<PAGE> 1
FORM 10-Q
---------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
--------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------- ---------------
Commission file number 0-14680
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GENZYME CORPORATION
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(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
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(Address of principal executive offices) (zip code)
(617) 252-7500
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(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
------ ------
<TABLE>
The number of shares outstanding of each of the issuer's classes of common
stock as of June 30, 1995:
<CAPTION>
Class Outstanding at June 30, 1995:
----- -----------------------------
<S> <C>
General Division Common Stock,
$0.01 par value ("General Division Stock") 26,754,922
Tissue Repair Division Common Stock,
$0.01 par value ("TR Stock") 8,818,362
</TABLE>
Total number of pages in document - 33
Exhibit index located on page - 30
<PAGE> 2
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, JUNE 30, 1995
<TABLE>
TABLE OF CONTENTS
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Unaudited Condensed Financial Statements
GENZYME CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations for
the Three and Six Months Ended June 30, 1995 and 1994............ 3
Condensed Consolidated Balance Sheets as of June 30,
1995 and December 31, 1994....................................... 5
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1995 and 1994.......................... 6
Notes to Unaudited Condensed Consolidated Financial Statements... 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 9
GENZYME GENERAL DIVISION
Condensed Combined Statements of Operations for
the Three and Six Months Ended June 30, 1995 and 1994............ 12
Condensed Combined Balance Sheets as of June 30,
1995 and December 31, 1994....................................... 14
Condensed Combined Statements of Cash Flows for the
Six Months Ended June 30, 1995 and 1994.......................... 15
Notes to Unaudited Condensed Combined Financial Statements....... 16
Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 18
GENZYME TISSUE REPAIR DIVISION
Condensed Combined Statements of Operations for
the Three and Six Months Ended June 30, 1995 and 1994............ 21
Condensed Combined Balance Sheets as of June 30,
1995 and December 31, 1994....................................... 22
Condensed Combined Statements of Cash Flows for the
Six Months Ended June 30, 1995 and 1994.......................... 23
Notes to Unaudited Condensed Combined Financial Statements....... 24
Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 25
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 27
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders.......... 27
ITEM 5. Other Information............................................ 28
ITEM 6. Exhibits and Reports on Form 8-K............................. 29
Signatures............................................................ 29
</TABLE>
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<PAGE> 3
<TABLE>
GENZYME CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
(DOLLARS IN THOUSANDS) JUNE 30, JUNE 30,
------------------------------------------------------------------------------------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Net product sales............................... $75,301 $57,510 $144,602 $110,985
Net service sales............................... 11,801 13,079 24,265 27,007
Revenues from research and development contracts:
Related parties.............................. 6,497 4,405 12,823 9,983
Other........................................ 6 384 104 685
------- ------- -------- --------
93,605 75,378 181,794 148,660
Operating costs and expenses:
Cost of products sold........................... 30,843 22,180 56,974 40,825
Cost of services sold........................... 7,826 8,308 15,777 17,017
Selling, general and administrative............. 25,902 20,466 51,893 42,922
Research and development (including research
and development related to contracts)......... 17,263 13,088 33,726 26,016
------- ------- -------- --------
81,834 64,042 158,370 126,780
------- ------- -------- --------
Operating income................................. 11,771 11,336 23,424 21,880
Other income and (expenses):
Minority interest in net loss of subsidiaries... 501 304 866 617
Equity in net loss of unconsolidated affiliate.. (793) - (1,742) -
Investment income............................... 1,297 2,038 3,062 5,776
Interest expense................................ (173) (407) (220) (843)
------- ------- -------- --------
832 1,935 1,966 5,550
------- ------- -------- --------
Income before income taxes....................... 12,603 13,271 25,390 27,430
Provision for income taxes....................... (4,663) (4,778) (9,394) (9,875)
------- ------- -------- --------
Net income....................................... $ 7,940 $ 8,493 $ 15,996 $ 17,555
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, condensed,
consolidated financial statements.
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<PAGE> 4
<TABLE>
GENZYME CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) JUNE 30, JUNE 30,
------------------------------------------------------------------------------------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
APPLICABLE TO GENZYME GENERAL DIVISION:
Net income..................................... $10,932 $ 9,110 $21,303 $18,702
Allocated tax benefit generated by Genzyme
Tissue Repair Division....................... 2,035 512 3,662 797
------- ------- ------- -------
Net income attributable to General
Division Stock............................. $12,967 $ 9,622 $24,965 $19,499
======= ======= ======= =======
Per common and common equivalent share:
Net income (1)................................ $0.46 $0.37 $0.89 $0.75
======= ======= ======= =======
Average shares outstanding.................... 28,318 25,930 28,105 25,988
======= ======= ======= =======
Per common share assuming full dilution:
Net income (1)............................... $0.43 $0.35 $0.83 $0.70
======= ======= ======= =======
Average fully diluted shares outstanding...... 30,323 27,821 30,235 27,879
======= ======= ======= =======
APPLICABLE TO GENZYME TISSUE REPAIR DIVISION:
Net loss attributable to TR Stock.............. $(5,027) $(1,129) $(8,969) $(1,944)
======= ======= ======= =======
Per common share:
Net loss...................................... $(0.57) $(0.34) $(1.03) $(0.59)
======= ======= ======= =======
Average shares outstanding.................... 8,763 3,292 8,721 3,287
======= ======= ======= =======
<FN>
(1) General Division 1994 net income per share is pro forma.
</TABLE>
The accompanying notes are an integral part of these unaudited, condensed,
consolidated financial statements.
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<PAGE> 5
<TABLE>
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS) JUNE 30, DECEMBER 31,
------------------------------------------------------------------------------------------
1995 1994
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................ $ 31,548 $ 63,542
Short-term investments................................... 13,055 13,073
Accounts receivable, less allowance
for doubtful accounts.................................. 81,238 78,127
Inventories.............................................. 41,986 36,840
Prepaid expenses and other current assets................ 11,935 11,074
Deferred tax assets - current............................ 4,072 4,072
-------- --------
Total current assets................................ 183,834 206,728
Property, plant and equipment, net......................... 315,662 296,802
Other Assets:
Long-term investments.................................... 58,005 76,845
Note receivable - related party.......................... 1,429 3,572
Intangibles, net of accumulated amortization............. 27,412 29,303
Deferred tax assets - noncurrent......................... 28,473 28,473
Other noncurrent assets.................................. 24,065 16,685
-------- --------
139,384 154,878
-------- --------
$638,880 $658,408
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable......................................... $ 10,583 $ 21,387
Accrued expenses......................................... 33,468 30,986
Income taxes payable..................................... 1,359 6,523
Deferred revenue......................................... 2,601 2,604
Current portion of long-term debt and
capital lease obligations.............................. 927 41,357
-------- --------
Total current liabilities........................... 48,938 102,857
Noncurrent Liabilities:
Long-term debt and capital lease obligations.............. 128,321 126,729
Other noncurrent liabilities.............................. 8,759 7,548
-------- --------
137,080 134,277
Minority interest in subsidiaries.......................... 1,554 2,310
Stockholders' Equity:
General Division Stock, $.01 par value................... 267 264
TR Stock, $.01 par value................................. 88 87
Treasury Stock - at cost................................. (825) (755)
Additional paid-in capital............................... 477,899 470,826
Accumulated deficit...................................... (22,812) (38,808)
Other equity adjustments................................. (3,309) (12,650)
-------- --------
451,308 418,964
-------- --------
$638,880 $658,408
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, condensed,
consolidated financial statements.
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<PAGE> 6
<TABLE>
GENZYME CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS) SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------------------
1995 1994
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income......................................... $ 15,996 $ 17,555
Reconciliation of net income to net
cash from operating activities:
Depreciation and amortization................... 11,595 8,240
Provision for bad debts......................... 3,699 2,483
(Gain)/loss on sale of investments.............. 110 (1,591)
Loss on disposal of fixed assets................ 32 -
Accrued interest/amortization on bonds.......... 514 (2,795)
Minority interest in net loss of subsidiaries... (866) (616)
Equity in net loss of unconsolidated affiliate.. 1,742 -
Other........................................... 1,173 11
Decrease in cash from working capital:
Accounts receivable........................... (4,363) (9,550)
Inventories................................... (4,183) (7,524)
Prepaid expenses and other current assets..... (710) (696)
Accounts payable, accrued expenses
and deferred revenue......................... (14,738) (4,258)
-------- ---------
Net cash from operating activities............ 10,001 1,259
INVESTING ACTIVITIES:
Investment in unconsolidated affiliate........... (4,000) -
Loans to related parties........................... (1,857) -
Purchases of investments........................... (22,027) (219,636)
Sales and maturities of investments................ 45,918 246,723
Property, plant and equipment...................... (25,675) (68,940)
Other noncurrent assets............................ (541) 2,901
-------- ---------
Net cash from investing activities............ (8,182) (38,952)
FINANCING ACTIVITIES:
Issuance of common stock........................... 6,846 2,581
Issuance of common stock by subsidiary........... 260 -
Issuance of debt................................... 77 21,614
Payments of debt and capital lease obligations..... (39,341) (360)
-------- ---------
Net cash from financing activities............ (32,158) 23,835
Effect of exchange rate changes on cash............. (1,655) (700)
-------- ---------
Decrease in cash and cash equivalents............... (31,994) (14,558)
Cash and cash equivalents, beginning of period...... 63,542 22,975
-------- ---------
Cash and cash equivalents, end of period............ $ 31,548 $ 8,417
======== =========
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest........................................ $ 5,197 $ 4,444
Income taxes.................................... 14,405 7,050
</TABLE>
Supplemental Disclosure of Non-Cash Transactions:
Additional investment in unconsolidated affiliate -- Note 6
The accompanying notes are an integral part of these unaudited, condensed,
consolidated financial statements.
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<PAGE> 7
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation:
----------------------
These unaudited condensed consolidated financial statements should be
read in conjunction with the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994 and the financial statements and
footnotes included therein. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to the Securities and Exchange Commission rules and regulations.
Certain items in the 1994 financial statements have been reclassified to
conform with the 1995 presentation.
The financial statements for the three and six months ended June 30,
1995 and 1994 are unaudited but include, in the Company's opinion, all
adjustments (consisting only of normally recurring accruals) necessary for a
fair presentation of the results for the periods presented.
2. Accounting Policies:
--------------------
The accounting policies underlying the quarterly financial statements
are those set forth in Note A of the financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1994.
3. Investments:
------------
As of June 30, 1995, the Company's investment portfolio, consisting
primarily of debt securities classified as available for sale, was adjusted
to its market value. As a result, gross unrealized holding gains of
approximately $5,000 and gross unrealized holding losses totaling
approximately $611,000 were recorded in a separate component of
Stockholders' equity.
As of June 30, 1995, the carrying values of the Company's investments in
Argus Pharmaceuticals, Inc., Celtrix Pharmaceuticals, Inc. and Univax
Biologics, Inc., included in Other noncurrent assets in the unaudited,
condensed, consolidated balance sheets, were adjusted to their respective
market values. Gross unrealized holding gains of approximately $414,000 and
gross unrealized holding losses of approximately $1,714,000 were recorded in
a separate component of Stockholders' equity.
<TABLE>
4. Inventories:
------------
<CAPTION>
June 30, 1995 December 31, 1994
------------- -----------------
<S> <C> <C>
Raw Materials............ $10,371,000 $14,572,000
Work-in-process.......... 14,374,000 9,247,000
Finished products........ 17,241,000 13,021,000
----------- -----------
$41,986,000 $36,840,000
=========== ===========
</TABLE>
5. Provision for Income Taxes:
---------------------------
The tax provision for the quarter ended June 30, 1995 varies from the
U.S. statutory tax rate because of the provision for state income taxes,
losses of subsidiaries which generate no current tax benefit, tax credits
and taxes on foreign earnings. The effective tax rate was 37% for the three
and six months ended June 30, 1995 as compared to 36% for the corresponding
periods in 1994. The increase was due primarily to the expiration of the
Orphan Drug Credit effective December 31, 1994.
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<PAGE> 8
6. Additional Investments in Unconsolidated Affiliate:
---------------------------------------------------
In June 1995, the Company converted approximately $4.0 million of
Genzyme Transgenics Corporation ("GTC") debt into equity through the
acquisition of 1.3 million shares of GTC common stock. The transaction
increased the Company's interest in GTC to 49%.
On July 3, 1995, GTC acquired Biodevelopment Laboratories, Inc. ("BDL").
As part of the transaction, the Company issued approximately 34,000 shares
of General Division Common Stock to former stockholders of BDL in exchange
for approximately 475,000 shares of newly issued GTC stock. In total, GTC
issued approximately 1,207,000 shares in the transaction, resulting in a
decrease in the Company's interest in GTC to 48.2%.
Also as part of the BDL transaction, the Company guaranteed a $7,500,000
line of credit to GTC from a commercial bank in return for warrants to
purchase 145,000 shares of GTC stock.
-8-
<PAGE> 9
GENZYME CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1995
RESULTS OF OPERATIONS
Revenue
-------
Total revenues for the three and six months ended June 30, 1995 were
$93.6 million and $181.8 million, respectively, an increase of 24% and 22%,
respectively, over the corresponding periods in 1994. Product and service
revenues were $87.1 million and $168.9 million, respectively, an increase of 23%
and 22% over the same periods in 1994. Product revenues increased 31% to $75.3
million for the second quarter, and 30% to $144.6 million for the six months
ended June 30, 1995, reflecting sales increases in the Therapeutic, Diagnostic
Product, and Pharmaceutical/Fine Chemical ("PFC") businesses of 26%, 26% and
78%, respectively, for the second quarter and 28%, 20% and 53%, respectively,
for the six months ended June 30, 1995. The increase in sales of Therapeutic
products resulted primarily from increased shipments of Ceredase[R] enzyme, for
which the rate of new patient accruals more than offset dosage reductions, and
the market introduction, in the second quarter of 1994, of Cerezyme[TM] enzyme,
the recombinant form of Ceredase[R] enzyme. The increase in Diagnostic Product
sales resulted from sales increases across most product lines including a
doubling in revenues from sales of Direct LDL tests. The increase in PFC sales
resulted from the operations of a Swiss company acquired in July 1994. Service
revenues for the second quarter and six months ended June 30, 1995 declined 10%
to $11,801 and $24,265, respectively, resulting primarily from the divestiture
of two small genetic diagnostic laboratories and a decline in identity testing
revenues.
International sales represented approximately 41% and 42%, respectively,
of product sales for the second quarter and six months ended June 30, 1995
compared with approximately 34% for the second quarter and six months ended June
30, 1994. The increase was due primarily to increases of 56% and 62%,
respectively, for the quarter and six months ended June 30, 1995 in the combined
international sales of Ceredase[R]/Cerezyme[TM] enzyme as well as favorable
exchange rates.
Revenues from research and development contracts for the three and six
months ended June 30, 1995 were $6.5 million and $12.9 million, respectively, an
increase of 36% and 21%, respectively, from the corresponding periods in 1994.
Revenues from Neozyme II increased 49% to $6.0 million for the second quarter of
1995 due primarily to increased activity relating to collaborations with third
parties. For the six months ended June 30, 1995 revenues from Neozyme II
increased 40% to $11.7 million. In the first quarter of 1994, the Surgical Aids
Partnership provided revenues to Genzyme of $0.9 million thereby exhausting the
funds it had available for the funding of the HAL[TM] products. In the first
six months of 1994, consolidation of the operations of Genzyme Transgenics
Corporation ("GTC") provided $1.3 million of reported revenues from research and
development contracts. Beginning in the fourth quarter of 1994, the Company
accounts for GTC using the equity method of accounting and, accordingly, no
longer reports GTC's revenue from research and development contracts.
Margins and Operating Expenses
------------------------------
Total gross margin for the quarter and six months ended June 30, 1995
was 56% and 57%, respectively, as compared to 57% and 58%, respectively, for the
same periods in 1994. Genzyme provides a broad range of health care products
and services, resulting in a range of gross margins depending on the particular
market conditions of each product or service. Product margins for the three and
six months ended June 30, 1995 declined to 59% and 61%, respectively, from 61%
and 63%,
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<PAGE> 10
respectively, for the same periods in 1994 due primarily to lower beginning in
the second quarter of 1994 which was not fully offset by a price increase in the
first quarter of 1994. Service margins for the three and six months ended
June 30, 1995 decreased to 34% and 35%, respectively, from 36% and 37%,
respectively, due to high fixed costs associated with identity testing which
experienced a decline in revenues relative to the same periods in 1994.
Selling, general and administrative expenses for the three and six
months ended June 30, 1995 were $25.9 million and $51.9 million, respectively,
compared to $20.4 million and $42.9 million for the same periods in 1994. The
increase was due primarily to increased staffing in support of the growth in
several product lines and to the ongoing expenses associated with various
operations acquired or established in 1994. As a percentage of total revenues,
selling, general and administrative expenses for the three and six months ended
June 30, 1995 were 28% and 29%, respectively, compared to 27% and 29%,
respectively, for the corresponding periods in 1994.
Research and development expenses for the three and six months ended
June 30, 1995 were $17.3 million and $33.7 million, compared to $13.1 million
and $26.0 million, respectively, for the same periods in 1994 due to increased
efforts on behalf of Neozyme II, increased spending on internal programs and
spending of $1,732,000 and $3,490,000, respectively, related to the operations
of BioSurface Technology, Inc., acquired in December 1994.
Other Income and Expenses
-------------------------
Investment income for the quarter and six months ended June 30, 1995
totaled $1.3 million and $3.1 million, respectively, compared with $2.0 million
and $5.8 million, respectively, for the same periods in 1994. Investment income
for the three and six months ended June 30, 1995 includes losses on the sales of
securities of approximately $85,000 and $24,000, respectively, as compared to
gains of $1.5 million and $1.6 million, respectively, on the sales of securities
for the corresponding period in 1994. Excluding the effect of these realized
gains and losses, investment income for the six months ended June 30, 1995
decreased 26% due to lower average cash and investment balances.
Interest expense for the quarter and six months ended June 30, 1995 was
$173,000 and $220,000, respectively, net of capitalized interest on
construction in progress of $2.3 million and $4.8 million, respectively.
Interest relating to Genzyme's 6 3/4% convertible subordinated notes was $1.7
million and $3.4 million, equal to the amount incurred in the same periods in
1994. The Company also incurred interest expense for the three and six months
ended June 30, 1995 of $0.4 million and $0.8 million, respectively, related to
a $21.5 million mortgage note issued in the second quarter of 1994, $0.1
million and $0.2 million, respectively, related to a deferred liability
established to acquire the remaining shares of a Swiss company acquired, in
part, in July 1994 and the remainder related to interest on capitalized leases.
The tax provision for the quarter ended June 30, 1995 varies from the
U.S. Statutory tax rate because of the provision for state income taxes, losses
of subsidiaries which generate no current tax benefit, tax credits and taxes on
foreign earnings. The effective tax rate was 37% for the three and six months
ended June 30, 1995 as compared to 36% for the corresponding period in 1994. The
increase was due primarily to the expiration of the Orphan Drug Credit.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1995, Genzyme had cash, cash equivalents and investments
in marketable securities totaling $102.6 million, a decrease of $50.9 from
December 31, 1994. The Company repaid a $39.0 million term loan in January
1995. In the six months ended June 30, 1995, Genzyme spent $25.7 million on
increased manufacturing
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<PAGE> 11
capacity and invested an additional $4.0 million in GTC, an unconsolidated
affiliate. These expenditures were financed partially by operations, $10.0
million, and by the issuance of common stock through exercises of stock options
and warrants, $7.1 million.
As of June 30, 1995, the Company had accounts receivable of $81.2 million,
an increase of $3.1 million from December 31, 1994, due primarily to increased
sales. Inventories increased $5.1 million, or 14%, to $42.0 million as of June
30, 1995 as compared to December 31, 1994. The increase was due primarily to
improved Ceredase[R] yields and management's efforts to build Ceredase[R]
inventories, support of increased business operations and, in part, to exchange
rate fluctuations.
In January 1995, the Company renewed its commitment to continue funding,
until March 1, 1996, the development of the HAL# products on behalf of the
Surgical Aids Partnership whose available funds were fully expended in the
first
quarter of 1994.
The Company is required to allocate up to $30 million in cash from the
General Division during specified periods through June 1998 to fund GTR's
operations, unless additional funds are raised from the sale of Tissue Repair
Division Common Stock to outside investors or unless the cash balance of the
General Division falls below $60 million. If the cash balance of the General
Division is between $60 million and $90 million, the Funding Commitment will be
reduced on a pro rata basis. The General Division's cash balance at June 30,
1995 was $86.4 million.
-11-
<PAGE> 12
<TABLE>
GENZYME GENERAL DIVISION
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
(DOLLARS IN THOUSANDS) JUNE 30, JUNE 30,
---------------------------------------------------------------------------------------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Net product sales................................ $74,054 $57,510 $142,325 $110,985
Net service sale................................. 11,801 13,079 24,265 27,007
Revenues from research and development contracts:
Related parties............................... 6,497 4,405 12,823 9,983
Other......................................... 6 384 104 685
------- ------- -------- --------
92,358 75,378 179,517 148,660
Operating costs and expenses:
Cost of products sold............................ 29,963 22,180 55,369 40,825
Cost of services sold............................ 7,826 8,308 15,777 17,017
Selling, general and administrative.............. 23,361 20,240 47,600 42,533
Research and development (including research
and development related to contracts).......... 14,148 12,185 27,797 24,461
------- ------- -------- --------
75,298 62,913 146,543 124,836
------- ------- -------- --------
Operating income................................... 17,060 12,465 32,974 23,824
Other income and (expenses)
Minority interest in net loss of subsidiaries.... 501 304 866 617
Equity in net loss of unconsolidated affiliate... (793) - (1,742) -
Investment income................................ 1,035 2,038 2,481 5,776
Interest expense................................. (173) (407) (220) (843)
------- ------- -------- --------
570 1,935 1,385 5,550
------- ------- -------- --------
Income before income taxes......................... 17,630 14,400 34,359 29,374
Provision for income taxes......................... (6,698) (5,290) (13,056) (10,672)
------- ------- -------- --------
Net income......................................... 10,932 9,110 21,303 18,702
Allocated tax benefit generated by
Tissue Repair Division........................... 2,035 512 3,662 797
------- ------- -------- --------
Net income attributable to Genzyme
General Division Stock........................... $12,967 $ 9,622 $ 24,965 $ 19,499
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, condensed,
combined financial statements.
-12-
<PAGE> 13
<TABLE>
GENZYME GENERAL DIVISION
CONDENSED COMBINED STATEMENTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) JUNE 30, JUNE 30,
--------------------------------------------------------------------------------------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income attributable to Genzyme
General Division Stock........................... $12,967 $ 9,622 $24,965 $19,499
======= ======= ======= =======
Income per General Division Common and
common equivalent share:
Net income (1).................................. $0.46 $0.37 $0.89 $0.75
======= ======= ======= =======
Average shares outstanding...................... 28,318 25,930 28,105 25,988
======= ======= ======= =======
Income per General Division Common Share
assuming full dilution:
Net income (1)................................. $0.43 $0.35 $0.83 $0.70
======= ======= ======= =======
Average fully diluted shares outstanding........ 30,323 27,821 30,235 27,879
======= ======= ======= =======
<FN>
(1) Pro forma for 1994.
</TABLE>
The accompanying notes are an integral part of these unaudited, condensed,
combined, financial statements.
-13-
<PAGE> 14
<TABLE>
GENZYME GENERAL DIVISION
COMBINED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS), JUNE 30, DECEMBER 31,
----------------------------------------------------------------------------------------
1995 1994
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.............................. $ 26,286 $ 46,549
Short-term investments................................. 4,051 7,155
Accounts receivable, less allowance
for doubtful accounts.............................. 80,243 76,641
Inventories............................................ 41,876 36,764
Prepaid expenses and other current assets.............. 11,747 10,790
Due from Genzyme Tissue Repair Division................ 826 171
Deferred tax assets - current.......................... 4,072 4,072
-------- --------
Total current assets.............................. 169,101 182,142
Property, plant and equipment, net....................... 314,360 295,346
Other Assets:
Long-term investments.................................. 56,031 74,948
Note receivable - related party........................ 1,429 3,572
Intangibles, net of accumulated amortization........... 27,412 29,303
Deferred tax assets - noncurrent....................... 28,473 28,473
Other noncurrent assets................................ 23,748 16,360
-------- --------
137,093 152,656
-------- --------
$620,554 $630,144
======== ========
LIABILITIES AND DIVISION EQUITY
Current Liabilities:
Accounts payable....................................... $ 9,807 $ 20,859
Accrued expenses....................................... 31,884 27,766
Income taxes payable................................... 1,359 6,523
Deferred revenue....................................... 2,601 2,604
Current portion of long-term debt and
capital lease obligations........................... 630 41,076
-------- --------
Total current liabilities......................... 46,281 98,828
Noncurrent Liabilities:
Long-term debt and capital lease obligations........... 128,302 126,555
Other noncurrent liabilities........................... 8,031 6,800
-------- --------
136,333 133,355
Minority interest in subsidiaries........................ 1,554 2,310
Division equity.......................................... 436,386 395,651
-------- --------
$620,554 $630,144
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, condensed,
combined financial statements.
-14-
<PAGE> 15
<TABLE>
GENZYME GENERAL DIVISION
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS) SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------------------------
1995 1994
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income......................................... $ 24,965 $ 19,499
Reconciliation of net income to net
cash from operating activities:
Depreciation and amortization................... 11,282 8,240
Provision for bad debts......................... 3,699 2,483
(Gain)/loss on sale of investments.............. 110 (1,591)
Loss on disposal of fixed assets................ 32 -
Accrued interest/amortization on bonds.......... 613 (2,795)
Minority interest in net loss of subsidiaries... (866) (616)
Equity in net loss of unconsolidated affiliate.. 1,742 -
Other........................................... 1,173 11
Decrease in cash from working capital:
Accounts receivable........................... (4,854) (9,550)
Inventories................................... (4,149) (7,524)
Prepaid expenses and other current assets..... (806) (696)
Accounts payable, accrued expenses
and deferred revenue......................... (13,350) (4,258)
Due from Genzyme Tissue Repair Division....... (655) -
-------- ---------
Net cash from operating activities............ 18,936 3,203
INVESTING ACTIVITIES:
Investment in unconsolidated affiliate............. (4,000) -
Loans to related parties........................... (1,857) -
Purchases of investments........................... (11,070) (219,636)
Sales and maturities of investments................ 37,831 246,723
Property, plant and equipment...................... (25,516) (68,940)
Other noncurrent assets............................ (549) 2,901
-------- ---------
Net cash from investing activities............ (5,161) (38,952)
-------- ---------
FINANCING ACTIVITIES:
Issuance of General Division Common Stock.......... 6,461 2,581
Issuance of common stock by subsidiary............. 260 -
Issuance of debt................................... 77 21,614
Payments of debt and capital lease obligations..... (39,181) (388)
Net cash to Genzyme................................ - 28
-------- ---------
Net cash from financing activities........... (32,383) 23,835
Effect of exchange rate changes on cash.............. (1,655) (700)
-------- ---------
Decrease in cash and cash equivalents................ (20,263) (12,614)
Cash and cash equivalents, beginning of period.... 46,549 22,975
-------- ---------
Cash and cash equivalents, end of period............. $ 26,286 $ 10,361
======== =========
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest........................................ $ 5,173 $ 4,444
Income taxes.................................... 14,405 7,050
</TABLE>
Supplemental Disclosure of Non-Cash Transactions:
Additional investment in unconsolidated affiliate -- Note 6
The accompanying notes are an integral part of these unaudited, condensed,
combined financial statements.
-15-
<PAGE> 16
GENZYME GENERAL DIVISION
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
1. Basis of Presentation:
----------------------
These unaudited condensed combined financial statements should be read
in conjunction with the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994 and the financial statements and footnotes for
Genzyme General Division included therein. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the Securities and Exchange Commission rules and regulations.
Certain items in the 1994 financial statements have been reclassified to
conform with the 1995 presentation.
The financial statements for the three and six months ended June 30,
1995 and 1994 are unaudited but include, in the Division's opinion, all
adjustments (consisting only of normally recurring accruals) necessary for a
fair presentation of the results for the periods presented.
2. Accounting Policies:
--------------------
The accounting policies underlying the quarterly financial statements
are those set forth in Note A of the General Division's financial statements
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1994.
3. Investments:
------------
As of June 30, 1995, the General Division's investment portfolio,
consisting primarily of debt securities classified as available for sale,
was adjusted to its market value. As a result, gross unrealized holding
gains of approximately $5,000 and gross unrealized holding losses totaling
approximately $549,000 were recorded in a separate component of Division
equity.
As of June 30, 1995, the carrying values of the General Division's
investments in Argus Pharmaceuticals, Inc., Celtrix Pharmaceuticals, Inc.
and Univax Biologics, Inc., included in Other noncurrent assets in the
unaudited, condensed, combined balance sheets, were adjusted to their
respective market values. Gross unrealized holding gains of approximately
$414,000 and gross unrealized holding losses of approximately $1,714,000
were recorded in a separate component of Division equity.
<TABLE>
4. Inventories:
------------
<CAPTION>
June 30, 1995 December 31, 1994
------------- -----------------
<S> <C> <C>
Raw Materials............ $10,292,000 $14,517,000
Work-in-process.......... 14,343,000 9,226,000
Finished products........ 17,241,000 13,021,000
----------- -----------
$41,876,000 $36,764,000
=========== ===========
</TABLE>
5. Provision for Income Taxes:
---------------------------
The tax provision for the quarter ended June 30, 1995 varies from the
U.S. statutory tax rate because of the provision for state income taxes,
losses of subsidiaries which generate no current tax benefit, tax credits
and taxes on foreign earnings. The effective tax rate was 38% for the three
and six months ended June 30, 1995 as compared to 37% and 36%, respectively,
for the corresponding periods in 1994. The increase was due primarily to
the expiration of the Orphan Drug Credit effective December 31, 1994. The
allocated tax benefit of $2.0 million generated by GTR reduced the General
Division's tax rate to 26% and 27%, respectively, for the quarter and six
months ended June 30, 1995.
-16-
<PAGE> 17
6. Additional Investments in Unconsolidated Affiliate:
---------------------------------------------------
In June 1995, the General Division converted approximately $4.0 million
of Genzyme Transgenics Corporation ("GTC") debt into equity through the
acquisition of 1.3 million shares of GTC common stock. The transaction
increased the General Division's interest in GTC to 49%.
On July 3, 1995, GTC acquired Biodevelopment Laboratories, Inc. ("BDL").
As part of the transaction, the General Division issued approximately 34,000
shares of General Division Common Stock to former stockholders of BDL in
exchange for approximately 475,000 shares of newly issued GTC stock. In
total, GTC issued approximately 1,207,000 shares in the transaction,
resulting in a decrease in the Division's interest in GTC to 48.2%.
Also as part of the BDL transaction, the Company guaranteed a $7,500,000
line of credit to GTC from a commercial bank in return for warrants to
purchase 145,000 shares of GTC stock.
-17-
<PAGE> 18
GENZYME GENERAL DIVISION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1995
The following discussion is a summary of the key factors management
considers necessary in reviewing the General Division's results of operations,
liquidity and capital resources. This discussion should be read in conjunction
with the financial statements and related notes of Genzyme.
RESULTS OF OPERATIONS
Revenue
-------
Total revenues for the three and six months ended June 30, 1995 were $92.4
million and $179.5 million, respectively, compared to $75.4 million and $148.7
million, respectively, for the corresponding periods in 1994. Product and
service revenues were $85.9 million and $166.6 million, respectively, an
increase of 22% and 21%, respectively, over the same periods in 1994. Product
revenues increased 29% to $74.1 million for the second quarter, and 28% to
$142.3 million for the six months ended June 30, 1995, reflecting sales
increases in the Therapeutic, Diagnostic Product, and Pharmaceutical/Fine
Chemical ("PFC") businesses of 26%, 26% and 78%, respectively for the second
quarter and 28%, 20% and 53%, respectively, for the six months ended June 30,
1995. The increase in sales of Therapeutic products resulted primarily from
increased shipments of Ceredase[R] enzyme, for which the rate of new patient
accruals more than offset dosage reductions, and the market introduction, in the
second quarter of 1994, of Cerezyme[TM] enzyme, the recombinant form of
Ceredase[R] enzyme. The increase in Diagnostic Product sales resulted from
sales increases across most product lines including a doubling in revenues from
sales of Direct LDL tests. The increase in PFC sales resulted from the
operations of a Swiss company acquired in July 1994. Service revenues for the
second quarter and six months ended June 30, 1995 declined 10% to $11,801 and
$24,265, respectively, resulting primarily from the divestiture of two small
genetic diagnostic laboratories and a decline in identity testing revenues.
International sales represented approximately 41% and 42%, respectively,
of product sales for the second quarter and six months ended June 30, 1995
compared with approximately 34% for the second quarter and six months ended June
30, 1994. The increase was due primarily to increases of 56% and 62%,
respectively, for the quarter and six months ended June 30, 1995 in the combined
international sales of Ceredase[R]/Cerezyme[TM] enzyme as well as favorable
exchange rates.
Revenues from research and development contracts for the three and six
months ended June 30, 1995 were $6.5 million and $12.9 million, respectively, an
increase of 36% and 21%, respectively, from the corresponding periods in 1994.
Revenues from Neozyme II increased 49% to $6.0 million for the second quarter of
1995 due primarily to increased activity relating to collaborations with third
parties. For the six months ended June 30, 1995 revenues from Neozyme II
increased 40% to $11.7 million. In the first quarter of 1994, the Surgical Aids
Partnership provided revenues to the General Division of $0.9 million thereby
exhausting the funds it had available for the funding of the HAL[TM] products.
In the first six months of 1994, consolidation of the operations of Genzyme
Transgenics Corporation ("GTC") provided $1.3 million of reported revenues from
research and development contracts. Beginning in the fourth quarter of 1994,
the Division accounts for GTC using the equity method of accounting and,
accordingly, no longer reports GTC's revenue from research and development
contracts.
-18-
<PAGE> 19
Margins and Operating Expenses
------------------------------
Total gross margin for the three and six months ended June 30, 1995 was
56% and 57%, respectively, compared to 57% and 58%, respectively for the
corresponding periods in 1994. The General Division provides a broad range of
health care products and services, resulting in a range of gross margins
depending on the particular market conditions of each product or service.
Product margins for the three and six months ended June 30, 1995 declined to
60% and 61%, respectively, from 61% and 63%, respectively, for the same periods
in 1994 due primarily to lower margins on Ceredase[R] enzyme as a result of the
higher cost of purchased material beginning in the second quarter of 1994 which
was not fully offset a price increase in the first quarter of 1994. Service
margins for the three and six months ended June 30, 1995 decreased to 34% and
35%, respectively, from 36% and 37%, respectively, due to high fixed costs
associated with identity testing which experienced a decline in revenues
relative to the same periods in 1994.
Selling, general and administrative expenses for the three and six
months ended June 30, 1995 were $23.4 million and $47.6 million, respectively,
compared to $20.2 million and $42.5 million for the same periods in 1994. The
increase was due primarily to increased staffing in support of the growth in
several product lines and to the ongoing expenses associated with operations
acquired or established in 1994. As a percentage of total revenues, selling,
general and administrative expenses for the six months ended June 30, 1995 were
25% and 27%, respectively, compared to 27% and 29%, respectively, for the
corresponding periods in 1994.
Research and development expenses for the three and six months ended
June 30, 1995 were $14.1 million and $27.8 million, respectively, compared to
$12.2 million and $24.5 million, respectively, for the same periods in 1994 due
to increased efforts on behalf of Neozyme II and increased spending on internal
programs.
Other Income and Expenses
-------------------------
Investment income for the quarter and six months ended June 30, 1995
totaled $1.0 million and $2.5 million, respectively, compared with $2.0 million
and $5.8 million, respectively, for the same periods in 1994. Investment
income for the three and six months ended June 30, 1995 includes losses on the
sales of securities of approximately $85,000 and $24,000, respectively, as
compared to gains of $1.5 million and $1.6 million, respectively, on the sales
of securities for the corresponding period in 1994. Excluding the effect of
these realized gains and losses, investment income for the six months ended
June 30, 1995 decreased 40% due to lower average cash and investment balances.
Interest expense for the quarter and six months ended June 30, 1995 was
$173,000 and $220,000, respectively, net of capitalized interest on
construction in progress of $2.3 million and $4.8 million, respectively.
Interest relating to Genzyme's 6 3/4% convertible subordinated notes was $1.7
million and $3.4 million, equal to the amount incurred in the same periods in
1994. The General Division also incurred interest expense for the three and
six months ended June 30, 1995 of $0.4 million and $0.8 million, respectively,
related to a $21.5 million mortgage note issued in the second quarter of 1994,
$0.1 million and $0.2 million, respectively, related to a deferred liability
established to acquire the remaining shares of a Swiss company acquired, in
part, in July 1994 and the remainder related to interest on capitalized leases.
The tax provision for the quarter and six months ended June 30, 1995
varies from the U.S. Statutory tax rate because of the provision for state
income taxes, losses of subsidiaries which generate no current tax benefit, tax
credits and taxes on foreign earnings. The effective tax rate was 38% for the
three and six months ended June 30, 1995 as compared to 37% and 36% for the
corresponding periods in 1994. The increase was due primarily to the
expiration of the Orphan Drug Credit. The allocated tax benefit of $2.0
million generated by GTR reduced the General
-19-
<PAGE> 20
Division's tax rate to 26% and 27%, respectively, for the quarter and six
months ended June 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1995, the General Division had cash, cash equivalents
and investments in marketable securities totaling $86.4 million, a decrease of
$42.3 from December 31, 1994. The General Division repaid a $39.0 million term
loan in January 1995. In the six months ended June 30, 1995, the General
Division spent $25.5 million on increased manufacturing capacity and invested
an additional $4.0 million in GTC, an unconsolidated affiliate. These
expenditures were financed primarily by operations, $18.9 million, and by the
issuance of common stock through exercises of stock options and warrants, $6.7
million.
As of June 30, 1995, the General Division had accounts receivable of
$80.2 million, an increase of $3.6 million from December 31, 1994, due
primarily to increased sales. Inventories increased $5.1 million, or 14%, to
$41.9 million as of June 30, 1995 as compared to December 31, 1994. The
increase was due primarily to improved Ceredase[R] yields and management's
efforts to build Ceredase[R] inventories, support of increased business
operations and, in part, to exchange rate fluctuations.
In January 1995, the General Division renewed its commitment to continue
funding, until March 1, 1996, the development of the HAL# products on behalf of
the Surgical Aids Partnership whose available funds were fully expended in the
first quarter of 1994.
-20-
<PAGE> 21
<TABLE>
GENZYME TISSUE REPAIR DIVISION
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) JUNE 30, JUNE 30,
---------------------------------------------------------------------------------------------------
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Revenues:
Net product sales.............................. $ 1,247 $ - $ 2,277 $ -
Operating costs and expenses:
Cost of products sold.......................... 880 - 1,605 -
Selling, general and administrative............ 2,541 226 4,293 389
Research and development....................... 3,115 903 5,929 1,555
------- ------- ------- -------
6,536 1,129 11,827 1,944
------- ------- ------- -------
Operating loss................................... (5,289) (1,129) (9,550) (1,944)
Investment income................................ 262 - 581 -
------- ------- ------- -------
Net loss......................................... $(5,027) $(1,129) $(8,969) $(1,944)
======= ======= ======= =======
Per Tissue Repair Division Common share:
Net loss....................................... $(0.57) $(0.34) $(1.03) $(0.59)
======= ======= ======= =======
Average shares outstanding..................... 8,763 3,292 8,721 3,287
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited, condensed,
combined financial statements.
-21-
<PAGE> 22
<TABLE>
GENZYME TISSUE REPAIR DIVISION
COMBINED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS) JUNE 30, DECEMBER 31,
-----------------------------------------------------------------------------
1995 1994
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................... $ 5,262 $16,993
Short-term investments.............................. 9,004 5,918
Accounts receivable, less allowance
for doubtful accounts............................ 995 1,486
Inventories......................................... 110 76
Prepaid expenses and other current assets........... 188 284
------- -------
Total current assets............................ 15,559 24,757
Property, plant and equipment, net................... 1,302 1,456
Other Assets:
Long-term investments............................... 1,974 1,897
Other noncurrent assets............................. 317 325
------- -------
2,291 2,222
------- -------
$19,152 $28,435
======= =======
LIABILITIES AND DIVISION EQUITY
Current Liabilities:
Accounts payable.................................... $ 776 $ 528
Accrued expenses.................................... 1,584 3,220
Payable to Genzyme General Division................. 826 171
Current portion of capital lease obligations........ 297 281
------- -------
Total current liabilities....................... 3,483 4,200
Noncurrent Liabilities:
Capital lease obligations........................... 19 174
Other noncurrent liabilities........................ 728 748
------- -------
747 922
Division equity....................................... 14,922 23,313
------- -------
$19,152 $28,435
======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited, condensed,
combined financial statements.
-22-
<PAGE> 23
<TABLE>
GENZYME TISSUE REPAIR DIVISION
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS) SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------------
1995 1994
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.............................................. $ (8,969) $(1,944)
Reconciliation of net loss to net
cash from operating activities:
Depreciation and amortization..................... 313 -
Accrued interest/amortization on bonds.......... (99) -
Increase (decrease) in cash from working capital:
Accounts receivable............................. 491 -
Inventories..................................... (34) -
Prepaid expenses and other current assets....... 96 -
Accounts payable, accrued expenses
and deferred revenue........................... (1,388) -
Due to Genzyme General Division................. 655 -
-------- -------
Net cash from operating activities.............. (8,935) (1,944)
INVESTING ACTIVITIES:
Purchases of investments............................. (10,957) -
Sales and maturities of investments.................. 8,087 -
Property, plant and equipment........................ (159) -
Other noncurrent assets.............................. 8 -
-------- -------
Net cash from investing activities.............. (3,021) -
FINANCING ACTIVITIES:
Issuance of TR Stock................................. 385 -
Payments of capital lease obligations................ (139) -
Net cash from Genzyme................................ - 1,944
Other................................................ (21) -
Net cash from financing activities.............. 225 1,944
-------- -------
Increase (decrease) in cash and cash
equivalents........................................... (11,731) -
Cash and cash equivalents, beginning of period......... 16,993 -
-------- -------
Cash and cash equivalents, end of period............... $ 5,262 $ -
======== =======
Supplemental Cash Flow Information:
Cash paid during the period for interest ............ $ 24 $ -
</TABLE>
The accompanying notes are an integral part of these unaudited, condensed,
combined financial statements.
-23-
<PAGE> 24
GENZYME TISSUE REPAIR DIVISION
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
1. Basis of Presentation:
----------------------
These unaudited condensed combined financial statements should be read
in conjunction with the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994 and the financial statements and footnotes for
Genzyme Tissue Repair Division ("GTR") included therein. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the Securities and
Exchange Commission rules and regulations. Certain items in the 1994
financial statements have been reclassified to conform with the 1995
presentation.
The financial statements for the three and six months ended June 30,
1995 and 1994 are unaudited but include, in GTR's opinion, all adjustments
(consisting only of normally recurring accruals) necessary for a fair
presentation of the results for the periods presented.
2. Accounting Policies:
--------------------
The accounting policies underlying the quarterly financial statements
are those set forth in Note A of GTR's financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1994.
3. Investments:
------------
As of June 30, 1995, GTR's investment portfolio, consisting primarily of
debt securities classified as available for sale, was adjusted to its market
value. As a result, gross unrealized holding losses totaling approximately
$62,000 were recorded in a separate component of Division equity.
<TABLE>
4. Inventories:
------------
<CAPTION>
June 30, 1995 December 31, 1994
------------- -----------------
<S> <C> <C>
Raw Materials.............. $ 79,000 $55,000
Work-in-process............ 31,000 21,000
$110,000 $76,000
</TABLE>
-24-
<PAGE> 25
GENZYME TISSUE REPAIR DIVISION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1995
The following discussion is a summary of the key factors management
considers necessary in reviewing GTR's results of operations, liquidity and
capital resources. This discussion should be read in conjunction with the
financial statements and related notes of Genzyme.
RESULTS OF OPERATIONS
Revenue
-------
Product revenues for the three and six months ended June 30, 1995 were
$1,247,000 and $2,277,000, respectively. Product revenues related solely to the
operations of BioSurface Technology, Inc., ("BioSurface") acquired in the fourth
quarter of 1994. Revenues consisted primarily of sales of EpicelSM skin grafts
which are dependent upon numerous factors, many of which are not in GTR's
control. As a result, GTR expects sales of EpicelSM skin grafts to fluctuate
from period to period. Revenues also included $40,000 and $50,000,
respectively, for the three and six months ended June 30, 1995 from the sales of
CarticelSM Service, GTR's cartilage repair service, which commenced in the first
quarter of 1995.
Margins and Operating Expenses
------------------------------
Gross margins for the quarter and six months ended June 30, 1995 were
29% and 30%, respectively. GTR incurs direct selling, general and
administrative expenses as well as a selling, general and administrative charge,
based on actual amounts incurred, from the General Division for selling, general
and administrative work performed by the General Division on behalf of GTR.
Selling, general and administrative expenses for the three and six months ended
June 30, 1995 were $2,541,000 and $4,293,000, respectively, compared to $226,000
and $389,000, respectively, for the corresponding periods in 1994. The increase
was due to increased support of GTR research and development by the General
Division and to the acquisition of BioSurface.
GTR incurs direct research and development expenses as well as a charge
for research and development work performed by the General Division on behalf of
GTR. Research and development expenses for the quarter and six months ended
June 30, 1995 were $3,115,000 and $5,929,000, respectively, compared to $903,000
and $1,555,000, respectively for the corresponding periods in 1994. Research
and development expenses related to the operations of BioSurface were $1,732,000
and $3,490,000, respectively, for the quarter and six months ended June 30,
1995. Excluding the effect of BioSurface, research and development expenses
increased 53% and 57%, respectively, for the quarter and six months ended June
30, 1995 due primarily to increased outside clinical trials and manufacturing
support related to the Vianain" programs.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1995, GTR had approximately $16.2 million of cash, cash
equivalents and investments in marketable securities, a decrease of $8.6 million
from December 31, 1994. The decrease was due to GTR's net loss and an increase
in working capital requirements which were funded by additional amounts payable
to the General Division and proceeds from the issuance of stock pursuant to
stock option and stock purchase plans.
-25-
<PAGE> 26
GTR anticipates that available funds plus revenues generated from the
CarticelSM Service and from sales of EpicelSM skin grafts will be sufficient to
fund GTR's operations through the end of 1995. In addition, Genzyme is required
to allocate up to $30 million in cash from the General Division during specified
periods through June 1998, unless additional funds are raised from the sale of
Tissue Repair Division Common Stock to outside investors or unless the cash
balance of the General Division falls below $60 million. If the cash balance of
the General Division is between $60 million and $90 million, the Funding
Commitment will be reduced on a pro rata basis. The General Division's cash
balance at June 30, 1995 was $86.4 million. Significant additional funds will
be required to complete commercialization and clinical testing of GTR's
products.
-26-
<PAGE> 27
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, JUNE 30, 1995
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for Genzyme, the General Division and the
Tissue Repair Division on the pages listed in the Index on Page 2 of
this report.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on Thursday,
May 18, 1995. The following represents the results of the voting on
proposals submitted to a vote of the stockholders at such meeting:
a. Proposal to elect directors: Douglas A. Berthiaume, by a vote
of 26,565,399 votes in favor and 318,355 votes withheld, and Henry
E. Blair, by a vote of 26,681,284 votes in favor and 202,470 votes
withheld, were re-elected as directors of the Company. There were
no abstentions or broker non-votes.
<TABLE>
b. Proposal to amend the Company's 1990 Equity Incentive Plan to
increase the number of shares of General Division Common Stock
covered by the Plan to 7,600,000.
<CAPTION>
Number of Number of Number of Votes Number of
Votes For Votes Against Abstaining Broker Non-Votes
--------- ------------- --------------- ----------------
<S> <C> <C> <C>
18,039,172 6,981,905 152,610 435,299
</TABLE>
<TABLE>
c. Proposal to amend the Company's 1990 Equity Incentive Plan to
limit the number of shares subject to options or stock
appreciation rights that may be granted under the Plan to any
individual within any fiscal year to 200,000 shares of General
Division Common Stock and 300,000 shares of Tissue Repair Division
Common Stock.
<CAPTION>
Number of Number of Number of Votes Number of
Votes For Votes Against Abstaining Broker Non-Votes
--------- ------------- --------------- ----------------
<S> <C> <C> <C>
24,527,597 314,277 157,071 620,262
</TABLE>
<TABLE>
d. Proposal to amend the Company's 1990 Equity Incentive Plan to
prohibit the granting of nonstatutory options at any price below
the fair market value of the underlying stock on the date of the
grant.
<CAPTION>
Number of Number of Number of Votes Number of
Votes For Votes Against Abstaining Broker Non-Votes
--------- ------------- --------------- ----------------
<S> <C> <C> <C>
23,722,017 208,175 139,539 620,262
</TABLE>
<TABLE>
e. Proposal to amend the Company's 1990 Equity Incentive Plan to
increase the number of shares of Tissue Repair Division Common
Stock covered by the Plan to 600,000.
<CAPTION>
Number of Number of Number of Votes Number of
Votes For Votes Against Abstaining Broker Non-Votes
--------- ------------- --------------- ----------------
<S> <C> <C> <C>
21,750,472 3,072,796 168,843 620,262
</TABLE>
-27-
<PAGE> 28
ITEM 5. OTHER INFORMATION
(a) Other Developments
In April 1995, the U.S. Food and Drug Administration
("FDA") contacted GTR and asked for more information regarding
the regulatory status of the CarticelSM Service. In order to
clarify the situation, GTR filed a formal request in May 1995
with the FDA Commissioner's office to review the situation and
determine appropriate regulatory jurisdiction. The FDA was
provided with information regarding GTR's quality standards and
the policies that GTR established for the CarticelSM Service, as
well as answers to specific technical questions. The FDA
responded to GTR's request for designation in July 1995,
confirming in its response GTR's belief that a formal
regulatory framework appropriate to the CarticelSM Service
had not yet been established. Furthermore, the FDA informed
GTR that it intended to hold a public hearing to explore the
public health impact of and consider appropriate regulatory
controls for autologous cell implants. The FDA also
informed GTR that it would not regulate the provision of the
CarticelSM and EpicelSM Services prior to the hearing and
development of regulations, and would allow GTR sufficient time
to comply with any new regulations that may be promulgated. The
FDA has subsequently announced that the public hearing will take
place in November 1995 to gather information on the subject of
autologous cells for structural and reconstructive purposes as a
starting point for the development of new regulations.
(b) Acticel[TM] Wound Dressings
Acticel[TM] wound dressings are "living bandages"
composed of three-dimensional sheets of living epidermal tissue
grown in the laboratory from donor cells and attached to
synthetic dressing materials. Acticel[TM] wound dressings
provide a covering to the wound, act as a barrier to
infectious agents and prevent desiccation of the tissue. In
August 1995, GTR completed an interim analysis of data obtained
from the first 77 patients in its clinical trial of Acticel[TM]
wound dressings as a treatment for partial thickness burns.
Although the results from treatment of the second half of this
patient group, which followed a clinical investigators' meeting
to discuss patient selection and use of the product, were at a
level sufficient to meet the stated trial objectives, it did
not appear that data for the entire trial would be sufficient
to support a filing of an application for marketing approval.
Based on this analysis, together with concerns as to
the commercial potential of the current product concept, and in
order to focus GTR's near-term efforts on the introduction of
the Carticel[SM] Service, GTR has elected to discontinue patient
enrollment in the trial. GTR has also determined that it will
undertake a review of the product design and commercial
potential of Acticel[TM] prior to initiation of future clinical
studies.
-28-
<PAGE> 29
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, JUNE 30, 1995
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Computation of weighted average shares used in computing
earnings per share amounts. Filed herewith.
(b) Reports on Form 8-K
None.
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENZYME CORPORATION
DATE: August 11, 1995 By: /s/David J. McLachlan
---------------------------
David J. McLachlan
Duly Authorized Officer and
Chief Financial Officer
-29-
<PAGE> 30
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, JUNE 30, 1995
<TABLE>
EXHIBIT INDEX
<CAPTION>
Exhibit
No. Description Page No.
------- ----------- --------
<S> <C> <C>
11 Computation of weighted average shares used in
computing earnings per share amounts. Filed herewith. 32
</TABLE>
-30-
<PAGE> 1
EXHIBIT 11
-31-
<PAGE> 2
<TABLE>
EXHIBIT 11 - COMPUTATION OF WEIGHTED AVERAGE SHARES
USED IN COMPUTING INCOME PER SHARE AMOUNTS
(Unaudited, in thousands)
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------
JUNE 30, 1995 JUNE 30, 1994
------------------------- ------------------------
COMMON COMMON
AND COMMON ASSUMING AND COMMON ASSUMING
EQUIVALENT FULL EQUIVALENT FULL
SHARE DILUTION SHARE DILUTION
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
APPLICABLE TO GENERAL DIVISION STOCK:
Common stock outstanding, beginning of period.............. 26,596 26,596 24,343 24,343
Weighted average common stock issued during the period..... 62 126 22 22
Weighted average common stock assuming
exercise of options....................................... 1,032 1,056 488 488
Weighted average common stock assuming
exercise of warrants...................................... 628 654 1,077 1,077
Weighted average common stock assuming conversion of
6 3/4% Convertible Subordinated Notes..................... (A) 1,891 (A) 1,891
------ ------ ------ ------
Weighted average number of shares outstanding.............. 28,318 30,323 25,930 27,821
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------------------------------------
JUNE 30, 1995 JUNE 30, 1994
------------------------- ------------------------
COMMON COMMON
AND COMMON ASSUMING AND COMMON ASSUMING
EQUIVALENT FULL EQUIVALENT FULL
SHARE DILUTION SHARE DILUTION
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
APPLICABLE TO GENERAL DIVISION STOCK:
Common stock outstanding, beginning of period............... 26,447 26,447 24,292 24,292
Weighted average common stock issued during the period...... 127 257 45 45
Weighted average common stock assuming
exercise of options........................................ 955 1,034 509 509
Weighted average common stock assuming
exercise of warrants....................................... 576 606 1,142 1,142
Weighted average common stock assuming conversion of
6 3/4% Convertible Subordinated Notes...................... (A) 1,891 (A) 1,891
------ ------ ------ ------
Weighted average number of shares outstanding............... 28,105 30,235 25,988 27,879
====== ====== ====== ======
<FN>
(A) These securities are "other potentially dilutive" securities which effect is included, to the extent such effect is
dilutive, in the determination of weighted average shares assuming full dilution.
</TABLE>
<PAGE> 3
<TABLE>
EXHIBIT 11 - COMPUTATION OF WEIGHTED AVERAGE SHARES
USED IN COMPUTING INCOME PER SHARE AMOUNTS (CONTINUED)
(Unaudited, in thousands)
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------
JUNE 30, 1995 JUNE 30, 1994
------------------------- ------------------------
COMMON COMMON
AND COMMON ASSUMING AND COMMON ASSUMING
EQUIVALENT FULL EQUIVALENT FULL
SHARE DILUTION SHARE DILUTION
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
APPLICABLE TO TR STOCK:
Common stock outstanding, beginning of period............. 8,753 3,286
Weighted average common stock issued during the period.... 10 6
Weighted average common stock assuming
exercise of options...................................... (B) (B)
Weighted average common stock assuming
exercise of warrants..................................... (B) (B)
Weighted average common stock assuming conversion of
6 3/4% Convertible Subordinated Notes.................... (A) (A)
------ ------
Weighted average number of shares outstanding............. 8,763 3,292
====== ======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------------------------------------
JUNE 30, 1995 JUNE 30, 1994
------------------------- ------------------------
COMMON COMMON
AND COMMON ASSUMING AND COMMON ASSUMING
EQUIVALENT FULL EQUIVALENT FULL
SHARE DILUTION SHARE DILUTION
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
APPLICABLE TO TR STOCK:
Common stock outstanding, beginning of period............... 8,675 3,279
Weighted average common stock issued during the period...... 46 8
Weighted average common stock assuming
exercise of options........................................ (B) (B)
Weighted average common stock assuming
exercise of warrants....................................... (B) (B)
Weighted average common stock assuming conversion of
6 3/4% Convertible Subordinated Notes...................... (A) (A)
------ ------
Weighted average number of shares outstanding............... 8,721 3,287
====== ======
<FN>
(A) These securities are "other potentially dilutive" securities which effect is included, to the extent such effect is
dilutive, in the determination of weighted average shares assuming full dilution.
(B) The effect of assumed conversion is antidilutive.
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF GENZYME CORPORATION GENERAL
DIVISION FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<EXCHANGE-RATE> 1
<CASH> 26,286
<SECURITIES> 4,051
<RECEIVABLES> 86,143
<ALLOWANCES> 5,900
<INVENTORY> 41,876
<CURRENT-ASSETS> 169,101
<PP&E> 373,630
<DEPRECIATION> 59,270
<TOTAL-ASSETS> 620,554
<CURRENT-LIABILITIES> 46,281
<BONDS> 128,932
<COMMON> 267
0
0
<OTHER-SE> 436,119
<TOTAL-LIABILITY-AND-EQUITY> 620,554
<SALES> 166,590
<TOTAL-REVENUES> 179,517
<CGS> 71,146
<TOTAL-COSTS> 142,844
<OTHER-EXPENSES> 1,742
<LOSS-PROVISION> 3,699
<INTEREST-EXPENSE> 220
<INCOME-PRETAX> 34,359
<INCOME-TAX> 9,394
<INCOME-CONTINUING> 24,965
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,965
<EPS-PRIMARY> .89
<EPS-DILUTED> .83
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF GENZYME CORPORATION TISSUE REPAIR
DIVISION FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<EXCHANGE-RATE> 1
<CASH> 5,262
<SECURITIES> 9,004
<RECEIVABLES> 1,393
<ALLOWANCES> 398
<INVENTORY> 110
<CURRENT-ASSETS> 15,559
<PP&E> 1,642
<DEPRECIATION> 340
<TOTAL-ASSETS> 19,152
<CURRENT-LIABILITIES> 3,483
<BONDS> 316
<COMMON> 88
0
0
<OTHER-SE> 14,834
<TOTAL-LIABILITY-AND-EQUITY> 19,152
<SALES> 2,277
<TOTAL-REVENUES> 2,277
<CGS> 1,605
<TOTAL-COSTS> 11,827
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24
<INCOME-PRETAX> (8,969)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,969)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,969)
<EPS-PRIMARY> (1.03)
<EPS-DILUTED> 0
</TABLE>
