<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
--------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to _______________
Commission file number 0-14680
----------------------------------------------
GENZYME CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 06-1047163
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Kendall Square, Cambridge, Massachusetts 02139
- --------------------------------------------------------------------------------
(Address of principal executive offices) (zip code)
(617) 252-7500
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of each of the issuer's classes of common stock
as of April 30, 1998:
Series
------
Genzyme General Division Common Stock
("GGD Stock") 78,456,119
Genzyme Tissue Repair Division Common Stock
("GTR Stock") 20,150,026
Genzyme Molecular Oncology Division Common Stock
("GMO Stock") 3,928,572
<PAGE> 2
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, MARCH 31, 1998
NOTE REGARDING FORWARD-LOOKING STATEMENTS:
This report on Form 10-Q for Genzyme Corporation ("Genzyme" or the "Company")
contains forward-looking statements concerning, among other things, the
Company's future revenues, operations and expenditures. All such forward-looking
statements are necessarily only estimates of future results and the actual
results may differ materially from these projections due to a number of factors,
including (i) the Company's ability to successfully complete preclinical and
clinical development and obtain timely regulatory approval and patent and other
proprietary rights protection of its products and services, (ii) the content and
timing of decisions made by the U.S. Food and Drug Administration (the "FDA")
regarding the indications for which the Company's products may be approved,
(iii) the accuracy of the Company's estimates of the size and characteristics of
markets to be addressed by the Company's products and services, (iv) market
acceptance of the Company's products and services, (v) the Company's ability to
obtain reimbursement for its products from third-party payers, where
appropriate, (vi) the accuracy of the Company's information concerning the
products and resources of competitors and potential competitors and (vii) the
risks and uncertainties described under the heading "Factors Affecting Future
Operating Results" in the sections entitled (a) "Management's Discussion and
Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and
Results of Operations" and "Management's Discussion and Analysis of Genzyme
General's Financial Condition and Results of Operations" in the Genzyme
General Annual Report for the fiscal year ended December 31, 1997 (the "1997
Genzyme General Annual Report"), (b) "Management's Discussion and Analysis of
Genzyme Tissue Repair's Financial Condition and Results of Operations" in
the Genzyme Tissue Repair Annual Report for the fiscal year ended December 31,
1997 (the "1997 GTR Annual Report") and (c) "Management's Discussion and
Analysis of Genzyme Molecular Oncology's Financial Condition and Results of
Operations" in the Genzyme Molecular Oncology Annual Report for the fiscal
year ended December 31, 1997 (the "1997 GMO Annual Report"). The 1997 Genzyme
General Annual Report, the 1997 GTR Annual Report and the 1997 GMO Annual
Report were filed as Exhibits 13.1, 13.2 and 13.3, respectively, to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997, as amended on Form 10-K/A (the "1997 Genzyme 10-K/A").
2
<PAGE> 3
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, MARCH 31, 1998
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
ITEM 1. Financial Statements
GENZYME GENERAL
Unaudited, Combined Balance Sheets as of March 31, 1998 and December 31, 1997.................................. 4
Unaudited, Combined Statements of Operations for the Three Months Ended March 31, 1998 and 1997................ 5
Unaudited, Combined Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997................ 6
Notes to Unaudited, Combined Financial Statements.............................................................. 7
GENZYME TISSUE REPAIR
Unaudited, Combined Balance Sheets as of March 31, 1998 and December 31, 1997.................................. 9
Unaudited, Combined Statements of Operations for the Three Months Ended March 31, 1998 and 1997................ 10
Unaudited, Combined Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997................ 11
Notes to Unaudited, Combined Financial Statements.............................................................. 12
GENZYME MOLECULAR ONCOLOGY
Unaudited, Combined Balance Sheets as of March 31, 1998 and December 31, 1997.................................. 13
Unaudited, Combined Statements of Operations for the Three Months Ended March 31, 1998 and 1997................ 14
Unaudited, Combined Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997................ 15
Notes to Unaudited, Combined Financial Statements.............................................................. 16
GENZYME CORPORATION AND SUBSIDIARIES
Unaudited, Consolidated Balance Sheets as of March 31, 1998 and December 31, 1997.............................. 17
Unaudited, Consolidated Statements of Operations for the Three Months Ended March 31, 1998 and 1997........... 18
Unaudited, Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997............ 20
Notes to Unaudited, Consolidated Financial Statements.......................................................... 21
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 25
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.................................................. 31
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K ........................................................................... 31
Signatures........................................................................................................... 32
</TABLE>
3
<PAGE> 4
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GENZYME GENERAL
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
(UNAUDITED, AMOUNTS IN THOUSANDS) 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 83,465 $ 66,276
Short-term investments .................................................. 37,111 35,294
Accounts receivable, net ................................................ 120,109 116,056
Inventories ............................................................. 133,115 137,708
Prepaid expenses and other current assets ............................... 21,143 15,941
Due from Genzyme Molecular Oncology ..................................... 5,173 5,434
Due from Genzyme Tissue Repair .......................................... 1,484 1,213
Deferred tax assets - current ........................................... 27,959 27,601
---------- ----------
Total current assets ................................................ 429,559 405,523
Property, plant and equipment, net ....................................... 366,101 365,337
Long-term investments .................................................... 99,336 91,627
Notes receivable - related parties ....................................... 2,621 4,601
Intangibles, net ......................................................... 246,600 243,071
Deferred tax assets - noncurrent ......................................... 36,029 35,988
Investments in equity securities ......................................... 31,531 30,047
Other .................................................................... 26,592 26,862
---------- ----------
Total assets ........................................................ $1,238,369 $1,203,056
========== ==========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable ........................................................ $ 16,975 $ 18,409
Accrued expenses ........................................................ 59,644 66,865
Income taxes payable .................................................... 18,647 11,157
Deferred revenue - related parties and unaffiliated entities ............ 366 217
Current portion of long-term debt and capital lease obligations ......... 2,099 887
---------- ----------
Total current liabilities ........................................... 97,731 97,535
Noncurrent liabilities:
Long-term debt and capital lease obligations ............................ 117,233 117,978
Other ................................................................... 6,694 6,667
---------- ----------
Total liabilities ................................................... 221,658 222,180
Division equity .......................................................... 1,016,711 980,876
---------- ----------
Total liabilities and division equity ............................... $1,238,369 $1,203,056
========== ==========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
4
<PAGE> 5
GENZYME GENERAL
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997
- ----------------------------------------------------------------- ----------------------------------
<S> <C> <C>
Revenues:
Net product sales ............................................. $139,370 $128,156
Net service sales ............................................. 13,700 14,756
Revenues from research and development contracts .............. 1,053 1,694
-------- --------
Total revenues ............................................ 154,123 144,606
Operating costs and expenses:
Cost of products sold ......................................... 46,350 46,512
Cost of services sold ......................................... 8,127 9,316
Selling, general and administrative ........................... 45,111 40,872
Research and development ...................................... 16,163 17,324
Amortization of intangibles ................................... 3,199 3,196
-------- --------
Total operating costs and expenses ........................ 118,950 117,220
-------- --------
Operating income ................................................ 35,173 27,386
Other income (expenses):
Equity in net loss of unconsolidated affiliates ............... (4,296) (70)
Investment income ............................................. 2,920 2,318
Interest expense .............................................. (1,990) (2,281)
-------- --------
Total other income (expenses) ............................. (3,366) (33)
-------- --------
Income before income taxes ...................................... 31,807 27,353
Provision for income taxes ...................................... (12,510) (10,626)
-------- --------
Net income ...................................................... 19,297 16,727
Tax benefit allocated from Genzyme Molecular Oncology ........... 1,235 -
Tax benefit allocated from Genzyme Tissue Repair ................ 4,406 4,511
-------- --------
Net income ...................................................... $ 24,938 $ 21,238
======== ========
Per Genzyme General common share:
Net income per Genzyme General common share - basic ............ $ 0.32 $ 0.28
======== ========
Weighted average shares outstanding ............................. 78,760 75,648
======== ========
Net income per Genzyme General common and common
equivalent share - diluted ................................... $ 0.31 $ 0.27
======== ========
Adjusted weighted average shares outstanding .................... 81,200 78,237
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
5
<PAGE> 6
GENZYME GENERAL
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
(UNAUDITED, AMOUNTS IN THOUSANDS) MARCH 31,
- --------------------------------------------------------------------------------------------------------
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ............................................................ $19,297 $ 16,727
Reconciliation of net income to net cash provided by operating
activities:
Depreciation and amortization ....................................... 13,798 9,324
Non-cash compensation expense ....................................... 20 159
Accrued interest/amortization on bonds .............................. (108) 651
Provision for bad debts and inventory ............................... 1,494 2,045
Equity in net loss of unconsolidated affiliates, net ................ 4,296 70
Other ............................................................... 113 286
Increase (decrease) in cash from working capital changes:
Accounts receivable ............................................... (6,417) (6,913)
Inventories ....................................................... 4,574 (5,961)
Prepaid expenses and other current assets ......................... (5,277) (2,837)
Accounts payable, accrued expenses, income taxes payable and
deferred revenue ................................................. 5,634 1,983
Due from Genzyme Tissue Repair .................................... (271) 112
Due from Genzyme Molecular Oncology ............................... 261 -
------- ---------
Net cash provided by operating activities ......................... 37,414 15,646
INVESTING ACTIVITIES:
Purchases of investments .............................................. (39,547) (25,425)
Sales and maturities of investments ................................... 30,071 44,502
Acquisitions of property, plant and equipment .......................... (11,831) (4,184)
Sale of equipment ..................................................... 584 -
Investment in unconsolidated affiliates ............................... (4,093) -
Acquisitions, net of acquired cash and assumed liabilities ............ (6,190) -
Repayment of loans by related parties.................................. 2,019 -
Other ................................................................. (444) (2,189)
------- ---------
Net cash provided (used) by investing activities .................. (29,431) 12,704
FINANCING ACTIVITIES:
Proceeds from issuance of common stock ................................ 10,356 91,824
Proceeds from issuance of debt ........................................ 666 -
Payments of debt and capital lease obligations ........................ (452) (104,510)
Net cash allocated to Genzyme Tissue Repair ........................... 76 (1,802)
Other ................................................................. (381) -
------- ---------
Net cash provided (used) by financing activities .................. 10,265 (14,488)
Effect of exchange rate changes on cash ................................. (1,059) (2,837)
------- ---------
Increase in cash and cash equivalents ................................... 17,189 11,025
Cash and cash equivalents at beginning of period ........................ 66,276 77,220
------- ---------
Cash and cash equivalents at end of period .............................. $83,465 $ 88,245
======= =========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
6
<PAGE> 7
GENZYME GENERAL
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
These unaudited, combined financial statements should be read in
conjunction with the 1997 Genzyme 10-K/A and the financial statements and
footnotes for both Genzyme General Division ("Genzyme General") and
Genzyme Corporation and Subsidiaries ("Genzyme" or the "Company")
included therein. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
the rules and regulations of the Securities and Exchange Commission.
Certain items in the 1997 financial statements have been reclassified to
conform with the 1998 presentation.
The financial statements for the three months ended March 31, 1998 and
1997 are unaudited but include, in management's opinion, all adjustments
(consisting only of normally recurring accruals) necessary for a fair
presentation of the results for the periods presented.
2. FINANCIAL INFORMATION
Financial information specific to Genzyme General is presented in these
Genzyme General unaudited, combined financial statements.
Accounting policies and financial information relevant to Genzyme,
Genzyme General, Genzyme Tissue Repair Division ("GTR") and Genzyme
Molecular Oncology Division ("GMO"), collectively, are presented in the
unaudited, consolidated financial statements of Genzyme.
3. NEW ACCOUNTING PRONOUNCEMENTS
For a discussion of new accounting pronouncements, see Note 2., "New
Accounting Pronouncements", to Genzyme Corporation and Subsidiaries'
Unaudited, Consolidated Financial Statements (the "Unaudited,
Consolidated Financial Statements") which is incorporated herein by
reference.
4. INVENTORIES (IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Raw materials................................... $ 53,514 $ 48,149
Work-in-process................................. 28,145 30,264
Finished products............................... 51,456 59,295
-------- --------
$133,115 $137,708
======== ========
</TABLE>
5. REVOLVING CREDIT FACILITY
The disclosures related to amounts borrowed by Genzyme General under
Genzyme's $225.0 million revolving credit facility with a syndicate of
commercial banks (the "Revolving Credit Facility") are included in Note
4., "Revolving Credit Facility", to the Unaudited, Consolidated Financial
Statements which is incorporated herein by reference.
6. PROVISION FOR INCOME TAXES
The tax provisions for the three months ended March 31, 1998 vary from
the U.S. statutory tax rate because of the provision for state income
taxes, the Foreign Sales Corporation, nondeductible amortization of
intangibles, tax credits and Genzyme General's share of the losses of
unconsolidated subsidiaries. The effective tax rate was 39.3% for the
three months ended March 31, 1998, a slight increase over the 38.8%
effective rate for the corresponding period in 1997. For the three
months ended March 31, 1998, tax benefits allocated from GTR and GMO of
$4.4 million and $1.2 million, respectively, reduced Genzyme General's
tax rate to 21.6%. In the three months ended March 31, 1997, tax benefits
allocated from GTR reduced Genzyme General's tax rate to 22.4%.
7
<PAGE> 8
GENZYME GENERAL
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
7. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1998 1997
---- ----
<S> <C> <C>
Genzyme General:
Net income attributable to GGD Stock-basic
and diluted .................................................. $24,938 $21,238
======= =======
Shares used in net income per common share-basic .............. 78,760 75,648
Effect of dilutive securities:
Stock options .............................................. 2,432 2,579
Warrants ................................................... 8 10
------- -------
Dilutive potential common shares .............................. 2,440 2,589
------- -------
Shares used in net income per common share-diluted ............ 81,200 78,237
======= =======
Net income per common share - basic ........................... $ 0.32 $ 0.28
======= =======
Net income per common share - diluted ......................... $ 0.31 $ 0.27
======= =======
</TABLE>
Options to purchase 3,859,733 and 4,093,682 shares of GGD Stock as of
March 31, 1998 and 1997, respectively, were outstanding during the
periods then ended but were not included in the calculation of diluted
income per share for such periods because the options' exercise prices
were greater than the average market price of GGD Stock during those
periods. Warrants to purchase 80,000 shares of GGD Stock exercisable as
of March 31, 1998 were not included in the calculation of diluted income
per share for such period because the exercise price of the warrants was
greater than the average market price of GGD Stock during the period.
8. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for
the reporting and display of comprehensive income and its components.
Components of comprehensive income are net income and all other nonowner
changes in equity such as the change in the cumulative translation
adjustment. SFAS 130 requires that an enterprise: (a) classify items of
other comprehensive income by their nature in a financial statement and
(b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the
equity section of the balance sheet. SFAS 130 is effective for financial
statements issued for periods beginning after December 15, 1997, which
for Genzyme General is the first quarter of 1998. Presentation of
comprehensive income for earlier periods is provided for comparative
purposes. Comprehensive income for the three months ended March 31, 1998
and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1998 1997
<S> <C> <C>
Net income .................................... $24,938 $21,238
Cumulative translation adjustment ............. (698) (8,871)
Unrealized gain (loss) on investments ......... 1,327 (665)
------- -------
Comprehensive income .......................... $25,567 $11,702
======= =======
</TABLE>
8
<PAGE> 9
GENZYME TISSUE REPAIR
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED, AMOUNTS IN THOUSANDS) MARCH 31, DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $10,903 $21,120
Short-term investments......................................................... 10,808 10,795
Accounts receivable, net....................................................... 2,285 2,221
Inventories.................................................................... 2,443 1,973
Prepaid expenses and other current assets...................................... 1,179 732
------- -------
Total current assets......................................................... 27,618 36,841
Property, plant and equipment, net................................................ 18,991 19,524
Other ............................................................................ 403 453
------- -------
Total assets................................................................. $47,012 $56,818
======= =======
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable............................................................... $ 1,659 $ 1,378
Accrued expenses............................................................... 2,454 2,816
Due to Genzyme General......................................................... 1,484 1,213
------- -------
Total current liabilities.................................................... 5,597 5,407
Long-term debt.................................................................... 18,000 18,000
Convertible debenture, net........................................................ 13,211 12,681
Other............................................................................. 490 527
------- -------
Total liabilities............................................................ 37,298 36,615
Division equity................................................................... 9,714 20,203
------- -------
Total liabilities and division equity........................................ $47,012 $56,818
======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
9
<PAGE> 10
GENZYME TISSUE REPAIR
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) THREE MONTHS ENDED MARCH 31,
- --------------------------------------------------------------------------------------------------------
1998 1997
---- ----
<S> <C> <C>
Revenues:
Net service sales .................................................. $ 3,611 $ 1,987
Operating costs and expenses:
Cost of services sold .............................................. 3,234 2,856
Selling, general and administrative ................................ 6,313 6,454
Research and development ........................................... 3,086 2,768
-------- --------
Total operating costs and expenses ............................... 12,633 12,078
-------- --------
Operating loss ........................................................ (9,022) (10,091)
Other income (expenses):
Equity in loss of joint venture .................................... (1,931) (1,589)
Interest income .................................................... 447 186
Interest expense ................................................... (814) (377)
-------- --------
Total other income (expenses) .................................... (2,298) (1,780)
-------- --------
Net loss .............................................................. $(11,320) $(11,871)
======== ========
Basic and diluted net loss per Genzyme Tissue Repair Common Share:
Net loss............................................................ $ (0.57) $ (0.90)
======== ========
Weighted average shares outstanding ................................... 20,002 13,178
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
10
<PAGE> 11
GENZYME TISSUE REPAIR
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED, AMOUNTS IN THOUSANDS) THREE MONTHS ENDED MARCH 31,
- -------------------------------------------------------------------------------------------------------------------
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss .................................................................... $(11,320) $(11,871)
Reconciliation of net loss to net cash used by operating activities:
Depreciation and amortization ............................................. 569 572
Non-cash compensation expense ............................................. 59 38
Provision for bad debt..................................................... 182 42
Accretion of debt conversion feature ...................................... 321 102
Equity in loss of joint venture ........................................... 1,931 1,589
Increase (decrease) in cash from working capital:
Accounts receivable ..................................................... (249) (2)
Inventories ............................................................. (470) 42
Prepaid expenses and other current assets ............................... (447) 105
Accounts payable and accrued expenses ................................... 81 297
Due to Genzyme General .................................................. 271 (112)
-------- --------
Net cash used by operating activities ................................. (9,072) (9,198)
INVESTING ACTIVITIES:
Sales and maturities of investments ......................................... - 318
Investment in joint venture ................................................. (1,888) (1,843)
Acquisitions of property, plant and equipment ............................... (33) (133)
Sales of property, plant and equipment ...................................... 35 202
Other ....................................................................... 6 (613)
-------- --------
Net cash used by investing activities ................................. (1,880) (2,069)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net ................................. 848 118
Proceeds from issuance of convertible debentures ............................ - 13,000
Cash allocated (to) from Genzyme General .................................... (76) 1,802
Other ....................................................................... (37) -
-------- --------
Net cash provided by financing activities ............................. 735 14,920
-------- --------
Increase (decrease) in cash and cash equivalents ............................... (10,217) 3,653
Cash and cash equivalents at beginning of period ............................... 21,120 15,912
-------- --------
Cash and cash equivalents at end of period ..................................... $ 10,903 $ 19,565
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
11
<PAGE> 12
GENZYME TISSUE REPAIR
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
These unaudited, combined financial statements should be read in
conjunction with the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 1997 and the financial statements and
footnotes for both GTR and Genzyme included therein. Certain information
and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission.
The financial statements for the three months ended March 31, 1998 and
1997 are unaudited but include, in management's opinion, all adjustments
(consisting only of normally recurring accruals) necessary for a fair
presentation of the results for the periods presented.
2. FINANCIAL INFORMATION
Financial information specific to GTR is presented in these GTR
unaudited, combined financial statements. Accounting policies and
financial information relevant to Genzyme, Genzyme General, GTR and GMO,
collectively, are presented in the Unaudited, Consolidated Financial
Statements of Genzyme.
3. NEW ACCOUNTING PRONOUNCEMENTS
For a discussion of new accounting pronouncements, see Note 2., "New
Accounting Pronouncements", to the Unaudited, Consolidated Financial
Statements which is incorporated herein by reference.
4. INVENTORIES
(In thousands)
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Raw materials............................................... $ 445 $ 243
Work-in-process............................................. 1,998 1,730
------ ------
$2,443 $1,973
====== ======
</TABLE>
5. REVOLVING CREDIT FACILITY
The disclosures related to amounts borrowed by GTR under Genzyme's
Revolving Credit Facility are included in Note 4., "Revolving Credit
Facility", to the Unaudited, Consolidated Financial Statements which
is incorporated herein by reference.
6. NET INCOME (LOSS) PER SHARE
Note 6., "Net Income (Loss) per Share", to the Unaudited, Consolidated
Financial Statements is incorporated herein by reference.
7. COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components. Components of comprehensive
income are net income and all other nonowner changes in equity such as
the change in the cumulative translation adjustment. SFAS 130 requires
that an enterprise: (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings
and additional paid-in capital in the equity section of a balance sheet.
SFAS 130 is effective for financial statements issued for periods
beginning after December 15, 1997 which for GTR is the first quarter of
1998. Presentation of comprehensive income for earlier periods provided
for comparative purposes is required. Comprehensive loss for GTR for the
three months ended March 31, 1998 and 1997 is the same as GTR's net loss.
12
<PAGE> 13
GENZYME MOLECULAR ONCOLOGY
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
(UNAUDITED, AMOUNTS IN THOUSANDS) 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................ $ 6,851 $15,010
Short-term investments ............................................... 6,708 5,170
Other ................................................................ 504 688
------- -------
Total current assets ............................................. 14,063 20,868
Equipment, net .......................................................... 444 487
Long-term investments ................................................... - 1,049
Intangibles, net ........................................................ 27,169 30,688
Investment in joint venture ............................................. 294 574
Other ................................................................... 188 135
------- -------
Total assets ..................................................... $42,158 $53,801
======= =======
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accrued expenses ..................................................... $ 2,086 $ 2,015
Due to Genzyme General ............................................... 5,173 5,434
Deferred revenue ..................................................... 1,353 1,583
Other ................................................................ 18 18
------- -------
Total current liabilities ........................................ 8,630 9,050
Noncurrent liabilities:
Long-term debt ....................................................... - 5,000
Convertible debentures, net .......................................... 18,074 17,024
Note payable to Genzyme General ...................................... 2,621 2,582
Deferred tax liability ............................................... 5,847 6,509
Other ................................................................ 27 170
------- -------
Total liabilities ................................................ 35,199 40,335
Division equity ......................................................... 6,959 13,466
------- -------
Total liabilities and division equity ............................ $42,158 $53,801
======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
13
<PAGE> 14
GENZYME MOLECULAR ONCOLOGY
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Service sales ................................................................. $ 933 $ -
Revenues from research and development contracts .............................. 1,350 -
Revenues from research and development contracts - related party .............. 534 -
------- ------
Total revenues ............................................................ 2,817 -
Operating costs and expenses:
Cost of services sold ......................................................... 469 -
Cost of research and development revenue ...................................... 267 -
Cost of research and development revenue - related party ...................... 485 -
Selling, general and administrative ........................................... 1,152 109
Research and development ...................................................... 3,295 518
Amortization of intangibles ................................................... 3,025 -
------- ------
Total operating costs and expenses ........................................ 8,693 627
------- ------
Operating loss ................................................................... (5,876) (627)
Other income (expenses):
Equity in loss of joint venture ............................................... (444) -
Interest income ............................................................... 280 -
Interest expense .............................................................. (1,162) -
------- ------
Total other income (expenses) ............................................. (1,326) -
------- ------
Loss before income taxes ......................................................... (7,202) (627)
Tax benefit ...................................................................... 662 -
------- ------
Net loss ......................................................................... $(6,540) $ (627)
======= ======
Basic and diluted net loss per Genzyme Molecular Oncology common share:
Net loss....................................................................... $ (1.66)
=======
Weighted average shares outstanding............................................... 3,929
=======
Pro forma basic and diluted net loss per Genzyme Molecular Oncology common share:
Pro forma net loss ............................................................ $(0.16)
======
Pro forma shares outstanding ..................................................... 3,929
======
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
14
<PAGE> 15
GENZYME MOLECULAR ONCOLOGY
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
(UNAUDITED, AMOUNTS IN THOUSANDS) MARCH 31,
- --------------------------------------------------------------------------------------------------------------
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ................................................................. $(6,540) $(627)
Reconciliation of net loss to net cash used
by operating activities:
Depreciation and amortization ...................................... 3,607 -
Deferred income tax benefit ........................................ (662) -
Accretion of debt conversion feature ............................... 706 -
Equity in loss of joint venture .................................... 444 -
Accrued interest/amortization of marketable securities ............. (94) -
Non-cash compensation expense ...................................... 28 -
Increase (decrease) in cash from working capital changes:
Other current assets ............................................. 184 -
Accrued expenses and deferred revenue ............................ 16 -
Due to Genzyme General ........................................... (261) -
------- -----
Net cash used by operating activities ............................ (2,572) (627)
INVESTING ACTIVITIES:
Purchases of investments ................................................. (1,439) -
Maturities of investments ................................................ 1,049 -
Acquisitions of equipment ................................................ (1) -
Other .................................................................... (53) -
------- -----
Net cash used in investing activities ............................ (444) -
FINANCING ACTIVITIES:
Repayment of debt ........................................................ (5,000) -
Parent company investment, Genzyme General ............................... - 627
Other .................................................................... (143) -
------- -----
Net cash provided (used) by financing activities ................. (5,143) 627
------- -----
Decrease in cash and cash equivalents ....................................... (8,159) -
Cash and cash equivalents at beginning of period ............................ 15,010 -
------- -----
Cash and cash equivalents at end of period .................................. $ 6,851 $ -
======= =====
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
15
<PAGE> 16
GENZYME MOLECULAR ONCOLOGY
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
These unaudited, combined financial statements should be read in
conjunction with the Company's Annual Report on Form 10-K/A for the fiscal
year ended December 31, 1997 and the financial statements and footnotes for
both GMO and Genzyme included therein. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain items in the 1997 financial
statements have been reclassified to conform to the 1998 presentation.
The financial statements for the three months ended March 31, 1998 and 1997
are unaudited but include, in management's opinion, all adjustments
(consisting only of normally recurring accruals) necessary for a fair
presentation of the results for the periods presented.
2. FINANCIAL INFORMATION
Financial information specific to GMO is presented in these GMO
unaudited, combined financial statements. Accounting policies and
financial information relevant to Genzyme, Genzyme General, GTR and GMO,
collectively, are presented in the Unaudited, Consolidated Financial
Statements of Genzyme.
3. NEW ACCOUNTING PRONOUNCEMENTS
For a discussion of new accounting pronouncements see Note 2., "New
Accounting Pronouncements", to the Unaudited, Consolidated
Financial Statements which is incorporated herein by reference.
4. REVOLVING CREDIT FACILITY
In March 1998, GMO repaid the full $5.0 million allocated to it under the
Revolving Credit Facility. See Note 4., "Revolving Credit Facility", to the
Unaudited, Consolidated Financial Statements which is incorporated herein
by reference.
5. NET LOSS PER SHARE
Note 6., "Net Income (Loss) Per Share", to the Unaudited, Consolidated
Financial Statements is incorporated herein by reference.
6. COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components. Components of comprehensive income
are net income and all other nonowner changes in equity such as the change
in the cumulative translation adjustment. SFAS 130 requires that an
enterprise: (a) classify items of other comprehensive income by their
nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a balance sheet. SFAS 130 is
effective for financial statements issued for periods beginning after
December 15, 1997 which for GMO is the first quarter of 1998. Presentation
of comprehensive income for earlier periods is provided for comparative
purposes. Comprehensive loss for the three months ended March
31, 1998 and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1998 1997
---- ----
<S> <C> <C>
Net loss ........................................... $(6,540) $(627)
Unrealized gain on investments ..................... 5 -
------- -----
Comprehensive loss ................................. $(6,535) $(627)
======= =====
</TABLE>
7. SUBSEQUENT EVENT
In April 1998, GMO filed with the Securities and Exchange Commission a
registration statement (which has not yet become effective) on Form S-3
covering the initial public offering of 3,450,000 shares of GMO Stock
(including 450,000 shares issuable upon exercise of the underwriters'
over-allotment option).
16
<PAGE> 17
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED, AMOUNTS IN THOUSANDS) MARCH 31, DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................................................... $ 101,219 $ 102,406
Short-term investments ........................................................ 54,627 51,259
Accounts receivable, net....................................................... 122,394 118,277
Inventories ................................................................... 135,558 139,681
Prepaid expenses and other current assets ..................................... 22,826 17,361
Deferred tax assets - current ................................................. 27,959 27,601
---------- ----------
Total current assets ........................................................ 464,583 456,585
Property, plant and equipment, net ............................................... 385,536 385,348
Long-term investments ............................................................ 99,336 92,676
Note receivable-related party .................................................... - 2,019
Intangibles, net ................................................................. 271,537 271,275
Deferred tax assets - noncurrent, net ............................................ 30,182 29,479
Investments in equity securities ................................................. 31,531 30,047
Other ............................................................................ 27,477 28,024
---------- ----------
Total assets ................................................................ $1,310,182 $1,295,453
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................................. $ 18,634 $ 19,787
Accrued expenses .............................................................. 64,184 71,696
Income taxes payable .......................................................... 18,204 11,168
Deferred revenue .............................................................. 1,719 1,800
Current portion of long-term debt and capital lease obligations ............... 2,117 905
---------- ----------
Total current liabilities ................................................... 104,858 105,356
Long-term debt and capital lease obligations .................................. 135,233 140,978
Convertible debentures, net ................................................... 31,285 29,705
Other ......................................................................... 7,211 7,364
---------- ----------
Total liabilities ........................................................... 278,587 283,403
Stockholders' equity:
Genzyme General Division Common Stock, $.01 par value ......................... 784 777
Genzyme Tissue Repair Division Common Stock, $.01 par value ................... 201 199
Genzyme Molecular Oncology Division Common Stock, $.01 par value .............. 39 39
Treasury Stock - at cost ...................................................... (901) (901)
Additional paid-in capital - Genzyme General .................................. 905,601 895,340
Additional paid-in capital - Genzyme Tissue Repair ............................ 171,259 170,430
Additional paid-in capital - Genzyme Molecular Oncology ....................... 34,545 34,517
Accumulated deficit ........................................................... (68,562) (76,346)
Foreign currency translation adjustments ...................................... (13,147) (12,449)
Unrealized net gains on investments ........................................... 1,776 444
---------- ----------
Total stockholders' equity .................................................. 1,031,595 1,012,050
---------- ----------
Total liabilities and stockholders' equity .................................. $1,310,182 $1,295,453
========== ==========
</TABLE>
The accompanying notes are an integral part of these unaudited, consolidated
financial statements.
17
<PAGE> 18
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Net product sales .............................................. $139,370 $128,156
Net service sales .............................................. 18,244 16,743
Revenues from research and development contracts ............... 2,937 1,694
-------- --------
Total revenues .............................................. 160,551 146,593
Operating costs and expenses:
Cost of products sold .......................................... 46,350 46,512
Cost of services sold .......................................... 11,830 12,172
Selling, general and administrative ............................ 52,576 47,326
Research and development ....................................... 23,296 20,092
Amortization of intangibles .................................... 5,972 3,196
-------- --------
Total operating costs and expenses .......................... 140,024 129,298
-------- --------
Operating income .................................................. 20,527 17,295
Other income (expenses):
Equity in net loss of unconsolidated affiliates ................ (6,671) (1,659)
Investment income .............................................. 3,647 2,504
Interest expense ............................................... (3,966) (2,658)
-------- --------
Total other income (expenses) ............................... (6,990) (1,813)
-------- --------
Income before income taxes ......................................... 13,537 15,482
Provision for income taxes ......................................... (5,753) (6,115)
-------- --------
Net income ......................................................... $ 7,784 $ 9,367
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, consolidated
financial statements.
18
<PAGE> 19
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Attributable to Genzyme General:
Net income .................................................................. $ 19,297 16,727
Tax benefit allocated from Genzyme Molecular Oncology ....................... 1,235 -
Tax benefit allocated from Genzyme Tissue Repair ............................ 4,406 4,511
-------- --------
Net income attributable to GGD Stock ........................................ $ 24,938 $ 21,238
======== ========
Per Genzyme General common share - basic:
Net income ................................................................ $ 0.32 $ 0.28
======== ========
Weighted average shares outstanding ......................................... 78,760 75,648
======== ========
Per Genzyme General common and common equivalent share - diluted:
Net income ................................................................ $ 0.31 $ 0.27
======== ========
Adjusted weighted average shares outstanding ................................ 81,200 78,237
======== ========
Attributable to Genzyme Tissue Repair:
Net loss attributable to GTR Stock .......................................... $(11,320) $(11,871)
======== ========
Basic and diluted net loss per Genzyme Tissue Repair common share:
Net loss .................................................................. $ (0.57) $ (0.90)
======== ========
Weighted average shares outstanding ......................................... 20,002 13,178
======== ========
Attributable to Genzyme Molecular Oncology:
Net loss attributable to GMO Stock .......................................... $ (6,540) $ (627)
======== ========
Basic and diluted net loss per Genzyme Molecular Oncology common share:
Net loss .................................................................. $ (1.66)
========
Weighted average shares outstanding ......................................... 3,929
========
Pro forma basic and diluted net loss per Genzyme Molecular Oncology
common share:
Pro forma net loss ......................................................... $ (0.16)
========
Pro forma weighted average shares outstanding ................................ 3,929
========
</TABLE>
The accompanying notes are an integral part of these unaudited, consolidated
financial statements.
19
<PAGE> 20
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED, AMOUNTS IN THOUSANDS) FOR THE THREE MONTHS ENDED MARCH 31,
- --------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES: 1998 1997
---- ----
<S> <C> <C>
Net income .................................................................. $ 7,784 $ 9,367
Reconciliation of net income to net cash provided by operating activities:
Depreciation and amortization ............................................ 17,722 9,896
Non-cash compensation expense ............................................ 107 197
Accrued interest/amortization on bonds ................................... (202) 651
Provision for bad debts and inventory .................................... 1,676 2,087
Deferred income tax benefit .............................................. (662) -
Equity in net loss of unconsolidated affiliates .......................... 6,671 1,659
Accretion of debt conversion feature ..................................... 1,027 102
Other .................................................................... 113 286
Increase (decrease) in cash from working capital changes:
Accounts receivable ................................................... (6,666) (6,915)
Inventories ........................................................... 4,104 (5,919)
Prepaid expenses and other current assets ............................. (5,540) (2,732)
Accounts payable, accrued expenses, income taxes payable
and deferred revenue ................................................ (364) (2,231)
--------- ---------
Net cash provided by operating activities ............................. 25,770 6,448
INVESTING ACTIVITIES:
Purchases of investments .................................................... (40,986) (25,425)
Sales and maturities of investments ......................................... 31,120 44,820
Acquisitions of property, plant and equipment ............................... (11,865) (4,317)
Sales of property, plant, and equipment ..................................... 619 202
Acquisitions, net of acquired cash and assumed liabilities .................. (6,190) -
Investment in joint venture ................................................. (5,981) (1,843)
Repayment of loans by affiliates ............................................ 2,019 -
Other ....................................................................... (491) (2,802)
--------- ---------
Net cash (used in) provided by investing activities ................... (31,755) 10,635
FINANCING ACTIVITIES:
Proceeds from issuance of common stock ...................................... 11,204 91,942
Proceeds from issuance of debt .............................................. 666 13,000
Payments of debt and capital lease obligations .............................. (5,452) (104,510)
Other ....................................................................... (561) -
--------- ---------
Net cash provided by financing activities ............................. 5,857 432
Effect of exchange rate changes on cash ......................................... (1,059) (2,837)
--------- ---------
Increase (decrease) in cash and cash equivalents ................................ (1,187) 14,678
Cash and cash equivalents at beginning of period ................................ 102,406 93,132
--------- ---------
Cash and cash equivalents at end of period ...................................... $ 101,219 $ 107,810
========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited, consolidated
financial statements.
20
<PAGE> 21
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
These unaudited, consolidated financial statements should be read in
conjunction with the 1997 Genzyme 10-K/A and the financial statements and
footnotes for Genzyme included therein. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain items in the 1997 financial
statements have been reclassified to conform to the 1998 presentation.
The financial statements for the three months ended March 31, 1998 and
1997 are unaudited but include, in management's opinion, all adjustments
(consisting only of normally recurring accruals) necessary for a fair
presentation of the results for the periods presented.
2. NEW ACCOUNTING PRONOUNCEMENTS
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132
is effective for fiscal years beginning after December 15, 1997. Genzyme
has not assessed the impact of SFAS 132 on its financial statement
disclosures.
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants (the "AICPA") issued
Statement of Position 98-1, "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
was issued to address diversity in practice regarding whether and under
what conditions the costs of internal-use software should be
capitalized. Genzyme has not assessed the impact of SOP 98-1 on its
financial statement disclosures.
In April 1998, the Accounting Standards Executive Committee of the
AICPA issued Statement of Position 98-5 "Accounting for the Costs of
Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires all costs of
start-up activities (as defined by SOP 98-5) to be expensed as incurred.
Genzyme has not assessed the impact of SOP 98-5 on its financial
statement disclosures.
3. INVENTORIES (IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Raw materials................................... $ 53,959 $ 48,392
Work-in-process................................. 30,143 31,994
Finished products............................... 51,456 59,295
-------- --------
Total................................ $135,558 $139,681
======== ========
</TABLE>
4. REVOLVING CREDIT FACILITY
Genzyme has a Revolving Credit Facility with a syndicate of commercial
banks administered by Fleet National Bank in the amount of $225.0
million. Amounts drawn under this facility may be allocated to either
Genzyme General, GTR or GMO. In March 1998, GMO repaid the full $5.0
million of borrowings allocated to it under the Revolving Credit
Facility. As of March 31, 1998, the Company had $113.0 million of debt
outstanding under the Revolving Credit Facility, $95.0 million of which
was allocated to Genzyme General and $18.0 million of which was
allocated to GTR.
5. PROVISION FOR INCOME TAXES
The tax provisions for the three months ended March 31, 1998 and 1997
vary from the U.S. statutory tax rate because of the provision for state
income taxes, nondeductible interest, the Foreign Sales Corporation,
nondeductible amortization of intangibles, tax credits and Genzyme's
share of the losses of unconsolidated subsidiaries. The effective tax
rate increased to 42.5% for the three months ended March 31, 1998, from
39.5% for the corresponding period in 1997 due to higher nondeductible
intangible amortization and losses from unconsolidated subsidiaries.
21
<PAGE> 22
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS
6. NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1998 1997
---- ----
<S> <C> <C>
Genzyme General:
Net income attributable to GGD Stock-basic
and diluted ............................................. $24,938 $21,238
======= =======
Shares used in net income per common share-basic ......... 78,760 75,648
Effect of dilutive securities:
Employee and director stock options ................... 2,432 2,579
Warrants .............................................. 8 10
------- -------
Dilutive potential common shares ......................... 2,440 2,589
------- -------
Shares used in net income per common share-diluted ....... 81,200 78,237
======= =======
Net income per common share - basic ...................... $ 0.32 $ 0.28
======= =======
Net income per common share - diluted .................... $ 0.31 $ 0.27
======= =======
</TABLE>
Options to purchase 3,859,733 and 4,093,682 shares of GGD Stock as
of March 31, 1998 and 1997, respectively, were outstanding during
the periods then ended but were not included in the calculation of
Genzyme General's diluted income per share for such periods because
the options' exercise prices were greater than the average market
price of GGD Stock during those periods. Warrants to purchase 80,000
shares of GGD Stock exercisable as of March 31, 1998 were not
included in the calculation of diluted income per share for such
period because the exercise price of the warrants was greater than
the average market price of GGD Stock during the period.
Genzyme Tissue Repair:
Basic net loss per Genzyme Tissue Repair common share is the same as
diluted net loss per Genzyme Tissue Repair common share for the
three months ended March 31, 1998 and 1997, respectively. Certain
securities were not included in the computation of GTR's diluted
earnings per share for the three months ended March 31, 1998 and
1997, respectively because they would have an anti-dilutive effect
due to GTR's net loss for each such period. These securities
include: (i) options to purchase 2,711,188 and 2,495,038 shares,
respectively, of GTR Stock with a price range in both periods of
$3.19 - $25.75 per share; (ii) 833,774 and 1,958,300 shares,
respectively, of GTR Stock which are not outstanding but are
issuable from time to time for the benefit of Genzyme General or its
stockholders ("GTR Designated Shares"); and (iii) 2,577,245 shares
of GTR Stock reserved for issuance upon conversion of a 5%
convertible note due February 27, 2000 (the "GTR Note").
22
<PAGE> 23
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS
6. NET INCOME (LOSS) PER SHARE (CONTINUED)
Genzyme Molecular Oncology:
Historical loss per share information is presented for GMO for the three
months ended March 31, 1998 but is omitted for the three months ended
March 31, 1997 as there were no shares of GMO Stock outstanding prior to
June 18, 1997. Pro forma net loss per share is disclosed for GMO for the
three months ended March 31, 1997. The pro forma shares outstanding
represent the shares issued to effect the merger of PharmaGenics, Inc.
("PharmaGenics") with and into Genzyme in June 1997.
Basic net loss per Genzyme Molecular Oncology common share is the same as
diluted net loss per Genzyme Molecular Oncology common share for the
three months ended March 31, 1998. Pro forma basic net loss per Genzyme
Molecular Oncology common share is the same as pro forma diluted net loss
per share for the three months ended March 31, 1997. Certain securities
were not included in the computation of GMO's diluted and pro forma
diluted earnings per share for the three months ended March 31, 1998 and
1997, respectively, because they would have an anti-dilutive effect due
to GMO's net loss for each such period. These securities include: (i)
options to purchase 870,305 shares of GMO Stock at $7.00 per share; (ii)
warrants to purchase 9,563 shares of GMO Stock at $8.04 per share; (iii)
3,475,915 shares of GMO Stock reserved for issuance upon conversion of a
6% convertible note due August 29, 2002 (the "GMO Debentures"); and (iv)
6,000,000 shares of GMO Stock which are not outstanding but are issuable
for the benefit of Genzyme General or its stockholders ("GMO Designated
Shares").
7. COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components. Components of comprehensive
income are net income and all other nonowner changes in equity such as
the change in the cumulative translation adjustment. SFAS 130 requires
that an enterprise: (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings
and additional paid-in capital in the equity section of a balance sheet.
SFAS 130 is effective for financial statements issued for periods
beginning after December 15, 1997 which for Genzyme is the first quarter
of 1998. Presentation of comprehensive income for earlier periods is
provided for comparative purposes. Comprehensive loss for GTR for the
three months ended March 31, 1998 and 1997 is the same as GTR's net loss.
Comprehensive income (loss) for Genzyme, Genzyme General and GMO for the
three months ended March 31, 1998 and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1998 1997
---- ----
<S> <C> <C>
Genzyme (consolidated):
Net income.......................................... $ 7,784 $ 9,367
Cumulative translation adjustment .................. (698) (8,871)
Unrealized gain (loss) on investments .............. 1,332 (665)
------- -------
Comprehensive income (loss) ........................ $ 8,418 $ (169)
======= =======
Genzyme General:
Net income ......................................... $24,938 $21,238
Cumulative translation adjustment .................. (698) (8,871)
Unrealized gain (loss) on investments .............. 1,327 (665)
------- -------
Comprehensive income ............................... $25,567 $11,702
======= =======
</TABLE>
23
<PAGE> 24
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS
7. COMPREHENSIVE INCOME (CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1998 1997
-------- --------
<S> <C> <C>
Genzyme Molecular Oncology:
Net loss ..................................... $ (6,540) $ (627)
Unrealized gain on investments ............... 5 -
-------- --------
Comprehensive loss ........................... $ (6,535) $ (627)
======== ========
</TABLE>
8. SUBSEQUENT EVENT
GENZYME MOLECULAR ONCOLOGY
In April 1998, GMO filed with the Securities and Exchange Commission a
registration statement (which has not yet become effective) on Form S-3,
covering the initial public offering of 3,450,000 shares of GMO Stock
(including 450,000 shares issuable upon exercise of the underwriters'
over-allotment option).
24
<PAGE> 25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998
The following discussion is a summary of the key factors management considers
relevant to an assessment of the Company's results of operations, liquidity and
capital resources.
GENZYME CORPORATION AND SUBSIDIARIES
Since the operating results of Genzyme and its subsidiaries reflect the combined
operations of Genzyme General, GTR and GMO, this discussion summarizes the key
factors management considers relevant to an assessment of Genzyme's consolidated
results of operations. Detailed discussion and analysis of each division's
results of operations are provided below under separate headings.
RESULTS OF OPERATIONS
GENZYME CORPORATION AND SUBSIDIARIES
REVENUES
Total revenues for the three months ended March 31, 1998 increased 10% to
$160.6 million from $146.6 million in the three months ended March 31,
1997. Product and service revenues increased 9% to $157.6 million for the
three months ended March 31, 1998 as compared to $144.9 million for the
corresponding period of 1997.
Product revenues consist of sales by Genzyme General. Product revenues for
the three months ended March 31, 1998 increased 9% to $139.4 million from
$128.2 million in the comparable period of 1997 due primarily to increased
sales of Cerezyme[R] enzyme. Service revenues consist primarily of genetic
testing services by Genzyme General, sales of GTR's Carticel[TM] autologous
cultured chondrocytes ("Carticel[TM] AuCC") and Epicel[SM] services as
well as sales of GMO's SAGE[TM] differential gene expression technology
("SAGE[TM]") services. For the three months ended March 31, 1998, service
revenues increased 9% to $18.2 million from $16.7 million in the three
months ended March 31, 1997 due primarily to a 120% increase in GTR's sales
of Carticel[TM] AuCC and the addition of sales of GMO's SAGE[TM] services,
offset in part by a 7% reduction in genetic testing service revenue. GMO
added $0.9 million of service revenue in the three months ended March 31,
1998 for which there were no comparable amounts in the three months ended
March 31, 1997.
International sales as a percentage of total product and service sales for
the three months ended March 31, 1998 increased to 41% from 37% for the
three months ended March 31, 1997 due primarily to a 32% increase in
combined international sales of Cerezyme[R] enzyme and Ceredase[R] enzyme
and increased European sales of Carticel[TM] AuCC.
Revenues from research and development contracts are attributable to
Genzyme General and GMO and increased 73% to $2.9 million for the three
months ended March 31, 1998 from $1.7 million in the corresponding period
of 1997. The increase was due primarily to $1.9 million of revenues from
GMO in the three months ended March 31, 1998, for which there were no
comparable amounts in the same period in 1997, offset in part by a decrease
in Genzyme General's research and development revenues.
MARGINS AND OPERATING EXPENSES
Gross margins for the three months ended March 31, 1998 were 63%, compared
to 60% for the three months ended March 31, 1997. Genzyme provides a broad
range of health care products and services, resulting in a range of gross
margins depending on the particular market conditions of each product or
service. Product margins for the three months ended March 31, 1998 were 67%
compared to 64% for the three months ended March 31, 1997. The increase in
product margins in 1998 is primarily due to increased sales volume of
Cerezyme[R] enzyme. Service margins for the three months ended March 31,
1998 were 35% compared to 27% for the three months ended March 31, 1997.
The increase in service margins resulted primarily from the continued
consolidation of facilities and services in genetic testing.
Selling, general and administrative ("SG&A") expenses and amortization of
intangibles for the three months ended March 31, 1998 were $58.5 million
compared to $50.5 million for the three months ended March 31, 1997, an
increase of 16%. The increase was due primarily to increased staffing in
support of the growth in several product lines, and GMO's amortization of
intangibles of $3.0 million for which there was no comparable amount in the
same period of last year.
Research and development expenses for the three months ended March 31, 1998
were $23.3 million compared to $20.1 million for the three months ended
March 31, 1997, an increase of 16%, due primarily to increased spending on
GMO's SAGE[TM] services, gene therapy and drug discovery programs,
partially offset by a decrease in Genzyme General's research and
development spending.
OTHER INCOME AND EXPENSES
Other income and expenses for the three months ended March 31, 1998 was a
net expense of $7.0 million compared to a net expense of $1.8 million in
the three months ended March 31, 1997. The increase is primarily due to
increased losses from unconsolidated affiliates. Equity in net loss of
Genzyme's unconsolidated affiliates increased from $1.7 million for the
three months ended March 31, 1997 to $6.7 million for the three months
ended March 31, 1998. The change is primarily due to (i) increased losses
from Genzyme's 42% owned affiliate, Genzyme Transgenics Corporation
("GTC"), (ii) losses resulting from Genzyme's joint venture with GelTex
Pharmaceuticals, Inc. ("GelTex") for the development and commercialization
of RenaGel[TM] non-absorbed phosphate binder, and (iii) losses resulting
from Genzyme's joint venture with GTC for the development and
commercialization of transgenic recombriant human antithrombin III
("ATIII"). The joint ventures with GelTex and GTC were established after
the quarter ended March 31, 1997.
25
<PAGE> 26
The tax provisions for the three months ended March 31, 1998 and 1997 vary
from the U.S. statutory tax rate because of the provision for state income
taxes, nondeductible interest, nondeductible amortization of intangibles,
Genzyme's share of the losses of unconsolidated affiliates, the Foreign
Sales Corporation and tax credits. The effective tax rate was 42.5% for the
three months ended March 31, 1998, compared to 39.5% in the corresponding
period of last year. The increase in the tax rate was due to higher
nondeductible intangible amortization and losses from unconsolidated
subsidiaries.
GENZYME GENERAL
REVENUES
Total revenues for the three months ended March 31, 1998 increased 7% to
$154.1 million from $144.6 million in the three months ended March 31,
1997. Product and service revenues increased 7% to $153.1 million for the
three months ended March 31, 1998 as compared to $142.9 million for the
corresponding period of 1997.
Product revenues for the three months ended March 31, 1998 increased 9% to
$139.4 million from $128.2 million in the comparable period of 1997. Sales
of Therapeutic products consisted primarily of sales of Cerezyme[R] enzyme
and Ceredase[R] enzyme and totaled $95.6 million for the three months ended
March 31, 1998 as compared to $78.6 million in the corresponding period of
last year, an increase of 22%. The increase was due to strong international
sales and the market launch of Cerezyme[R] enzyme in Japan. Genzyme
General's results of operations are highly dependent on sales of
Cerezyme[R] enzyme and Ceredase[R] enzyme, which together represented 67%
of combined product sales for the three months ended March 31, 1998,
compared to 60% in the corresponding period of last year.
The increase in Cerezyme[R] enzyme and Ceredase[R] enzyme sales was offset,
in part, by decreased sales in the Surgical Products business unit.
Surgical Products' revenues declined 11% to $25.6 million in the three
months ended March 31, 1998 compared to $28.6 million reported in the
corresponding period of last year. The primary reason for this decline was
a milestone payment of $2.0 million recorded last year from Genzyme
General's Japanese marketing partner, Kaken Pharmaceuticals Co., Ltd., for
Seprafilm[R] bioresorbable membrane and no comparable amount was recorded
in 1998.
For the three months ended March 31, 1998, service revenues decreased 7% to
$13.7 million from $14.8 million in the three months ended March 31, 1997
due primarily to a reduction in the Diagnostics business unit's sales of
genetic testing services.
International sales as a percentage of total product and service sales for
the three months ended March 31, 1998 increased to 42% from 37% for the
three months ended March 31, 1997 due primarily to a 32% increase in
combined international sales of Cerezyme[R] enzyme and Ceredase[R] enzyme.
MARGINS AND OPERATING EXPENSES
Gross margins for the three months ended March 31, 1998 were 64%, compared
to 61% in the corresponding period of last year. Genzyme General provides a
broad range of health care products and services, resulting in a range of
gross margins depending on the particular market conditions of each product
or service. Product margins for the three months ended March 31, 1998 were
67% compared to 64% in the corresponding period of last year. The increase
in product margins is primarily due to increased sales volume of
Cerezyme[R] enzyme. Service margins for the three months ended March 31,
1998 were 41% compared to 37% for the corresponding period of last year.
The increase in service margins resulted primarily from the continued
consolidation of facilities and services in genetic testing.
SG&A expenses and amortization of intangibles for the three months ended
March 31, 1998 were $48.3 million compared to $44.1 million for the three
months ended March 31, 1997, an increase of 10%. The increase was due
primarily to increased support of the growth in several product lines.
Research and development expenses for the three months ended March 31, 1998
were $16.2 million compared to $17.3 million for the three months ended
March 31, 1997, a decrease of 7%. The decrease was primarily due to Genzyme
General no longer classifying costs related to the development of ATIII as
research and development expenses. These amounts are now part of equity in
net loss of unconsolidated affiliates due to the formation of the joint
venture with GTC to develop and commercialize ATIII.
OTHER INCOME AND EXPENSES
Other income and expenses for the three months ended March 31, 1998 was a
net expense of $3.4 million compared to a net expense of $33,000 for the
corresponding time period of last year. The increase is primarily due to
increased losses from unconsolidated affiliates. Equity in net loss of
unconsolidated affiliates increased from $70,000 for the three months ended
March 31, 1997 to $4.3 million for the three months ended March 31, 1998.
The change is primarily due to (i) increased losses from GTC, (ii) losses
resulting from Genzyme's joint venture with GelTex, and (iii) losses
resulting from Genzyme's joint venture with GTC. The joint ventures with
GelTex and GTC were established after the quarter ended March 31, 1997.
26
<PAGE> 27
The tax provisions for the three months ended March 31, 1998 and 1997 vary
from the U.S. statutory tax rate because of the provision for state income
taxes, nondeductible interest, nondeductible amortization of intangibles,
Genzyme General's share of the losses of unconsolidated affiliates, the
foreign sales corporation and tax credits. The effective tax rate was 39.3%
for the three months ended March 31, 1998, compared to 38.8% in the
corresponding period of last year. The increase in the tax rate was due to
higher nondeductible intangible amortization and losses from unconsolidated
subsidiaries. For the three months ended March 31, 1998, tax benefits
allocated from GTR and GMO of $4.4 million and $1.2 million, respectively,
reduced Genzyme General's tax rate to 21.6%. In the three months ended
March 31, 1997, tax benefits allocated from GTR reduced Genzyme General's
tax rate to 22.4%.
GENZYME TISSUE REPAIR
REVENUES
Service revenues for the three months ended March 31, 1998 and 1997 were
$3.6 million and $2.0 million, respectively, an increase of 82%. Sales of
Carticel[TM] AuCC were $2.5 million for the three months ended March 31,
1998 as compared to $1.1 million for the comparable period in 1997, an
increase of 120%. The growth in Carticel[TM] AuCC sales is primarily
attributable to increased market penetration and the number of orthopedic
surgeons trained in the technique as well as an increase in reimbursement
and policy coverage by insurance companies following issuance by the FDA of
a biologics license (the "BLA") to GTR in August 1997 for Carticel[TM]
AuCC. Sales of the Epicel[SM] service increased 31% to $1.1 million in the
three months ended March 31, 1998 from $0.9 million in the same period of
1997 due to a slight increase in the number of burn incidents requiring the
service.
MARGINS AND OPERATING EXPENSES
GTR's gross margin for the first quarter of 1998 was 10%, as compared to
the first quarter of 1997 when cost of services sold exceeded revenue by
44%. This improvement in service margins is primarily attributable to the
higher sales volume and efficiencies gained in the manufacturing process.
SG&A expenses were $6.3 million for the three months ended March 31, 1998
as compared to $6.5 million in the comparable period of last year, a
decrease of 2%. The decrease is due to a decrease in expenses related to
the marketing of Carticel[TM] AuCC. GTR incurs direct SG&A charges as well
as an SG&A charge, based on actual amounts incurred, from Genzyme General
for SG&A work performed by Genzyme General on behalf of GTR. In the first
quarter of 1998, $1.6 million of SG&A services were provided by Genzyme
General as compared to $2.4 million in the first quarter of 1997. This
change was due to a decrease in expenses incurred in connection with the
marketing of Carticel[TM] AuCC and the costs incurred in the first quarter
of 1997 related to filing of the BLA for Carticel[TM] AuCC.
Research and development expenses were $3.1 million and $2.8 million for
the three months ended March 31, 1998 and 1997, respectively, an increase
of 11%. The increase was primarily due to spending on Carticel[TM] AuCC. In
the first quarter of 1998, $2.2 million of research and development
services were provided to GTR by Genzyme General, compared to $1.9 million
in the first quarter of 1997.
OTHER INCOME AND EXPENSES
Interest income increased to $0.4 million in the first quarter of 1998 from
$0.2 million in the same period of 1997, due primarily to higher average
cash balances.
Interest expense was $0.8 million and $0.4 million for the three months
ended March 31, 1998 and 1997, respectively. Interest expense increased in
the first quarter of 1998 as a result of interest related to the addition
of $13.0 million of debt from the GTR Note.
On October 1, 1996, Diacrin/Genzyme LLC was established as a joint venture
between GTR and Diacrin, Inc. to develop and commercialize products and
processes using porcine fetal cells for the treatment of Parkinson's
disease and Huntington's disease in humans. Under the terms of the joint
venture agreement, GTR will provide 100% of the initial $10.0 million of
the funding requirements and 75% of the next $40.0 million of funding
requirements for products to be developed by the joint venture. Thereafter,
all costs will be shared equally by the two parties. In the three months
ending March 31, 1998 and 1997, GTR provided $1.9 million and $1.8 million,
respectively, of funding to, and realized a net loss of $1.9 million and
$1.6 million, respectively, from the joint venture. The increased funding
and additional net losses from the joint venture are primarily due to
increased research and development expenses incurred by the joint venture.
GENZYME MOLECULAR ONCOLOGY
REVENUES
GMO recorded $2.8 million of total revenue for the three months ended
March 31, 1998 as compared to no revenue for the corresponding period in
1997 during which GMO was a development stage enterprise. Research and
development revenue of $1.9 million consisted primarily of revenues from
research and development contracts with strategic partners and includes
work performed for the joint venture ("StressGen/Genzyme LLC") with
StressGen Biotechnologies Corporation ("StressGen"). GMO recorded service
revenue of $0.9 million, which consists of sales of SAGE[TM]
27
<PAGE> 28
services. SAGE[TM] is a high-speed, differential gene identification
technology that was acquired upon the merger of PharmaGenics with and into
Genzyme in June 1997.
MARGINS AND OPERATING EXPENSES
GMO's cost of revenues for the first three months of 1998 were $1.2
million. There were no similar amounts in the same period in 1997. Cost of
revenues consisted of work performed related to the development of gene
therapies on behalf of StressGen/Genzyme LLC and pursuant to service
contracts with strategic partners, as well as efforts in the development of
SAGE[TM] services performed in connection with a third party service
contract.
For the three months ended March 31, 1998, GMO incurred $1.2 million of
SG&A expenses, as compared to $0.1 million for the first three months of
1997. The increase is due to increased administrative support corresponding
to the growth of GMO's business in the areas of gene therapy and drug
discovery, as well as legal expenses related to patents.
GMO's research and development costs were $3.3 million compared to $0.5
million for the three months ended March 31, 1998 and 1997, respectively.
The increase in research and development costs relate to increases in
research personnel and related expenses pertaining to GMO's SAGE[TM]
services, gene therapy and drug discovery programs.
GMO's amortization expense of $3.0 million for the three months ended March
31, 1998 was attributable to certain intangible assets acquired in
connection with the PharmaGenics merger. GMO incurred no similar amounts
for the same period of 1997.
OTHER INCOME AND EXPENSES
Interest income and interest expense were $0.3 million and $1.2 million,
respectively, for the three months ended March 31, 1998. There were no
similar amounts for the comparable period in 1997. The interest income
results from higher average cash balances due to the issuance of the GMO
Debentures. The interest expense consists of interest and related
accretion of the conversion feature of the GMO Debentures.
On July 31, 1997, StressGen/Genzyme LLC was established as a joint venture
among Genzyme, StressGen and the Canadian Medical Discoveries Fund to
develop stress gene therapies for the treatment of cancer. GMO recorded an
equity in net loss of the joint venture of $0.4 million for the period
ended March 31, 1998.
GMO recorded a tax benefit of $0.7 million for the three months ended March
31, 1998 from amortization of the deferred tax liability established upon
the acquisition of PharmaGenics.
LIQUIDITY AND CAPITAL RESOURCES
GENZYME CORPORATION AND SUBSIDIARIES
As of March 31, 1998, Genzyme had cash, cash equivalents, and short- and
long-term investments of $255.2 million, an increase of $8.8 million from
December 31, 1997. Operating and financing activities provided $25.8
million and $5.9 million of cash, respectively, investing activities used
$31.8 million and fluctuations in exchange rates caused a reduction in cash
of $1.1 million. In the three months ended March 31, 1998, financing
activities provided $11.2 million of cash proceeds from the exercise of
stock options and $0.7 million from the issuance of debt, and used $5.5
million for the repayment of debt and capital lease obligations. At March
31, 1998, $113.0 million was outstanding under the Revolving Credit
Facility, of which $95.0 million was allocated to Genzyme General and $18.0
million was allocated to GTR. In the three months ended March 31, 1998,
investing activities provided $2.0 million of cash from the repayment of
loans by affiliates. Investing activities used $9.9 million of cash for the
investment portfolio; $11.9 million of cash to finance capital
expenditures; $6.0 million of cash to fund Genzyme's investments in joint
ventures; $6.2 million of cash to fund acquisitions for the Diagnostics
business unit's genetic testing services group and $0.5 million to fund
other noncurrent assets.
GENZYME GENERAL
At March 31, 1998, Genzyme General had cash, cash equivalents, and short-
and long-term investments of $219.9 million compared to $193.2 million at
December 31, 1997, an increase of $26.7 million. Operating and financing
activities provided $37.4 million and $10.3 million of cash, respectively,
investing activities used $29.4 million of cash, and fluctuations in
exchange rates caused a reduction in cash of $1.1 million. In the three
months ended March 31, 1998, financing activities provided $10.4 million of
cash proceeds from the exercise of stock options and $0.7 million from the
issuance of debt, and used $0.5 million for the repayment of debt and
capital lease obligations. In the three months ended March 31, 1998,
investing activities provided $2.0 million of cash from the repayment loans
by affiliates. Investing activities used $9.5 million of cash for the
investment portfolio; $11.8 million to finance capital expenditures; $4.1
million to fund Genzyme General's investments in joint ventures; $6.2
million of cash to fund acquisitions for the Diagnostics business unit's
genetic testing services group and $0.4 million to fund other non current
assets.
28
<PAGE> 29
Management of Genzyme General believes that its available cash,
investments and cash flow from product and service sales will be
sufficient to finance its planned operations and capital requirements for
the foreseeable future. Although Genzyme General currently has substantial
cash resources, it has committed to utilize a portion of its resources for
certain purposes, such as completing the market introduction of
Seprafilm[R] bioresorbable membrane in the United States and Europe and
developing other products on behalf of a joint venture between Genzyme and
Genzyme Development Partners, L.P. ("GDP"), and for making certain
payments to third parties in connection with strategic collaborations.
Genzyme General's cash resources will also be diminished upon repayment of
amounts borrowed, plus accrued interest, under the Revolving Credit
Facility and if Genzyme exercises its option to acquire the partnership
interests in GDP using cash to pay some or all of the exercise price. In
addition to these commitments, Genzyme historically has pursued strategic
acquisitions and collaborations with complementary businesses as
opportunities become available and expects to seek additional acquisitions
and collaborations in the future. Further, to the extent the liabilities
or contingencies of GTR and GMO affect Genzyme's resources or financial
condition, such liabilities or contingencies could affect the financial
condition or results of operations of Genzyme General. As a result of the
foregoing, Genzyme may have to obtain additional financing. There can be
no assurance that such financing will be available on terms reasonably
acceptable to Genzyme, if at all.
GENZYME TISSUE REPAIR
As of March 31, 1998, GTR had cash, cash equivalents and short-term
investments of $21.7 million, a decline of $10.2 million from December 31,
1997. In the three months ended March 31, 1998, GTR used $9.1 million of
cash for operations and $1.9 million for investing activities to fund GTR's
investment in Diacrin/Genzyme LLC. Financing activities provided
$0.7 million of cash which consisted of $0.8 million of cash proceeds from
the exercise of stock options, offset by $0.1 million of cash which was
allocated from GTR to Genzyme General.
29
<PAGE> 30
As of March 31, 1998, $18.0 million of funds allocated to GTR in December
1996 under the Revolving Credit Facility remained outstanding.
Management of GTR believes its available cash and investments will be
sufficient to finance planned operations and capital requirements through
the end of 1998. GTR must raise significant additional capital in order to
continue operations at current levels beyond 1998. GTR's plans to raise
additional capital include the consideration of the sale of additional
equity securities, additional borrowings, strategic alliances with third
parties to fund further development and marketing of Carticel(TM) AuCC and
other business transactions that would generate capital resources to assure
continuation of GTR's operations and research programs. If these
initiatives are not successful, GTR may be required to delay, scale back or
eliminate certain of its programs, or to license third parties to
commercialize technologies or products that GTR would otherwise undertake
itself.
GENZYME MOLECULAR ONCOLOGY
As of March 31, 1998, GMO had cash, cash equivalents and short- and
long-term investments of $13.6 million, a decline of $7.7 million from
December 31, 1997. For the three months ended March 31, 1998, GMO used $2.6
million for operations and $0.4 million for investing activities. In the
period ended March 31, 1998, GMO used $1.4 million for the purchase of
short-term marketable securities, while the maturity of long-term
investments provided $1.0 million of cash. For the period ended March 31,
1998, GMO used $5.1 million of cash for financing activities, $5.0 million
of which was related to the repayment of amounts borrowed under the
Revolving Credit Facility.
In April 1998, GMO filed with the Securities and Exchange Commission a
registration statement (which has not yet become effective) on Form S-3
covering the initial public offering of 3,450,000 shares of GMO Stock
(including 450,000 shares issuable upon exercise of the underwriters'
over-allotment option). Management of GMO currently believes that the
proceeds of this offering, together with existing cash balances, revenues
generated from SAGE[TM] agreements and committed research funding from
collaborators will enable GMO to maintain its current and planned
operations through the end of 1999. Substantial additional funds will be
required to complete development and commercialization of GMO's products
and services (other than SAGE[TM] services). In addition, GMO's cash
requirements may vary materially from those now planned as a result of
numerous factors, including progress of GMO's research and development
programs, achievement of milestones under strategic alliance arrangements,
the ability of GMO to establish and maintain additional strategic alliances
and licensing arrangements, the progress of development efforts of GMO's
strategic partners, competing technological and market developments, the
costs involved in enforcing patent claims and other intellectual property
rights and the cost and timing of regulatory approvals. Insufficient funds
may require GMO to delay, scale back or eliminate certain of its programs
or to license third parties to commercialize technologies or products that
GMO would otherwise undertake itself.
30
<PAGE> 31
NEW ACCOUNTING PRONOUNCEMENTS
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 is
effective for fiscal years beginning after December 15, 1997. Genzyme has
not assessed the impact of SFAS 132 on its financial statement disclosures.
In March 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position 98-1, "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 was
issued to address diversity in practice regarding whether and under what
conditions the costs of internal-use software should be capitalized.
Genzyme has not assessed the impact of SOP 98-1 on its financial
statement disclosures.
In April 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position 98-5 ("SOP 98-5"), "Accounting for the Costs
of Start-Up Activities". SOP 98-5 requires all costs of start-up
activities (as defined by SOP 98-5) to be expensed as incurred. Genzyme
has not assessed the impact of SOP 98-5 on its financial statement
disclosures.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index following this signature page to this
Form 10-Q.
(b) Report on Form 8-K
On January 8, 1998, the Company filed a Current Report on
Form 8-K to announce that it would take pre-tax charges of
$29.2 million in the fourth quarter of 1997, due primarily to
certain strategic changes in Genzyme General's
pharmaceuticals and surgical products business units.
31
<PAGE> 32
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, MARCH 31, 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENZYME CORPORATION
DATE: May 14, 1998 By: /s/ David J. McLachlan
------------------------
David J. McLachlan
Duly Authorized Officer and
Executive Vice President, Finance;
Chief Financial Officer
32
<PAGE> 33
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, MARCH 31, 1998
EXHIBIT INDEX
Exhibit
No. Description Page No.
------- ----------- --------
27.1 Financial Data Schedules for Genzyme for the three
months ended March 31, 1998 (for EDGAR filing
purposes only). Filed herewith.
27.2 Financial Data Schedules for Genzyme for the three
months ended March 31, 1997 (for EDGAR filing
purposes only). Filed herewith.
33
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27.1
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR GENZYME CORPORATION FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND AS OF MARCH 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AS INCLUDED IN THE FORM
10-Q FOR GENZYME CORPORATION DATED MARCH 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 101,219
<SECURITIES> 54,827
<RECEIVABLES> 137,615
<ALLOWANCES> 17,918
<INVENTORY> 135,558
<CURRENT-ASSETS> 464,583
<PP&E> 506,665
<DEPRECIATION> 111,379
<TOTAL-ASSETS> 1,310,182
<CURRENT-LIABILITIES> 104,858
<BONDS> 0
0
0
<COMMON> 1,024
<OTHER-SE> 1,030,571
<TOTAL-LIABILITY-AND-EQUITY> 1,310,182
<SALES> 157,614
<TOTAL-REVENUES> 160,551
<CGS> 46,350
<TOTAL-COSTS> 58,180
<OTHER-EXPENSES> 87,069
<LOSS-PROVISION> 1,446
<INTEREST-EXPENSE> 3,966
<INCOME-PRETAX> 13,537
<INCOME-TAX> 5,753
<INCOME-CONTINUING> 7,784
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,784
<EPS-PRIMARY> 0.27<F1>
<EPS-DILUTED> 0.27<F1>
<FN>
<F1>THE EARNINGS PER SHARE FIGURES PRESENTED ON THIS SCHEDULE REPRESENT EPS DATA
FOR NET INCOME ATTRIBUTABLE TO GENZYME GENERAL DIVISION COMMON STOCK ("GGD
STOCK"). GENZYME CORPORATION REPORTS EARNINGS BASED ON ITS THREE TRACKING
STOCKS, GGD STOCK, GENZYME TISSUE REPAIR COMMON STOCK ("GTR STOCK") AND GENZYME
MOLECULAR ONCOLOGY COMMON STOCK ("GMO STOCK") THEREFORE, CONSOLIDATED EARNINGS
PER SHARE DATA IS NOT APPLICABLE. FOR THE THREE MONTHS ENDED MARCH 31, 1998,
GENZYME GENERAL HAD NET INCOME OF $24,938 AND NET INCOME PER SHARE OF GGD STOCK
- -- BASIC AND DILUTED OF $0.32 AND $0.31, RESPECTIVELY. NET LOSS FOR GTR FOR THE
THREE MONTHS ENDED MARCH 31, 1998 WAS $(11,320) OR $(0.57) PER SHARE OF GTR
STOCK -- BASIC AND DILUTED. NET LOSS FOR GMO FOR THE THREE MONTHS ENDED MARCH
31, 1998 WAS $(6,540) OR $(1.66) PER SHARE OF GMO STOCK -- BASIC AND DILUTED.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27.2
THIS SCHEDULE CONTAINS RESTATED SUMMARY CONSOLIDATED FINANCIAL INFORMATION
EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR GENZYME
CORPORATION AND SUBSIDIARIES FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND AS OF
MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS AS INCLUDED IN THE FORM 10-Q FOR GENZYME CORPORATION DATED MARCH 31,
1997.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 107,810
<SECURITIES> 74,196
<RECEIVABLES> 137,615
<ALLOWANCES> 17,918
<INVENTORY> 129,586
<CURRENT-ASSETS> 432,120
<PP&E> 394,735
<DEPRECIATION> 7,162
<TOTAL-ASSETS> 1,183,073
<CURRENT-LIABILITIES> 109,735
<BONDS> 0
0
0
<COMMON> 890
<OTHER-SE> 907,687
<TOTAL-LIABILITY-AND-EQUITY> 1,183,073
<SALES> 144,899
<TOTAL-REVENUES> 146,593
<CGS> 46,512
<TOTAL-COSTS> 58,684
<OTHER-EXPENSES> 70,863
<LOSS-PROVISION> 1,410
<INTEREST-EXPENSE> 2,658
<INCOME-PRETAX> 15,482
<INCOME-TAX> 6,115
<INCOME-CONTINUING> 9,367
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,367
<EPS-PRIMARY> 0.28<F1>
<EPS-DILUTED> 0.27<F1><F2>
<FN>
<F1>GENZYME CORPORATION HAS TWO CLASSES OF COMMON STOCK-GENZYME GENERAL DIVISION
COMMON STOCK ("GGD STOCK") AND GENZYME TISSUE REPAIR DIVISION COMMON STOCK ("GTR
STOCK"). EARNINGS (LOSS) PER SHARE IS REPORTED SEPARATELY FOR EACH CLASS OF
TRACKING STOCK. CONSOLIDATED EPS IS NOT PRESENTED FOR GENZYME. NET INCOME PER
SHARE FOR GGD STOCK FOR THE THREE MONTHS ENDED MARCH 31, 1997 HAS BEEN RESTATED
TO CONFORM TO SFAS 128. NET INCOME PER SHARE ATTRIBUTABLE TO GGD STOCK FOR THE
THREE MONTHS ENDED MARCH 31, 1997 COMPUTED UNDER THE PROVISIONS OF APB 15 WAS
HISTORICALLY REPORTED AS $0.27 PER SHARE FOR BOTH PRIMARY AND FULLY DILUTED
DPS.
<F2>NET LOSS ATTRIBUTABLE TO GTR STOCK FOR THE THREE MONTHS ENDED MARCH 31,
1997 COMPUTED TO CONFORM TO SFAS 128 IS THE SAME AS NET LOSS PER SHARE OF GTR
STOCK AS COMPUTED UNDER APB 15 AS THE INCLUSION OF CERTAIN POTENTIALLY DILUTIVE
SHARES IN THE DILUTIVE LOSS PER SHARE CALCULATION FOR GTR STOCK WOULD HAVE BEEN
ANTIDILUTIVE. NET LOSS ATTRIBUTABLE TO GTR STOCK FOR THE THREE MONTHS ENDED
MARCH 31, 1997 WAS $(0.90) PER SHARE.
</FN>
</TABLE>
