99-002781.txt : 19990518 0000950135-99-002781.hdr.sgml : 19990518 ACCESSION NUMBER: 0000950135-99-002781 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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: 99626677 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 CORP. 10-Q 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, 1999 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________________ to ______________________ Commission file number 0-14680 GENZYME CORPORATION (Exact name of registrant as specified in its charter) Massachusetts 06-1047163 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) One Kendall Square, Cambridge, Massachusetts 02139 (Address of principal executive offices) (zip code) (617) 252-7500 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ _____ The number of shares outstanding of each of the issuer's series of common stock as of April 30, 1999: Genzyme General Division Common Stock ("GGD Stock") 82,568,892 Genzyme Tissue Repair Division Common Stock ("GTR Stock") 22,369,980 Genzyme Molecular Oncology Division Common Stock ("GMO Stock") 12,677,390 1 2 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, MARCH 31, 1999 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 expected future revenues, operations and expenditures, and its plans to create a new division and to transfer the Company's interest in Diacrin/Genzyme LLC to its General Division ("Genzyme General") from its Tissue Repair Division ("Genzyme Tissue Repair" or "GTR"). All such forward-looking statements are necessarily only estimates of future results and the actual results achieved by the Company 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") and other agencies 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 ability of the Company to obtain requisite corporate approvals concerning the creation of the new division and the transfer of the interest in Diacrin/Genzyme LLC. See also "Factors Affecting Future Operating Results" under the headings (x) "Management's Discussion and Analysis of Genzyme General's Financial Condition and Results of Operations" and "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations" in the Genzyme General Annual Report for the fiscal year ended December 31, 1998 (the "1998 Genzyme General Annual Report"), (y) "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, 1998 (the "1998 GTR Annual Report") and (z) "Management's Discussion and Analysis of Genzyme Molecular Oncology Division's ("Genzyme Molecular Oncology" or "GMO") Financial Condition and Results of Operations" in the Genzyme Molecular Oncology Annual Report for the fiscal year ended December 31, 1998 (the "1998 GMO Annual Report") set forth in Exhibits 13.1, 13.2 and 13.3, respectively, to Genzyme's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (the "1998 Genzyme 10-K"). 2 3 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, MARCH 31, 1999 TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO. ITEM 1. Financial Statements GENZYME GENERAL Unaudited, Combined Statements of Operations for the Three Months Ended March 31, 1999 and 1998....................... 4 Unaudited, Combined Balance Sheets as of March 31, 1999 and December 31, 1998......................................... 5 Unaudited, Combined Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998....................... 6 Notes to Unaudited, Combined Financial Statements..................................................................... 7 GENZYME TISSUE REPAIR Unaudited, Combined Statements of Operations for the Three Months Ended March 31, 1999 and 1998....................... 10 Unaudited, Combined Balance Sheets as of March 31, 1999 and December 31, 1998......................................... 11 Unaudited, Combined Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998....................... 12 Notes to Unaudited, Combined Financial Statements..................................................................... 13 GENZYME MOLECULAR ONCOLOGY Unaudited, Combined Statements of Operations for the Three Months Ended March 31, 1999 and 1998....................... 14 Unaudited, Combined Balance Sheets as of March 31, 1999 and December 31, 1998......................................... 15 Unaudited, Combined Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998....................... 16 Notes to Unaudited, Combined Financial Statements..................................................................... 17 GENZYME CORPORATION AND SUBSIDIARIES Unaudited, Consolidated Statements of Operations for the Three Months Ended March 31, 1999 and 1998.................. 18 Unaudited, Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998..................................... 20 Unaudited, Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998................... 21 Notes to Unaudited, Consolidated Financial Statements.................................................................. 22 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 25 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.................................................. 33 PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K............................................................................ 33 Signatures................................................................................................................. 34
3 4 GENZYME GENERAL COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED ---------------------- MARCH 31, (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 - ----------------------------------------------------------- ---------------------- Total revenues ........................................... $ 178,119 $ 154,123 Operating costs and expenses: Cost of products and services sold ................... 52,566 54,477 Selling, general and administrative .................. 51,012 45,111 Research and development ............................. 26,667 18,418 Amortization of intangibles .......................... 3,503 3,199 --------- --------- Total operating costs and expenses ............. 133,748 121,205 --------- --------- Operating income ......................................... 44,371 32,918 Other income (expenses): Equity in net loss of unconsolidated affiliates ...... (7,710) (2,905) Gain on affiliate sale of stock ...................... 606 -- Minority interest .................................... 866 864 Gain on sale of investment in equity securities....... 1,963 -- Investment income .................................... 7,930 2,920 Interest expense ..................................... (5,050) (1,990) --------- --------- Total other income (expenses) ..................... (1,395) (1,111) --------- --------- Income before income taxes ............................... 42,976 31,807 Provision for income taxes ............................... (16,391) (12,510) --------- --------- Net income ............................................... 26,585 19,297 Tax benefit allocated from Genzyme Tissue Repair ......... 3,962 4,406 Tax benefit allocated from Genzyme Molecular Oncology .... 1,934 1,235 --------- --------- Net income attributable to GGD Stock ..................... $ 32,481 $ 24,938 ========= ========= Per Genzyme General common share: Net income per Genzyme General common share - basic .... $ 0.40 $ 0.32 ========= ========= Weighted average shares outstanding .................... 81,958 78,760 ========= ========= Net income per Genzyme General common and common equivalent share - diluted ........................... $ 0.38 $ 0.31 ========= ========= Adjusted weighted average shares outstanding ........... 85,632 81,200 ========= ========= Net income ............................................... $ 26,585 $ 19,297 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments ............ (8,826) (698) Unrealized gains (losses) on securities: Unrealized gains (losses) arising during the period (2,319) 1,327 Reclassification adjustment for gains (losses) included in net income .......................... (1,214) -- --------- --------- Unrealized gains (losses) on securities, net ... (3,533) 1,327 --------- --------- Other comprehensive income (loss) ..................... (12,359) 629 --------- --------- Comprehensive income (loss) ........................... $ 14,226 $ 19,926 ========= =========
The accompanying notes are an integral part of these unaudited, combined financial statements. 4 5 GENZYME GENERAL COMBINED BALANCE SHEETS
MARCH 31, DECEMBER 31, (UNAUDITED, AMOUNTS IN THOUSANDS) 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents ..................................... $ 61,668 $ 100,012 Short-term investments ........................................ 247,668 174,421 Accounts receivable, net ...................................... 156,461 153,278 Inventories ................................................... 107,910 107,188 Prepaid expenses and other current assets ..................... 31,108 29,659 Due from Genzyme Tissue Repair ................................ 3,994 548 Due from Genzyme Molecular Oncology ........................... 4,526 4,773 Deferred tax assets - current ................................. 39,690 39,725 ---------- ---------- Total current assets ....................................... 653,025 609,604 Property, plant and equipment, net ............................... 374,294 378,992 Long-term investments ............................................ 300,985 281,664 Intangibles, net ................................................. 259,934 263,748 Deferred tax assets - noncurrent ................................. 28,245 28,138 Investment in equity securities .................................. 39,305 51,977 Other noncurrent assets .......................................... 33,197 32,184 ---------- ---------- $1,688,985 $1,646,307 ========== ========== LIABILITIES AND DIVISION EQUITY Current liabilities: Accounts payable .............................................. $ 21,513 $ 26,249 Accrued expenses .............................................. 76,664 70,313 Income taxes payable .......................................... 20,974 16,532 Deferred revenue .............................................. 1,618 1,231 Current portion of long-term debt and capital lease obligations 83,158 82,568 ---------- ---------- Total current liabilities ................................... 203,927 196,893 Long-term debt and capital lease obligations ..................... 3,070 3,087 Convertible subordinated notes and debentures .................... 271,813 271,559 Other ............................................................ 8,072 7,701 ---------- ---------- Total liabilities ........................................... 486,882 479,240 Division equity .................................................. 1,202,103 1,167,067 ---------- ---------- Total liabilities and division equity ........................ $1,688,985 $1,646,307 ========== ==========
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, - ------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES: 1999 1998 --------- -------- Net income ............................................................... $ 26,585 $ 19,297 Reconciliation of net income to net cash provided by operating activities: Depreciation and amortization ......................................... 14,164 13,798 Accrued interest/amortization on bonds ................................ (2,499) (108) Provision for bad debts and inventory ................................. 2,754 1,494 Equity in net loss of unconsolidated affiliates ....................... 7,710 2,905 Minority interest in net loss of subsidiaries ......................... (866) (864) Gain on affiliate sale of stock ....................................... (606) -- Gain on sale of investment in equity securities ....................... (1,963) -- Other ................................................................. (410) 133 Increase (decrease) in cash from working capital changes: Accounts receivable ................................................ (7,597) (6,417) Inventories ........................................................ (856) 4,574 Prepaid expenses and other current assets .......................... (1,730) (5,277) Due from Genzyme Tissue Repair ..................................... (3,446) (271) Due from Genzyme Molecular Oncology ................................ 247 261 Accounts payable, accrued expenses, income taxes payable and deferred revenue ............................................... 13,573 5,634 --------- -------- Net cash provided by operating activities .......................... 45,060 35,159 INVESTING ACTIVITIES: Purchases of investments ................................................. (196,387) (39,547) Sales and maturities of investments ...................................... 105,106 30,071 Proceeds from sale of equity investment .................................. 11,090 -- Acquisitions of property, plant and equipment ............................ (10,288) (11,831) Sales of property, plant and equipment ................................... -- 584 Acquisitions, net of acquired cash and assumed liabilities ............... -- (6,190) Investments in joint ventures ............................................ (9,592) (2,088) Repayment of loans by affiliates ......................................... -- 2,019 Other .................................................................... 3,211 (194) --------- -------- Net cash used in investing activities .............................. (96,860) (27,176) FINANCING ACTIVITIES: Proceeds from issuance of common stock ................................... 19,900 10,356 Payments of debt and capital lease obligations ........................... (350) (452) Net cash allocated (to) from Genzyme Tissue Repair for designated shares.. (5,000) 76 Other .................................................................... 1,548 285 --------- -------- Net cash provided by financing activities .......................... 16,098 10,265 Effect of exchange rate changes on cash ...................................... (2,642) (1,059) --------- -------- Increase (decrease) in cash and cash equivalents ............................. (38,344) 17,189 Cash and cash equivalents at beginning of period ............................. 100,012 66,276 --------- -------- Cash and cash equivalents at end of period ................................... $ 61,668 $ 83,465 ========= ========
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 1998 Genzyme 10-K and the financial statements and footnotes for both Genzyme General 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 according to the rules and regulations of the Securities and Exchange Commission. Certain items in the 1998 financial statements have been reclassified to conform with the 1999 presentation. The financial statements for the three months ended March 31, 1999 and 1998 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. Financial information relevant to Genzyme, Genzyme General, GTR and GMO, collectively, are presented in the unaudited, consolidated financial statements of Genzyme (the "Unaudited, Consolidated Financial Statements of Genzyme"). 3. INVENTORIES (IN THOUSANDS):
March 31, 1999 December 31, 1998 -------------- ----------------- Raw materials .... $ 37,814 $ 41,064 Work-in-process .. 44,053 25,093 Finished products 26,043 41,031 -------- -------- Total $107,910 $107,188 ======== ========
4. EQUITY LINE OF CREDIT In 1998, the Board of Directors of Genzyme (the "Genzyme Board") made $50.0 million in cash available from Genzyme General to GTR under an equity line of credit (the "GTR Equity Line"). Under the terms of the GTR Equity Line, GTR may draw down funds as needed each fiscal quarter in exchange for GTR Designated Shares. GTR Designated Shares are shares of GTR Stock that are not issued and outstanding, but which the Genzyme Board may from time to time issue, sell or otherwise distribute without allocating the proceeds to GTR. In February 1999, GTR made a $5.0 million draw under the GTR Equity Line in exchange for 1,633,399 GTR Designated Shares. The GTR Designated Shares are subject to distribution as described in the "Management and Accounting Policies Governing the Relationship of Genzyme Divisions," which are set forth in Exhibit 99.1 to the 1998 Genzyme 10-K. 5. GAIN ON SALE OF EQUITY INVESTMENT In January 1999, Genzyme sold all of its remaining shares of TECHNE Corporation ("TECHNE") common stock for net proceeds of $11.1 million and Genzyme General recorded a gain of approximately $2.0 million related to the sale. Genzyme received these shares in partial consideration for the sale of its research products business to TECHNE in 1998. 7 8 GENZYME GENERAL NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS 6. 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, ------------------ 1999 1998 ------- ------- Genzyme General: Net income attributable to GGD Stock-basic and diluted . $32,481 $24,938 ======= ======= Shares used in net income per common share-basic ....... 81,958 78,760 Effect of dilutive securities: Employee and director stock options .............. 3,642 2,432 Warrants ......................................... 32 8 ------- ------- Dilutive potential common shares (a,b) ................. 3,674 2,440 ------- ------- Shares used in net income per common share-diluted (a,b) 85,632 81,200 ======= ======= Net income per common share - basic .................... $ 0.40 $ 0.32 ======= ======= Net income per common share - diluted (a,b) ............ $ 0.38 $ 0.31 ======= =======
(a) Certain securities were not included in the computation of Genzyme General's diluted earnings per share for the three months ended March 31, 1999 and 1998 because each such security had an exercise price greater than the average market price of GGD Stock during each respective period. Such securities include:
Three Months Ended (Amounts in thousands) March 31, - ---------------------------------------------------------------------------------- 1999 1998 ----- ----- Shares of GGD Stock issuable for options .................... 1,381 3,860 Shares of GGD Stock issuable for warrants ................... 80 80 ----- ----- Total shares with exercise prices greater than the average market price of GGD Stock during the period .......... 1,461 3,940 ===== =====
(b) In computing diluted earnings per share for Genzyme General for the three months ended March 31, 1999, the following securities were not included in the calculation because inclusion of such shares would have an anti-dilutive effect on Genzyme General's net income per share: (i) approximately 6,313,000 shares of GGD Stock reserved in May 1998 for issuance upon conversion of Genzyme's 5 1/4% convertible subordinated notes due June 2005 (the "GGD Notes"); and (ii) approximately 646,000 shares of GGD Stock reserved in September 1998 for issuance upon conversion of Genzyme's 5% convertible subordinated debentures due August 2003 (the "GGD Debentures"). 8 9 GENZYME GENERAL NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS 7. SEGMENT REPORTING Genzyme General's reportable segments are strategic business units that offer different products and services. Genzyme General has three reportable segments: --the Therapeutics business unit, which develops, manufactures and distributes human therapeutic products for significant unmet medical needs. The business derives substantially all of its revenue from Cerezyme[R] enzyme and Ceredase[R] enzyme sales. --the Surgical Products business unit, which commenced operations in July 1996 upon the acquisition of Deknatel Snowden Pencer, Inc., develops, manufactures and markets surgical products for three principal business lines: (i) cardiovascular surgery; (ii) general surgery; and (iii) plastic surgery. --the Diagnostic Products business unit, which provides diagnostic products to niche markets focusing on in vitro diagnostics. Information concerning the operations in these reportable segments is as follows:
3 Months Ended 3 Months Ended March 31, March 31, 1999 1998 ----------------------------- REVENUES: Therapeutics $ 115,041 $ 93,522 Surgical Products 27,354 24,227 Diagnostic Products 14,692 16,717 Other 20,455 18,604 Eliminations/Adjustments 577 1,053 ------------------------- Total $ 178,119 $ 154,123 ========================= NET INCOME: Therapeutics $ 33,871 $ 28,922 Surgical Products (6,733) (5,647) Diagnostic Products 1,129 84 Other (1,780) (1,520) Eliminations/Adjustments 98 (2,542) ------------------------- Total $ 26,585 $ 19,297 =========================
There has been no material change in segment assets since December 31, 1998. 8. CREATION OF NEW DIVISION In March 1999, Genzyme announced that it intends to create a separate division, with its own series of common stock, for the existing surgical products business that is currently part of Genzyme General, subject to approval of the Genzyme Board. 9. REALLOCATION OF JOINT VENTURE INTEREST On October 1, 1996, Diacrin/Genzyme LLC was established as a joint venture between GTR and Diacrin, Inc. ("Diacrin") to develop and commercialize products and processes using porcine fetal cells for the treatment of Parkinson's disease and Huntington's disease in humans. In March 1999, Genzyme announced that it plans to reallocate Genzyme's interest in Diacrin/Genzyme LLC from GTR to Genzyme General in the second quarter of 1999, subject to the approval of the holders of GTR Stock, in exchange for $25.0 million of cash and a 3% worldwide royalty on any products sold by Diacrin/Genzyme LLC (the "Transfer"). Upon approval of the Transfer, Genzyme General will pay GTR $25.0 million in cash and the funds available under the GTR Equity Line will be reduced to $20.0 million from $45.0 million. Of the $25.0 million in cash to be paid to GTR for the Transfer, $5.0 million is non-refundable and $20.0 million represents a pre-payment related to the achievement of certain future milestones by Diacrin/Genzyme LLC. If the milestones are not met, GTR is required to repay Genzyme General for the advanced milestone funds plus interest in cash or GTR Designated Shares, at GTR's option. 10. SUBSEQUENT EVENT In April 1999, Genzyme General received approximately $8.3 million ($8.0 million in principal and $0.3 million in interest) in connection with certain notes receivable that were previously fully reserved due to uncertainty surrounding collection. Genzyme received these notes in partial consideration for the sale of Genetic Design, Inc. in 1996. The $8.3 million will be recorded as a gain in the second quarter of 1999. 9 10 GENZYME TISSUE REPAIR COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) MARCH 31, - ----------------------------------------------------------- ----------------------- 1999 1998 -------- -------- Revenues: Net service sales .................................... $ 4,023 $ 3,611 Operating costs and expenses: Cost of services sold ................................ 2,998 3,234 Selling, general and administrative .................. 6,314 6,313 Research and development ............................. 1,968 3,086 -------- -------- Total operating costs and expenses ................. 11,280 12,633 -------- -------- Operating loss .......................................... (7,257) (9,022) Other income (expenses): Equity in net loss of joint venture .................. (2,007) (1,931) Interest income ...................................... 93 447 Interest expense ..................................... (445) (814) -------- -------- Total other income (expenses) ...................... (2,359) (2,298) -------- -------- Net loss attributable to GTR Stock ...................... $ (9,616) $(11,320) ======== ======== Net loss per GTR basic and diluted common share: Net loss ............................................. $ (0.44) $ (0.57) ======== ======== Weighted average shares outstanding ..................... 21,945 20,002 ======== ======== Net loss ................................................ $ (9,616) $(11,320) Other comprehensive income, net of tax .................. -- -- -------- -------- Comprehensive loss ...................................... $ (9,616) $(11,320) ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. 10 11 GENZYME TISSUE REPAIR COMBINED BALANCE SHEETS
(UNAUDITED, AMOUNTS IN THOUSANDS) MARCH 31, DECEMBER 31, - ---------------------------------------------------- ----------------------- 1999 1998 --------- ------------ ASSETS Current assets: Cash and cash equivalents ........................ $ 6,377 $ 7,732 Accounts receivable, net ......................... 3,081 3,833 Inventories ...................................... 2,657 2,645 Other current assets ............................. 1,788 1,723 -------- -------- Total current assets ........................... 13,903 15,933 Property, plant and equipment, net .................. 2,900 2,836 Other noncurrent assets ............................. 120 185 -------- -------- Total assets ................................... $ 16,923 $ 18,954 ======== ======== LIABILITIES AND DIVISION EQUITY Current liabilities: Accounts payable ................................. $ 1,081 $ 1,355 Accrued expenses ................................. 1,872 2,491 Due to Genzyme General ........................... 3,994 548 Current portion of long-term debt ................ 18,000 18,000 -------- -------- Total current liabilities ...................... 24,947 22,394 Convertible note, net ............................... 9,532 12,579 Other noncurrent liabilities ........................ 340 377 -------- -------- Total liabilities .............................. 34,819 35,350 Division equity ..................................... (17,896) (16,396) -------- -------- Total liabilities and division equity .......... $ 16,923 $ 18,954 ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. 11 12 GENZYME TISSUE REPAIR COMBINED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED (UNAUDITED, AMOUNTS IN THOUSANDS) MARCH 31, - ----------------------------------------------------------------------- ------------------- 1999 1998 ------- -------- OPERATING ACTIVITIES: Net loss ........................................................... $(9,616) $(11,320) Reconciliation of net loss to net cash used by operating activities: Depreciation and amortization .................................... 328 569 Non-cash compensation expense .................................... -- 59 Provision for bad debts .......................................... -- 182 Accretion of debt discount ....................................... -- 321 Equity in net loss of joint venture .............................. 2,007 1,931 Increase (decrease) in cash from working capital: Accounts receivable ............................................ 752 (249) Inventories .................................................... (12) (470) Other current assets ........................................... (81) (447) Accounts payable and accrued expenses .......................... (816) 81 Due to Genzyme General ......................................... 3,446 271 ------- -------- Net cash used by operating activities ........................ (3,992) (9,072) INVESTING ACTIVITIES: Investment in joint venture ........................................ (2,084) (1,888) Purchase of property, plant and equipment .......................... (345) (33) Sale of property, plant and equipment .............................. -- 35 Other .............................................................. 34 6 ------- -------- Net cash used by investing activities ........................ (2,395) (1,880) FINANCING ACTIVITIES: Proceeds from issuance of common stock ............................. 116 848 Payments of debt and capital lease obligations ..................... (47) -- Cash allocated (to) from Genzyme General for designated shares ..... 5,000 (76) Other .............................................................. (37) (37) ------- -------- Net cash provided by financing activities .................... 5,032 735 ------- -------- Decrease in cash and cash equivalents ................................. (1,355) (10,217) Cash and cash equivalents at beginning of period ...................... 7,732 21,120 ------- -------- Cash and cash equivalents at end of period ............................ $ 6,377 $ 10,903 ======= ========
Supplemental disclosure of non-cash activities: Debt conversion -- Note 4. The accompanying notes are an integral part of these unaudited, combined financial statements. 12 13 GENZYME TISSUE REPAIR NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION These unaudited, combined financial statements should be read in conjunction with the 1998 Genzyme 10-K 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. Certain items in the 1998 Financial Statements have been reclassified to conform with the 1999 presentation. The financial statements for the three months ended March 31, 1999 and 1998 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. Financial information relevant to Genzyme, Genzyme General, GTR and GMO, collectively, are presented in the Unaudited, Consolidated Financial Statements of Genzyme. 3. INVENTORIES (in thousands):
March 31, 1999 December 31, 1998 -------------- ----------------- Raw materials . .......... $ 212 $ 264 Work-in-process .......... 2,445 2,381 ------ ------ Total .......... $2,657 $2,645 ====== ======
4. DEBT CONVERSION In January 1999, the holder of Genzyme's 5% convertible subordinated note due February 2000 (the "GTR Note") converted $3.0 million in principal amount in exchange for 1,352,178 shares of GTR Stock. GTR paid $133,000 of accrued interest to the holder in connection with this conversion. 5. GTR EQUITY LINE OF CREDIT In 1998, the Genzyme Board made $50.0 million in cash available from Genzyme General to GTR under the GTR Equity Line. Under the terms of the GTR Equity Line, GTR may draw down funds as needed each fiscal quarter in exchange for GTR Designated Shares. The GTR Designated Shares are subject to distribution as described in the "Management and Accounting Policies Governing the Relationship of Genzyme Divisions," which are set forth in Exhibit 99.1 to the 1998 Genzyme 10-K. In February 1999, GTR made a $5.0 million draw under the GTR Equity Line in exchange for 1,633,399 GTR Designated Shares. 6. NET INCOME (LOSS) PER SHARE Note 5., "Net Income (Loss) Per Share," to the Unaudited, Consolidated Financial Statements of Genzyme is incorporated herein by reference. 7. REALLOCATION OF JOINT VENTURE INTEREST In March 1999, Genzyme announced that it plans to reallocate Genzyme's interest in Diacrin/Genzyme LLC from GTR to Genzyme General in the second quarter of 1999, subject to the approval of holders of GTR Stock, in exchange for $25.0 million of cash and a 3% worldwide royalty on any products sold by Diacrin/Genzyme LLC. Upon approval of the Transfer, GTR will receive $25.0 million in cash from Genzyme General and the funds available under the GTR Equity Line will be reduced to $20.0 million from $45.0 million. Of the $25.0 million in cash to be paid to GTR for the Transfer, $5.0 million is non-refundable and $20.0 million represents a pre-payment related to the achievement of certain future milestones by Diacrin/Genzyme LLC. If the milestones are not met, GTR is required to repay Genzyme General for the advanced milestone funds plus interest in cash or GTR Designated Shares, at GTR's option. 13 14 GENZYME MOLECULAR ONCOLOGY COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) MARCH 31, - --------------------------------------------------------------------------------------------- 1999 1998 -------- ------- Revenues: Service revenue .................................................... $ 900 $ 933 Service revenue - related party .................................... 11 -- Research and development ........................................... 4 750 Research and development - related party ........................... 298 534 Licensing revenue .................................................. 400 600 -------- ------- Total revenues ................................................... 1,613 2,817 Operating costs and expenses: Cost of services sold .............................................. 346 469 Cost of research and development services sold ..................... 294 752 Selling, general and administrative ................................ 1,619 1,152 Research and development ........................................... 3,905 3,295 Amortization of intangibles ........................................ 2,956 3,025 -------- ------- Total operating costs and expenses ............................... 9,120 8,693 -------- ------- Operating loss ........................................................ (7,507) (5,876) Other income (expenses): Equity in net loss of joint venture ................................ (375) (444) Interest income .................................................... 163 280 Interest expense ................................................... (3) (1,162) -------- ------- Total other income (expenses) .................................... (215) (1,326) -------- ------- Loss before income taxes .............................................. (7,722) (7,202) Tax benefit ........................................................... 662 662 -------- ------- Net loss attributable to GMO Stock .................................... $ (7,060) $(6,540) ======== ======= Net loss per GMO basic and diluted common share: Net loss ........................................................... $ (0.56) $ (1.66) ======== ======= Weighted average shares outstanding ................................... 12,658 3,929 ======== ======= Net loss .............................................................. $ (7,060) $(6,540) Other comprehensive income (loss), net of tax: Unrealized gains (losses) on securities arising during the period .. -- 5 -------- ------- Other comprehensive income (loss) .................................. -- 5 -------- ------- Comprehensive loss .................................................... $ (7,060) $(6,535) ======== =======
The accompanying notes are an integral part of these unaudited, combined financial statements. 14 15 GENZYME MOLECULAR ONCOLOGY COMBINED BALANCE SHEETS
(UNAUDITED, AMOUNTS IN THOUSANDS) MARCH 31, DECEMBER 31, - --------------------------------------------------------------------- 1999 1998 --------- ------------ ASSETS Current assets: Cash and cash equivalents ............. $12,546 $10,868 Short-term investments ................ -- 1,032 Accounts receivable, net .............. 431 5,931 Other current assets .................. 104 85 ------- ------- Total current assets ................ 13,081 17,916 Equipment, net ........................... 720 791 Intangibles, net ......................... 14,288 17,245 ------- ------- Total assets ........................ $28,089 $35,952 ======= ======= LIABILITIES AND DIVISION EQUITY Current liabilities: Accrued expenses ...................... $ 852 $ 1,273 Due to Genzyme General ................ 4,526 4,773 Payable to joint venture .............. 1,850 1,181 Deferred revenue ...................... 1,350 1,500 ------- ------- Total current liabilities ........... 8,578 8,727 Deferred tax liability ................... 3,199 3,861 ------- ------- Total liabilities ................... 11,777 12,588 Division equity .......................... 16,312 23,364 ------- ------- Total liabilities and division equity $28,089 $35,952 ======= =======
The accompanying notes are an integral part of these unaudited, combined financial statements. 15 16 GENZYME MOLECULAR ONCOLOGY COMBINED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED (UNAUDITED, AMOUNTS IN THOUSANDS) MARCH 31, - --------------------------------------------------------------------------------------------------------- 1999 1998 -------- -------- OPERATING ACTIVITIES: Net loss ...................................................................... $ (7,060) $ (6,540) Reconciliation of net loss to net cash provided (used) by operating activities: Depreciation and amortization ............................................... 3,028 3,607 Deferred tax benefit ........................................................ (662) (662) Accretion of debt conversion feature ........................................ -- 706 Equity in loss of joint venture ............................................. 375 444 Accrued interest/amortization of marketable securities ...................... 10 (94) Non-cash compensation expense ............................................... 10 28 Increase (decrease) in cash from working capital: Accounts receivable ....................................................... 5,500 (233) Other current assets ...................................................... (19) 417 Accrued expenses, deferred revenue and other .............................. (277) 16 Due to Genzyme General .................................................... (247) (261) -------- -------- Net cash provided (used) by operating activities ........................ 658 (2,572) INVESTING ACTIVITIES: Purchases of investments ...................................................... -- (1,439) Maturities of investments ..................................................... 1,022 1,049 Other ......................................................................... -- (54) -------- -------- Net cash provided (used) by investing activities ........................ 1,022 (444) FINANCING ACTIVITIES: Repayments of debt ............................................................ -- (5,000) Other ......................................................................... (2) (143) -------- -------- Net cash used by financing activities ................................... (2) (5,143) -------- -------- Increase (decrease) in cash and cash equivalents ................................. 1,678 (8,159) Cash and cash equivalents at beginning of period ................................. 10,868 15,010 -------- -------- Cash and cash equivalents at end of period ....................................... $ 12,546 $ 6,851 ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. 16 17 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 1998 Genzyme 10-K 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 1998 financial statements have been reclassified to conform with the 1999 presentation. The financial statements for the three months ended March 31, 1999 and 1998 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. Financial information relevant to Genzyme, Genzyme General, GTR and GMO, collectively, are presented in the Unaudited, Consolidated Financial Statements of Genzyme. 3. PAYABLE TO JOINT VENTURE Pursuant to the funding commitment provided in the Collaboration Agreement related to StressGen/Genzyme LLC, the joint venture between Genzyme, StressGen Biotechnologies Corporation ("StressGen") and the Canadian Medical Discoveries Fund, Inc. ("CMDF"), Genzyme and StressGen are obligated to fund the operations of StressGen/Genzyme LLC in equal portions after the initial $10.0 million (Canadian) of funding of StressGen/Genzyme LLC has been expended. Because CMDF has the right to require Genzyme and StressGen to repurchase CMDF's membership interest, GMO records 50% of the losses incurred by StressGen/Genzyme LLC. As of March 31, 1999 and December 31, 1998, GMO's portion of the cumulative losses of StressGen/Genzyme LLC exceeded its initial capital contribution of $0.7 million and as a result, GMO has recorded $1.9 million and $1.1 million, respectively, as current liabilities due to the joint venture. 4. NET LOSS PER SHARE Note 5., "Net Income (Loss) Per Share," to the Unaudited, Consolidated Financial Statements of Genzyme is incorporated herein by reference. 17 18 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, ---------------------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 - ----------------------------------------------------------- ---------------------- Revenues: Net product sales ..................................... $ 163,702 $ 139,370 Net service sales ..................................... 18,730 18,244 Revenues from research and development contracts....... 1,312 2,937 --------- --------- Total revenues ...................................... 183,744 160,551 Operating costs and expenses: Cost of products sold ................................ 43,818 46,350 Cost of services sold ................................ 12,088 11,830 Selling, general and administrative .................. 58,945 52,576 Research and development ............................. 32,834 25,551 Amortization of intangibles .......................... 6,207 5,972 --------- --------- Total operating costs and expenses ............. 153,892 142,279 --------- --------- Operating income ......................................... 29,852 18,272 Other income (expenses): Equity in net loss of unconsolidated affiliates....... (10,092) (5,280) Gain on affiliate sale of stock ...................... 606 -- Minority interest .................................... 866 864 Gain on sale of investment in equity securities ...... 1,963 -- Investment income .................................... 8,193 3,647 Interest expense ..................................... (5,498) (3,966) --------- --------- Total other income (expenses) ..................... (3,962) (4,735) --------- --------- Income before income taxes ............................... 25,890 13,537 Provision for income taxes ............................... (9,833) (5,753) --------- --------- Net income ............................................... $ 16,057 $ 7,784 ========= =========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. 18 19 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) MARCH 31, - ---------------------------------------------------------------------------------------------------------- 1999 1998 - ---------------------------------------------------------------------------------------------------------- Attributable to Genzyme General: Net income ..................................................................... $ 26,585 $ 19,297 Tax benefit allocated from Genzyme Tissue Repair ............................... 3,962 4,406 Tax benefit allocated from Genzyme Molecular Oncology .......................... 1,934 1,235 -------- -------- Net income attributable to GGD Stock ........................................... $ 32,481 $ 24,938 ======== ======== Per Genzyme General common share: Net income per Genzyme General common share - basic .......................... $ 0.40 $ 0.32 ======== ======== Weighted average shares outstanding ............................................. 81,958 78,760 ======== ======== Net income per Genzyme General common and common equivalent share - diluted ................................................................. $ 0.38 $ 0.31 ======== ======== Adjusted weighted average shares outstanding ................................... 85,632 81,200 ======== ======== Attributable to Genzyme Tissue Repair: Net loss attributable to GTR Stock ............................................. $ (9,616) $(11,320) ======== ======== Net loss per GTR basic and diluted common share: Net loss ..................................................................... $ (0.44) $ (0.57) ======== ======== Weighted average shares outstanding ............................................ 21,945 20,002 ======== ======== Attributable to Genzyme Molecular Oncology: Net loss attributable to GMO Stock ............................................. $ (7,060) $ (6,540) ======== ======== Net loss per GMO basic and diluted common share: Net loss ..................................................................... $ (0.56) $ (1.66) ======== ======== Weighted average shares outstanding ............................................ 12,658 3,929 ======== ======== Comprehensive income: Net income ..................................................................... $ 16,057 $ 7,784 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments ..................................... (8,826) (698) Unrealized gains (losses) on securities: Unrealized gains (losses) arising during the period ........................ (2,319) 1,332 Reclassification adjustment for gains (losses) included in net income ...... (1,214) -- -------- -------- Unrealized gains (losses) on securities, net ........................... (3,533) 1,332 -------- -------- Other comprehensive income (loss) .............................................. (12,359) 634 -------- -------- Comprehensive income ........................................................... $ 3,698 $ 8,418 ======== ========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. 19 20 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(UNAUDITED, AMOUNTS IN THOUSANDS) MARCH 31, DECEMBER 31, - ------------------------------------------------------------------ --------------------------- 1999 1998 ----------- ----------- ASSETS Current assets: Cash and cash equivalents ...................................... $ 80,591 $ 118,612 Short-term investments ......................................... 247,668 175,453 Accounts receivable, net ....................................... 159,973 163,042 Inventories .................................................... 110,567 109,833 Prepaid expenses and other current assets ...................... 33,000 31,467 Deferred tax assets - current .................................. 39,690 39,725 ----------- ----------- Total current assets ......................................... 671,489 638,132 Property, plant and equipment, net ................................ 377,914 382,619 Long-term investments ............................................. 300,985 281,664 Intangibles, net .................................................. 272,997 279,516 Deferred tax assets - noncurrent .................................. 25,046 24,277 Investment in equity securities ................................... 39,305 51,977 Other noncurrent assets ........................................... 33,317 32,369 ----------- ----------- Total assets .................................................. $ 1,721,053 $ 1,690,554 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ............................................... $ 22,594 $ 27,604 Accrued expenses ............................................... 79,388 74,077 Income taxes payable ........................................... 20,985 16,543 Deferred revenue ............................................... 2,968 2,731 Current portion of long-term debt and capital lease obligations 101,158 100,568 Payable to joint venture ....................................... 1,850 1,181 ----------- ----------- Total current liabilities .................................... 228,943 222,704 Long-term debt .................................................... 3,070 3,087 Convertible subordinated notes and debentures, net ................ 281,345 284,138 Other ............................................................. 8,412 8,078 ----------- ----------- Total liabilities ............................................. 521,770 518,007 Stockholders' equity: Preferred Stock ................................................ -- -- GGD Stock ...................................................... 825 814 GTR Stock ...................................................... 224 209 GMO Stock ...................................................... 127 126 Treasury Stock - at cost ....................................... (901) (901) Additional paid-in capital - Genzyme General ................... 973,723 958,820 Additional paid-in capital - Genzyme Tissue Repair ............. 182,299 174,198 Additional paid-in capital - Genzyme Molecular Oncology ........ 63,434 63,427 Retained earnings (accumulated deficit) ........................ 2,278 (13,779) Accumulated other comprehensive income ......................... (22,726) (10,367) ----------- ----------- Total stockholders' equity .................................... 1,199,283 1,172,547 ----------- ----------- Total liabilities and stockholders' equity .................... $ 1,721,053 $ 1,690,554 =========== ===========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. 20 21 GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, AMOUNTS IN THOUSANDS) FOR THE THREE MONTHS ENDED MARCH 31, - ----------------------------------------------------------------------------------------------------------------- 1999 1998 --------- --------- OPERATING ACTIVITIES: Net income ....................................................... $ 16,057 $ 7,784 Reconciliation of net income to net cash provided by operating activities: Depreciation and amortization ................................. 17,268 17,722 Accrued interest/amortization on bonds ........................ (2,489) (202) Provision for bad debts and inventory ......................... 2,754 1,676 Deferred income tax benefit ................................... (662) (662) Equity in net loss of unconsolidated affiliates ............... 10,092 5,280 Gain on affiliate sale of stock ............................... (606) -- Minority interest in net loss of affiliates ................... (866) (864) Accretion of debt conversion feature .......................... -- 1,027 Gain on sale of investment in equity securities ............... (1,963) -- Other ......................................................... (400) 220 Increase (decrease) in cash from working capital changes: Accounts receivable ........................................ (1,345) (6,899) Inventories ................................................ (868) 4,104 Prepaid expenses and other current assets .................. (1,830) (5,307) Accounts payable, accrued expenses, income taxes payable and deferred revenue ..................................... 6,584 (364) --------- --------- Net cash provided by operating activities .................. 41,726 23,515 INVESTING ACTIVITIES: Purchases of investments ......................................... (196,387) (40,986) Sales and maturities of investments .............................. 106,128 31,120 Acquisitions of property, plant and equipment .................... (10,633) (11,864) Sale of property, plant and equipment ............................ -- 619 Acquisitions, net of acquired cash and assumed liabilities ....... -- (6,190) Proceeds from sale of equity investment .......................... 11,090 -- Investments in joint ventures .................................... (11,676) (3,976) Repayment of loans by affiliates ................................. -- 2,019 Other ............................................................ 3,245 (242) --------- --------- Net cash used by investing activities ...................... (98,233) (29,500) FINANCING ACTIVITIES: Proceeds from issuance of common stock ........................... 20,016 11,204 Payments of debt and capital lease obligations ................... (397) (5,452) Other ............................................................ 1,509 105 --------- --------- Net cash provided by financing activities .................. 21,128 5,857 Effect of exchange rate changes on cash .............................. (2,642) (1,059) --------- --------- Increase (decrease) in cash and cash equivalents ..................... (38,021) (1,187) Cash and cash equivalents at beginning of period ..................... 118,612 102,406 --------- --------- Cash and cash equivalents at end of period ........................... $ 80,591 $ 101,219 ========= =========
Supplemental disclosure of non-cash activity: Debt conversion -- Note 3. The accompanying notes are an integral part of these unaudited, consolidated financial statements. 21 22 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 1998 Genzyme 10-K 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 1998 financial statements have been reclassified to conform to the 1999 presentation. The financial statements for the three months ended March 31, 1999 and 1998 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. INVENTORIES (IN THOUSANDS):
March 31, 1999 December 31, 1998 -------------- ----------------- Raw materials ............. $ 38,026 $ 41,328 Work-in-process ........... 46,498 27,474 Finished products.......... 26,043 41,031 -------- -------- Total ................ $110,567 $109,833 ======== ========
3. DEBT CONVERSION In January 1999, the holder of the GTR Note converted $3.0 million in principal amount in exchange for 1,352,178 shares of GTR Stock. GTR paid $133,000 of accrued interest to the holder in connection with this conversion. 4. GAIN ON SALE OF EQUITY INVESTMENT In January 1999, Genzyme sold all of its remaining shares of TECHNE common stock for net proceeds of $11.1 million and recorded a gain of approximately $2.0 million related to the sale. 5. 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, ------------------ 1999 1998 ------- ------- Genzyme General: Net income attributable to GGD Stock-basic and diluted . $32,481 $24,938 ======= ======= Shares used in net income per common share-basic ....... 81,958 78,760 Effect of dilutive securities: Employee and director stock options .............. 3,642 2,432 Warrants ......................................... 32 8 ------- ------- Dilutive potential common shares (a,b) ................. 3,674 2,440 ------- ------- Shares used in net income per common share-diluted (a,b) 85,632 81,200 ======= ======= Net income per common share - basic .................... $ 0.40 $ 0.32 ======= ======= Net income per common share - diluted (a,b) ............ $ 0.38 $ 0.31 ======= =======
22 23 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS 5. NET INCOME (LOSS) PER SHARE (continued) Genzyme General (continued): (a) Certain securities were not included in the computation of Genzyme General's diluted earnings per share for the three months ended March 31, 1999 and 1998 because each such security had an exercise price greater than the average market price of GGD Stock during each respective period. Such securities include:
Three Months Ended (Amounts in thousands) March 31, - --------------------------------------------------------------------------------- 1999 1998 ------ ------ Shares of GGD Stock issuable for options ................... 1,381 3,860 Shares of GGD Stock issuable for warrants .................. 80 80 ----- ----- Total shares with exercise prices greater than the average market price of GGD Stock during the period ... 1,461 3,940 ===== =====
(b) In computing diluted earnings per share for Genzyme General for the three months ended March 31, 1999, the following securities were not included in the calculation because inclusion of such shares would have an anti-dilutive effect on Genzyme General's net income per share: (i) approximately 6,313,000 shares of GGD Stock reserved in May 1998 for issuance upon conversion of the GGD Notes; and (ii) approximately 646,000 shares of GGD Stock reserved in September 1998 for issuance upon conversion of the GGD Debentures. GTR: Basic net loss per GTR common share is the same as diluted net loss per GTR common share for the three months ended March 31, 1999 and 1998. Certain securities were not included in the computation of GTR's diluted loss per share for the three months ended March 31, 1999 and 1998 because they would have an anti-dilutive effect due to GTR's net loss per share for the relevant period. For the three months ended March 31, 1999 and 1998, these securities include:
Three Months Ended (Amounts in thousands) March 31, - --------------------------------------------------------------------------------- 1999 1998 ------ ------ Shares of GTR Stock issuable for options ................. 3,875 2,711 GTR Designated Shares .................................... 2,310 834 Shares of GTR Stock issuable upon conversion of the GTR Note ...................................... 6,458 2,577 ----- ----- Total shares excluded from the GTR diluted loss per share calculation ................................ 12,643 6,122 ====== =====
GMO: Basic net loss per GMO common share is the same as diluted net loss per GMO common share for the three months ended March 31, 1999 and 1998. Certain securities were not included in the computation of GMO's diluted loss per share for the three months ended March 31, 1999 and 1998 because they would have an anti-dilutive effect due to GMO's net loss per share for the relevant period. For the three months ended March 31, 1999 and 1998, these securities include:
Three Months Ended (Amounts in thousands) March 31, - --------------------------------------------------------------------------------- 1999 1998 ------ ------ Shares of GMO Stock issuable for options ................. 1,604 870 Warrants to purchase GMO Stock ........................... 10 10 GMO Designated Shares .................................... 1,410 6,000 Shares of GMO Stock issuable upon conversion of Genzyme's 6% convertible subordinated debentures due August 2002 ("GMO Debentures") ..................... -- 3,476 ----- ------ Total shares excluded from the GMO diluted loss per share calculation .............................. 3,024 10,356 ===== ======
23 24 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS 6. SEGMENT REPORTING Genzyme reportable segments are strategic business units or divisions that offer different products and services. Genzyme has five reportable segments: - the Therapeutics business unit, which develops, manufactures and distributes human therapeutic products for significant unmet medical needs. The business derives substantially all of its revenue from Cerezyme[R] enzyme and Ceredase[R] enzyme sales. - the Surgical Products business unit, which commenced operations in July 1996 upon the acquisition of Deknatel Snowden Pencer, Inc., develops, manufactures and markets surgical products for three principal business lines: (i) cardiovascular surgery; (ii) general surgery; and (iii) plastic surgery. - the Diagnostic Products business unit, which provides diagnostic products to niche markets focusing on in vitro diagnostics. - GTR develops and markets biological products for orthopedic injuries, such as cartilage repair, and severe burns. - GMO is developing cancer products, with a focus on therapeutic vaccines and angiogenesis inhibitors. Information concerning the operations in these reportable segments is as follows:
3 Months Ended 3 Months Ended March 31, March 31, 1999 1998 -------------- -------------- REVENUES: Therapeutics $115,041 $ 93,522 Surgical Products 27,354 24,227 Diagnostic Products 14,692 16,717 GTR 4,023 3,611 GMO 1,613 2,817 Other 20,455 18,604 Eliminations/Adjustments 566 1,053 -------- -------- Total $183,744 $160,551 ======== ======== NET INCOME: Therapeutics $ 33,871 $ 28,922 Surgical Products (6,733) (5,647) Diagnostic Products 1,129 84 GTR (9,616) (11,320) GMO (7,060) (6,540) Other (1,780) (1,520) Eliminations/Adjustments 6,246 3,805 -------- -------- Total $ 16,057 $ 7,784 ======== ======== There has been no material change in segment assets since December 31, 1998.
7. CREATION OF NEW DIVISION In March 1999, Genzyme announced that it intends to create a separate division, with its own series of common stock, for the existing surgical products business that is currently part of Genzyme General, subject to approval of the Genzyme Board. 8. SUBSEQUENT EVENT In April 1999, Genzyme received approximately $8.3 ($8.0 million in principal and $0.3 million in interest) in connection with certain notes receivable that were previously fully reserved due to uncertainty surrounding collection. Genzyme received these notes in partial consideration for the sale of Genetic Design, Inc. in 1996. The $8.3 million will be recorded as a gain in the second quarter of 1999. 24 25 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 The following discussion is a summary of the key factors management considers necessary in reviewing the Company's results of operations, liquidity and capital resources. GENZYME CORPORATION AND SUBSIDIARIES Since the operating results of Genzyme and its subsidiaries reflect the combined operations of Genzyme General, GTR and GMO, this discussion summarizes the key factors management considers necessary in reviewing Genzyme's consolidated results of operations. Detailed discussion and analysis of each division's results of operations are provided below under separate headings. RESULTS OF OPERATIONS GENZYME CORPORATION REVENUES Total revenues for the three months ended March 31, 1999 increased 14% to $183.7 million from $160.6 million in the corresponding period of 1998. Product revenues consist solely of sales by Genzyme General. Product revenues for the three months ended March 31, 1999 increased 17% to $163.7 million from $139.4 million in the comparable period of 1998. The increase was primarily due to increased sales of Cerezyme[R] enzyme. Combined sales of Cerezyme[R] enzyme and Ceredase[R] enzyme increased 22% in the three months ended March 31, 1999 to $113.8 million from $93.5 million in the corresponding period of 1998 due to continued strong growth in the number of patients worldwide receiving enzyme replacement therapy for the treatment of Gaucher disease. Service revenues consist primarily of genetic testing services performed by Genzyme General, sales of GTR's Carticel[R] autologous cultured chondrocytes ("Carticel[R] AuCC") and Epicel[TM] skin grafts as well as the provision of services relating to GMO's SAGE[TM] differential gene expression technology. For the three months ended March 31, 1999, service revenues increased 3% to $18.7 million from $18.2 million for the corresponding period of 1998. Service sales increased for the three months ended March 31, 1999 due primarily to increased sales of both Carticel[R] AuCC and services relating to the SAGE[TM] technology and a slight increase in genetic testing service revenue, offset in part by slight reductions in sales of Epicel[TM] skin grafts. International sales as a percentage of total product and service sales for the three months ended March 31, 1999 decreased to 40% from 41% for the corresponding period of 1998. MARGINS AND OPERATING EXPENSES Gross margins for the quarters ended March 31, 1999 and 1998 were 69% and 63%, respectively. 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, 1999 were 73% compared to 67% for the same period of 1998. The increase in product margins is primarily due to increased sales volume of Cerezyme[R] enzyme. Service margins were 35% for each of the periods ended March 31, 1999 and 1998. In the three months ended March 31, 1999, increased service margins attributable to higher sales for GTR and GMO were offset by decreased genetic testing services margins. Selling, general and administrative ("SG&A") expenses and amortization of intangibles for the three months ended March 31, 1999 were $65.2 million as compared to $58.5 million for the same period in 1998, an increase of 11%. The increase for both periods was due primarily to increased staffing in support of the growth in several of Genzyme General's product lines and costs associated with the market introduction of Thyrogen[R] hormone in January 1999. Research and development expenses for the three months ended March 31, 1999 were $32.8 million compared to $25.6 million for the three months ended March 31, 1998, an increase of 29%, due primarily to (i) increased costs in connection with the results of ATIII LLC, Genzyme's joint venture with Genzyme Transgenics Corporation ("GTC") for the development and commercialization of transgenic recombinant human antithrombin III; (ii) increased spending on GMO's small molecule immunotherapy and anti-angiogenesis programs; (iii) increased spending on Alpha-galactosidase for Fabry disease and (iv) increased spending on the gene-graft and cardiomyocyte program. 25 26 OTHER INCOME AND EXPENSES Other income and expenses for the three months ended March 31, 1999 was a net other expense of $4.0 million compared to a net other expense of $4.7 million for the three months ended March 31, 1998. Equity in net loss of Genzyme's unconsolidated affiliates increased to $10.1 million for the three months ended March 31, 1999 from $5.3 million for the three months ended March 31, 1998. The change is primarily due to (i) increased losses from RenaGel LLC, Genzyme's joint venture with GelTex Pharmaceuticals, Inc. ("GelTex") for the development and commercialization of Renagel[R] Capsules, (ii) increased losses resulting from Diacrin/Genzyme LLC, (iii) Genzyme's portion of the losses of Pharming/Genzyme LLC, Genzyme's joint venture with Pharming Group N.V. for the development and commercialization of human alpha glucosidase as a treatment for Pompe's disease, which became effective on October 9, 1998; and (iv) Genzyme's portion of the losses of BioMarin/Genzyme LLC, Genzyme's joint venture with BioMarin Pharmaceutical Inc. ("BioMarin") for the development and commercialization of alpha-L-iduronidase for the treatment of mucopolysaccharidosis-I, which was established on September 4, 1998. For the three months ended March 31, 1999, other income and expense, net, also includes a gain of $0.6 million on Genzyme's investment in GTC due to issuance by GTC of its common stock, and a $2.0 million gain on the sale of TECHNE common stock. There were no comparable amounts in the same period of 1998. For each of the three months ended March 31, 1999 and 1998, Genzyme recorded minority interest of $0.9 million, representing the portion of the results of ATIII LLC allocated to GTC. Investment income increased to $8.2 million for the three months ended March 31, 1999 from $3.6 million for the same period of 1998. The increase was due to higher average cash balances resulting primarily from the net proceeds from the issuance in May 1998 of the GGD Notes and cash generated from operations. Interest expense was $5.5 million for the three months ended March 31, 1999, compared to $4.0 million in corresponding period of 1998. The increase was due primarily to additional interest expense related to the GGD Notes. The tax provisions for the three months ended March 31, 1999 and 1998 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 affiliates. The effective tax rate for the three months ended March 31, 1999 decreased to 38% from 43% for the same period of 1998, due to an increase in tax credits and a decrease in nondeductible amortization and losses of unconsolidated affiliates. GENZYME GENERAL REVENUES Total revenues for the three months ended March 31, 1999 increased 16% to $178.1 million from $154.1 million in the corresponding period of 1998. Product revenues for the three months ended March 31, 1999 increased 17% to $163.7 million from $139.4 million in the comparable period of 1998. Revenues for the Therapeutics business unit consisted primarily of sales of Cerezyme[R] enzyme and Ceredase[R] enzyme, which increased 24% to $118.9 million for the three months ended March 31, 1999 from $95.6 million in the corresponding periods in 1998 due to increased sales of Cerezyme[R] enzyme. Combined revenues for Cerezyme[R] enzyme and Ceredase[R] enzyme for the three months ended March 31, 1999 were $113.8 million as compared to $93.5 million for the same period of 1998. Genzyme General's results of operations are highly dependent on these products, which together represented 70% of product sales for the three months ended March 31, 1999, compared to 67% in the corresponding period of last year. Therapeutics revenues for the first quarter of 1999 also include sales of Thyrogen[R] hormone and lipids and peptides for drug delivery. Revenues for the Surgical Products business unit increased 18% to $30.1 million in the three months ended March 31, 1999 from $25.6 million in the corresponding period of last year due primarily to increased sales of Seprafilm[R] Bioresorbable Membrane, which increased 85% this quarter in comparison to the same quarter of 1998. For the three months ended March 31, 1999, overall sales of surgical instruments, sutures and devices increased 7% percent compared with the same period in 1998. 26 27 Revenues for the Diagnostics business unit decreased 6% to $28.6 million for the three months ended March 31, 1999 from $30.5 million in the same period of last year. The decrease in diagnostics revenues for the quarter reflects the sale of Genzyme's research products business to TECHNE in July 1998. The research products business had revenues of approximately $4.0 million per quarter at the time it was sold. Diagnostic product revenues now include royalties on sales by TECHNE's biotechnology group. Excluding revenues from the research products business, diagnostic product sales increased 16% this quarter to $14.7 million compared to the same period last year. Revenues from genetic testing services were $13.9 million for the first quarter of 1999, up slightly in comparison to the corresponding period of 1998. International sales as a percentage of total product and service sales for the three months ended March 31, 1999 decreased to 40% from 42% for the corresponding period of 1998. MARGINS AND OPERATING EXPENSES Gross margins for the quarters ended March 31, 1999 and 1998 were 70% and 64%, respectively, due primarily to increased Cerezyme[R] enzyme sales. Genzyme General provides a broad range of health care products and services, resulting in a range of gross margins depending on the particular market conditions of each product or service. Product margins for the three months ended March 31, 1999 were 73% compared to 67% for the same periods of 1998. The increase in product margins is primarily due to increased sales volume of Cerezyme[R] enzyme. Genetic testing service margins for the three months ended March 31, 1999 decreased to 37%, in comparison to 41% for the corresponding period of 1998, due primarily to less capacity utilization in the three months ended March 31, 1999. SG&A expenses and amortization of intangibles for the three months ended March 31, 1999 were $54.5 million as compared to $48.3 million for the same period in 1998, an increase of 13%. The increase was due primarily to increased staffing in support of the growth in several product lines and costs associated with the market introduction of Thyrogen[R] hormone in January 1999. Research and development expenses for the three months ended March 31, 1999 were $26.7 million compared to $18.4 million for the three months ended March 31, 1998, an increase of 45%, due primarily to (i) increased costs in connection with the results of ATIII LLC; (ii) increased spending on Alpha-galactosidase for Fabry disease and (iii) increased spending on the gene-graft and the cardiomyocyte program. OTHER INCOME AND EXPENSES Other income and expenses for the three months ended March 31, 1999 was a net other expense of $1.4 million compared to a net other expense of $1.1 million in the three months ended March 31, 1998. Equity in net loss of Genzyme's unconsolidated affiliates increased to $7.7 million for the three months ended March 31, 1999 from $2.9 million for the three months ended March 31, 1998. The change is primarily due to (i) increased losses from RenaGel LLC; and (ii) Genzyme's portion of the losses of Pharming/Genzyme LLC and BioMarin/Genzyme LLC. For the three months ended March 31, 1999, other income and expense, net, also includes a gain of $0.6 million on Genzyme's investment in GTC due to issuance by GTC of its common stock and a gain of $2.0 million on the sale of TECHNE common stock. There were no comparable amounts in the same period of 1998. For each of the three months ended March 31, 1999 and 1998, Genzyme recorded minority interest of $0.9 million, representing the portion of the results of ATIII LLC allocated to GTC. Investment income increased to $7.9 million for the for the three months ended March 31, 1999 from $2.9 million for the same period of 1998. The increase was due to higher average cash balances resulting primarily from the net proceeds from the issuance in May 1998 of the GGD Notes and increased cash provided by operating activities. Interest expense was $5.1 million for the three months ended March 31, 1999, compared to $2.0 million for the corresponding period of 1998. The increase was due to additional interest expense related to the GGD Notes and the GGD Debentures. The tax provisions for the three months ended March 31, 1999 and 1998 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 General's share of the losses of unconsolidated affiliates. The effective tax rate for the three months ended March 31, 1999 decreased to 38% from 39% for the same period of 1998. For the three months ended March 31, 1999, tax benefits allocated from GTR and GMO of $4.0 million and $1.9 million, respectively, reduced Genzyme General's tax rate to 24.4% 27 28 and in the corresponding period of 1998, tax benefits allocated from GTR and GMO of $4.4 million and $1.2 million, respectively, reduced Genzyme General's tax rate to 22%. The difference is attributable to the fact that the same approximate dollar benefits from GTR and GMO gave a lower percentage of benefit on an increased profit before tax. GENZYME TISSUE REPAIR REVENUES Total revenues for the three months ended March 31, 1999 were $4.0 million, representing an increase of 11% over the same period in 1998. Sales of Carticel[R] AuCC were $2.9 million for the three months ended March 31, 1999 as compared to $2.5 million for the three months ended March 31, 1998, an increase of 18%. This increase is the result of continued growth of domestic sales and increased European sales. Sales of Epicel[TM] skin grafts decreased slightly to $1.0 million in the three months ended March 31, 1999 from $1.1 million in the three months ended March 31, 1998. Revenues from the sale of Epicel[TM] skin grafts fluctuate from quarter to quarter depending on the need for severe burn care. MARGINS AND OPERATING EXPENSES GTR's gross margin for the three months ended March 31, 1999 was 25%, as compared to 10% for the three months ended March 31, 1998. The improvement in gross margin is primarily the result of a reduction in labor and manufacturing expenses and decreased material expenses. SG&A expenses remained level at $6.3 million for both the three months ended March 31, 1999 and 1998. GTR incurs direct SG&A costs as well as an SG&A charge, based on actual amounts incurred, from Genzyme General for SG&A work performed by Genzyme General on behalf of GTR. In the three months ended March 31, 1999, $1.3 million of SG&A services were provided by Genzyme General as compared to $1.6 million for the same period of 1998. Research and development expenses for the three months ended March 31, 1999 were $2.0 million as compared to $3.1 million in the comparable period of 1998, representing a 36% decrease. This decrease was the result of a cessation of certain research and development projects. In the three months ended March 31, 1999, $1.5 million of research and development services were provided to GTR by Genzyme General, compared to $2.2 million in the same period of 1998. OTHER INCOME AND EXPENSES Interest income was $0.1 million for the three months ended March 31, 1999, compared to interest income of $0.4 million in the three months ended March 31, 1998. The decrease was due primarily to lower average cash balances. Interest expense was $0.4 million for the three months ended March 31, 1999, as compared to $0.8 million for the same period of 1998. The decrease in interest expense was the result of the completion of the accretion of the conversion feature related to the GTR Note in the second quarter of 1998, and the conversion of $3.6 million of principal amount of the GTR Note into shares of GTR Stock. Of this amount, $0.6 million of principal amount was converted in the fourth quarter of 1998 and $3.0 million was converted in January 1999. On October 1, 1996, Diacrin/Genzyme LLC was established as a joint venture between GTR and Diacrin to develop and commercialize products and processes using porcine fetal cells for the treatment of Parkinson's disease and Huntington's disease in humans. Under the terms of the joint venture agreement, GTR provided 100% of the initial $10.0 million of the funding requirements and will provide 75% of the next $40.0 million of funding requirements for products to be developed by the joint venture. Thereafter, all costs will be shared equally by the two parties. In the three months ending March 31, 1999, GTR provided $2.1 million of funding to, and realized a net loss of $2.0 million from, the joint venture as compared to funding of $1.9 million, and a net loss of $1.9 million, for the corresponding period in 1998. 28 29 GENZYME MOLECULAR ONCOLOGY REVENUES GMO recorded service revenues of $0.9 million for both the three months ended March 31, 1999 and 1998. Service revenues consisted of service contracts relating to the SAGE[TM] technology performed primarily for third parties. GMO also recorded research and development revenues of $0.3 million in the three months ended March 31, 1999, as compared to $1.3 million in the three months ended March 31, 1998. These revenues consisted of work performed on behalf of StressGen/Genzyme LLC, in both the three months ended March 31, 1999 and 1998, as well as work performed on behalf of Schering-Plough Corporation in the three months ended March 31, 1998 for which there was no comparable amount in the same period of 1999. GMO recorded licensing revenue of $0.4 million in the three months ended March 31, 1999, as compared to $0.6 million in the three months ended March 31, 1998. Licensing revenue consists of licenses to the SAGE[TM] technology and other of GMO's therapeutics and diagnostics technology. MARGINS AND OPERATING EXPENSES For the three months ended March 31, 1999, GMO recorded cost of revenues of $0.6 million, as compared to $1.2 million in the three months ended March 31, 1998. Cost of revenues consisted of work performed on behalf of StressGen/Genzyme LLC, as well as work performed under SAGE[TM] contracts with third parties, and for the three months ended March 31, 1998, contract research in gene therapy. The decrease in cost of revenues was the result of the absence of contract research for the three months ended March 31, 1999 and a reduction in the amount of royalties due to a third party on sales of services related to the SAGE[TM] technology. GMO recorded $1.6 million of SG&A expenses in the three months ended March 31, 1999, as compared to $1.2 million in the comparable period in 1998. The increase is due primarily to increased legal expenses related to patents. Research and development expenses incurred by GMO in the three months ended March 31, 1999 was $3.9 million, compared to $3.3 million in the same period of 1998. The increase in research and development costs relates to increased research personnel and related expenses associated with the continued development of GMO's small molecule, immunotherapy and anti-angiogenesis programs. GMO's amortization of intangibles was $3.0 million for both the three months ended March 31, 1999 and the three months ended March 31, 1998. Amortization of intangibles is attributable to certain intangible assets acquired in connection with the acquisition of PharmaGenics, Inc. on June 18, 1997. OTHER INCOME AND EXPENSES Interest income and interest expense were $0.2 million and $3,000, respectively, for the three months ended March 31, 1999. GMO's interest income and interest expense for the three months ended March 31, 1998, were $0.3 million and $1.2 million, respectively. The decrease in interest income results from lower average cash balances. The decrease in interest expense is due to the exchange of the GMO Debentures for the GGD Debentures in August 1998. GMO recorded an equity in the loss of StressGen/Genzyme LLC of $0.4 million for both the three months ended March 31, 1999 and the three months ended March 31, 1998. GMO recorded a tax benefit of $0.7 million for both the three months ended March 31, 1999 and the three months ended March 31, 1998. This tax benefit is the result of the amortization of the deferred tax liability established upon the acquisition of PharmaGenics, Inc. LIQUIDITY AND CAPITAL RESOURCES GENZYME CORPORATION AND SUBSIDIARIES As of March 31, 1999, Genzyme had cash, cash equivalents, and short- and long-term investments of $629.2 million, an increase of $53.5 million from December 31, 1998. Operating and financing activities provided $41.7 million and $21.1 million of cash, respectively, investing activities used $98.2 million and fluctuations in exchange rates caused a reduction in cash of $2.6 million. In the three months ended March 31, 1999, financing activities provided $20.0 million of cash proceeds from the exercise of stock options and used $0.4 million for the repayment of debt and capital lease obligations. At March 31, 1999, $100.0 million was outstanding under Genzyme's $225 million revolving credit facility with a syndicate of 29 30 commercial banks (the "Revolving Credit Facility"), of which $82.0 million was allocated to Genzyme General and $18.0 million was allocated to GTR. In the three months ended March 31, 1999, investing activities provided $11.1 million of cash from the sale of Genzyme's shares of TECHNE common stock. Investing activities used $90.3 million of cash for the investment portfolio; $10.6 million of cash to fund capital expenditures and $11.7 million of cash to fund Genzyme's investments in joint ventures. Genzyme 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 currently has substantial cash resources, it has committed to utilize a portion of its resources for certain purposes, such as: (i) paying strategic collaborators and funding joint venture obligations, including a $10.0 million milestone payment to GelTex in October 1999 and a $10.0 million equity investment in BioMarin upon completion of their planned initial public equity offering; (ii) product development and marketing; (iii) expanding facilities; and (iv) marketing Carticel[R] AuCC, Thyrogen[R] hormone and Genzyme's line of products designed to limit the incidence and occurrence of post-operative adhesions (the "Sepra Products"). Genzyme's cash resources will be further reduced to pay principal and interest on the following debt: (i) $100.0 million payable in November 1999 under the Revolving Credit Facility; (ii) $21.2 million in principal amount under the GGD Debentures, which are convertible into GGD stock and mature on August 29, 2003; (iii) $9.4 million in principal amount under the GTR Note, which is convertible into GTR Stock and matures on February 27, 2000; and (iv) $250.0 million in principal amount under the GGD Notes, which are convertible into shares of GGD Stock and GMO stock and which mature on June 1, 2005. To the extent cash is used to pay or redeem these debt instruments, including the interest payable thereon, Genzyme's cash resources will be diminished. Genzyme may also require additional capital to finance its activities. There can be no assurance that such financing will be available on terms acceptable to Genzyme, if at all. GENZYME GENERAL As of March 31, 1999, Genzyme General had cash, cash equivalents, and short- and long-term investments of $610.3 million, an increase of $54.2 million from December 31, 1998. Operating and financing activities provided $45.1 million and $16.1 million of cash, respectively, investing activities used $96.9 million and fluctuations in exchange rates caused a reduction in cash of $2.6 million. In the three months ended March 31, 1999, financing activities provided $19.9 million of cash proceeds from the exercise of stock options and used $0.4 million of cash for the repayment of debt and capital lease obligations. At March 31, 1999, $82.0 million of funds allocated to Genzyme General under the Revolving Credit Facility remained outstanding. In the three months ended March 31, 1999, investing activities provided $11.1 million of cash from the sale of Genzyme's investment in TECHNE common stock. Investing activities used a net of $91.3 million of cash for the investment portfolio; $10.3 million of cash to fund capital expenditures; $9.6 million of cash to fund Genzyme General's investments in joint ventures; and $3.2 million to fund other noncurrent assets. In 1998, the Genzyme Board made $50.0 million of Genzyme General's cash available to GTR under the GTR Equity Line. Under the terms of the GTR Equity Line, GTR may draw down funds as needed each fiscal quarter in exchange for GTR Designated Shares. In February 1999, GTR made a $5.0 million draw under the GTR Equity Line in exchange for 1,633,399 GTR Designated Shares. In March 1999, Genzyme announced that it plans to reallocate Genzyme's interest in Diacrin/Genzyme LLC from GTR to Genzyme General, subject to the approval of holders of GTR Stock, in exchange for $25.0 million of cash and a 3% worldwide royalty on any products sold by Diacrin/Genzyme LLC. Upon approval of the Transfer, GTR will receive $25.0 million in cash from Genzyme General, and the funds available under the GTR Equity Line will be reduced to $20.0 million from $45.0 million. Of the $25.0 million in cash to be paid to GTR for the Transfer, $5.0 million is non-refundable and $20.0 million represents a pre-payment related to the achievement of certain future milestones by Diacrin/Genzyme LLC. If the milestones are not met, GTR is required to repay Genzyme General for the advanced milestone funds plus interest in cash or GTR Designated Shares, at GTR's option. In 1998, the Genzyme Board made $30.0 million of Genzyme General's cash available to GMO under an equity line of credit (the "GMO Equity Line"). Under the terms of the GMO Equity Line, GMO may draw down funds as needed each fiscal quarter in exchange for GMO Designated Shares. GMO has not yet drawn any funds under the GMO Equity Line in 1999. In March 1999, Genzyme announced that it intends to create a separate division, with its own series of common stock, for the existing surgical products business that is part of Genzyme General, subject to approval of the Genzyme Board. To the extent Genzyme General contributes cash to this division, its cash resources will be diminished. 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: (i) paying strategic collaborators and funding joint venture obligations, including a $10.0 million milestone payment to GelTex in October 1999 and a $10.0 million equity investment in BioMarin upon completion of their planned initial public equity offering; (ii) product development and marketing; (iii) expanding facilities; and (iv) marketing Thyrogen[R] hormone and the Sepra Products. Genzyme General's cash resources will be further reduced to pay principal and interest on the following debt: (i) $82.0 million under the Revolving Credit Facility; (ii) $21.2 million in principal amount under the GGD Debentures, which are convertible into shares of GGD Stock and mature on August 29, 2003; and (iii) $250.0 million in principal amount under the GGD Notes, which are convertible into shares of GGD Stock and mature on June 1, 2005. To the extent cash is used to pay or redeem these debt instruments, including the interest payable thereon, Genzyme General's cash will also be diminished. 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. Genzyme General may require additional capital to 30 31 finance any activities. There can be no assurance that such financing will be available on terms acceptable to Genzyme General, if at all. GENZYME TISSUE REPAIR As of March 31, 1999, GTR had cash and cash equivalents of $6.4 million, a decline of $1.4 million from December 31, 1998. In the three months ended March 31, 1999, GTR used $4.0 million of cash for operations. Investing activities used $2.4 million of cash, which included $2.1 million used to fund GTR's investment in Diacrin/Genzyme LLC and $0.3 million used for purchases of property, plant and equipment. Financing activities provided $5.0 million of cash, which consisted of $5.0 million allocated to GTR under the GTR Equity Line and $0.1 million of cash proceeds from employee stock plans. As of March 31, 1999, $18.0 million of funds allocated to GTR in December 1996 under the Revolving Credit Facility remained outstanding. This $18.0 million is due to be repaid in November 1999. In March 1999, Genzyme announced that it plans to reallocate Genzyme's interest in Diacrin/Genzyme LLC from GTR to Genzyme General, in the second quarter of 1999, subject to the approval of holders of GTR Stock, in exchange for $25.0 million of cash and a 3% worldwide royalty on any products sold by Diacrin/Genzyme LLC. Upon approval of the Transfer, GTR will receive $25.0 million in cash from Genzyme General and the funds available under the GTR Equity Line will be reduced to $20.0 million from $45.0 million. Of the $25.0 million in cash to be paid to GTR for the Transfer, $5.0 million is non-refundable and $20.0 million represents a pre-payment related to the achievement of certain future milestones by Diacrin/Genzyme LLC. If the milestones are not met, GTR is required to repay Genzyme General for the advanced milestone funds plus interest in cash or GTR Designated Shares, at GTR's option. GTR believes its available cash and investments, and amounts available under the GTR Equity Line will be sufficient to finance planned operations and capital requirements through the end of 1999. GTR must raise significant additional capital in order to continue operations at current levels beyond 1999. GTR's plans to raise additional capital include the consideration of the sale of additional equity securities, strategic alliances with third parties to fund further developments and marketing of Carticel[R] 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, 1999, GMO had cash, cash equivalents, and short-term investments of $12.5 million, an increase of $1.7 million from December 31, 1998. Operating activities provided $0.7 million of cash. Financing activities provided $1.0 million of cash due to the maturity of investments. GMO believes that the existing cash balances, revenues generated from SAGE[TM] agreements, committed research funding from collaborators and cash available under the GMO Equity line, will enable GMO to maintain its current and planned operations through 2000. To the extent CMDF exercises its option to require Genzyme to purchase a portion of CMDF's membership interest in StressGen/Genzyme LLC, GMO's cash resources will be diminished. Substantial additional funds will be required to complete development and commercialization of GMO's products and services (other than services related to the SAGE[TM] technology). In addition, GMO's cash requirements may vary materially from those now planned as a result of numerous factors, including the 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, the development of competitor products and services 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. 31 32 EURO-THE NEW EUROPEAN CURRENCY Since December 31, 1998, there have been no material changes related to Genzyme's outstanding derivatives and forward contracts, or any other material contracts as a result of the Euro conversion nor have there been any material changes in Genzyme's competitive position as a result of the conversion. The Company's disclosures related to the Euro conversion are described in the 1998 Genzyme 10-K under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries Financial Condition and Results of Operations -- "Euro -- the New European Currency," set forth in Exhibit 13.1 to the 1998 Genzyme 10-K and which is incorporated herein by reference. YEAR 2000 There have been no material changes in the Company's Year 2000 compliance program or its potential Y2K exposures since December 31, 1998. The Company's disclosures related to Year 2000 issues are described in the 1998 Genzyme 10-K under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries Financial Condition and Results of Operations -- Year 2000," set forth in Exhibit 13.1 to the 1998 Genzyme 10-K and which is incorporated herein by reference. MARKET RISK There have been no material changes in the Company's market risk since December 31, 1998. The Company's disclosure related to market risks are described in the 1998 Genzyme 10-K under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operation -- "Market Risk," set forth in Exhibit 13.1 to the 1998 Genzyme 10-K and which is incorporated herein by reference. SUBSEQUENT EVENT In April 1999, Genzyme General received approximately $8.3 million ($8.0 million in principal and $0.3 million in interest) in connection with certain notes receivable that were previously fully reserved due to uncertainty surrounding collection. Genzyme received these notes in partial consideration for the sale of Genetic Design, Inc. in 1996. The $8.3 million will be recorded as a gain in the second quarter of 1999. 32 33 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, MARCH 31, 1999 ITEM 3. QUANTITATIVE AND QUALITATIVE ANALYSIS OF MARKET RISK There have been no material changes in the Company's market risk since December 31, 1998. The Company's market risk disclosures are described in the 1998 Genzyme 10-K under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations - Market Risk," which is set forth in Exhibit 13.1 to the 1998 Genzyme 10-K and is incorporated herein by reference. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedule for Genzyme Corporation for the three months ended March 31, 1999 (for EDGAR filing purposes only). Filed herewith. (b) Reports on Form 8-K On March 17, 1999, Genzyme Corporation filed a Current Report on Form 8-K to announce that the Genzyme Board had authorized the renewal of Genzyme's shareholder rights plan. This plan became effective on March 28, 1999, which was the date on which the previous rights plan expired. 33 34 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, MARCH 31, 1999 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 17, 1999 By: /s/ Michael S. Wyzga ------------------------ Michael S. Wyzga Senior Vice President, Corporate Controller and Chief Accounting Officer 34 35 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, MARCH 31, 1999 EXHIBIT INDEX 27 Financial Data Schedule for Genzyme Corporation for the three months ended March 31, 1999 (for EDGAR filing purposes only). Filed herewith. 35 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF GENZYME CORPORATION AND ITS SUBSIDIARIES FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS AS INCLUDED IN THE FORM 10-Q FOR GENZYME CORPORATION DATED MARCH 31, 1999. 1,000 U.S. DOLLARS 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 1 80,591 247,668 177,780 17,807 110,567 671,489 536,314 158,400 1,721,053 228,943 284,415 1,176 0 0 1,198,107 1,721,053 163,702 183,744 43,818 55,906 95,630 2,356 5,498 25,890 9,833 16,057 0 0 0 16,057 0.40 0.38 GENZYME CORPORATION REPORTS EARNINGS PER SHARE BASED ON ITS THREE TRACKING STOCKS - GENZYME GENERAL DIVISION COMMON STOCK ("GGD STOCK"), GENZYME TISSUE REPAIR DIVISION COMMON STOCK ("GTR STOCK") AND GENZYME MOLECULAR ONCOLOGY DIVISION COMMON STOCK ("GMO STOCK"). THE EARNINGS PER SHARE DATA PRESENTED ON THIS SCHEDULE REFLECTS THE EARNINGS PER SHARE DATA FOR NET INCOME ATTRIBUTABLE TO GGD STOCK. FOR THE THREE MONTHS ENDED MARCH 31, 1999, NET INCOME ATTRIBUTABLE TO GENZYME GENERAL DIVISION WAS $32,481 AND NET INCOME PER SHARE OF GGD STOCK ON A BASIC AND DILUTED BASIS WAS $0.40 AND $0.38, RESPECTIVELY. NET LOSS FOR GENZYME TISSUE REPAIR DIVISION FOR THE THREE MONTHS ENDED MARCH 31, 1999 WAS $(9,616) OR $(0.44) PER BASIC AND DILUTED SHARE OF GTR STOCK. NET LOSS FOR GENZYME MOLECULAR ONCOLOGY DIVISION FOR THE THREE MONTHS ENDED MARCH 31, 1999 WAS $(7,060) OR $(0.56) PER BASIS AND DILUTED SHARE OF GMO STOCK.
-----END PRIVACY-ENHANCED MESSAGE-----