<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, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________________ to ______________________
Commission file number 0-14680
GENZYME CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts 06-1047163
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Kendall Square, Cambridge, Massachusetts 02139
(Address of principal executive offices) (zip code)
(617) 252-7500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
_____ _____
The number of shares outstanding of each of the issuer's series of common stock
as of April 30, 1999:
Genzyme General Division Common Stock
("GGD Stock") 82,568,892
Genzyme Tissue Repair Division Common Stock
("GTR Stock") 22,369,980
Genzyme Molecular Oncology Division Common Stock
("GMO Stock") 12,677,390
1
<PAGE> 2
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, MARCH 31, 1999
NOTE REGARDING FORWARD-LOOKING STATEMENTS:
This report on Form 10-Q for Genzyme Corporation ("Genzyme" or the "Company")
contains forward-looking statements concerning, among other things, the
Company's expected future revenues, operations and expenditures, and its plans
to create a new division and to transfer the Company's interest in
Diacrin/Genzyme LLC to its General Division ("Genzyme General") from its Tissue
Repair Division ("Genzyme Tissue Repair" or "GTR"). All such forward-looking
statements are necessarily only estimates of future results and the actual
results achieved by the Company may differ materially from these projections due
to a number of factors, including (i) the Company's ability to successfully
complete preclinical and clinical development and obtain timely regulatory
approval and patent and other proprietary rights protection of its products and
services, (ii) the content and timing of decisions made by the U.S. Food and
Drug Administration (the "FDA") and other agencies regarding the indications for
which the Company's products may be approved, (iii) the accuracy of the
Company's estimates of the size and characteristics of markets to be addressed
by the Company's products and services, (iv) market acceptance of the Company's
products and services, (v) the Company's ability to obtain reimbursement for its
products from third-party payers, where appropriate, (vi) the accuracy of the
Company's information concerning the products and resources of competitors and
potential competitors and (vii) the ability of the Company to obtain requisite
corporate approvals concerning the creation of the new division and the transfer
of the interest in Diacrin/Genzyme LLC. See also "Factors Affecting Future
Operating Results" under the headings (x) "Management's Discussion and Analysis
of Genzyme General's Financial Condition and Results of Operations" and
"Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries'
Financial Condition and Results of Operations" in the Genzyme General Annual
Report for the fiscal year ended December 31, 1998 (the "1998 Genzyme General
Annual Report"), (y) "Management's Discussion and Analysis of Genzyme Tissue
Repair's Financial Condition and Results of Operations" in the Genzyme Tissue
Repair Annual Report for the fiscal year ended December 31, 1998 (the "1998 GTR
Annual Report") and (z) "Management's Discussion and Analysis of Genzyme
Molecular Oncology Division's ("Genzyme Molecular Oncology" or "GMO") Financial
Condition and Results of Operations" in the Genzyme Molecular Oncology Annual
Report for the fiscal year ended December 31, 1998 (the "1998 GMO Annual
Report") set forth in Exhibits 13.1, 13.2 and 13.3, respectively, to Genzyme's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (the
"1998 Genzyme 10-K").
2
<PAGE> 3
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, MARCH 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
PAGE NO.
<S> <C>
ITEM 1. Financial Statements
GENZYME GENERAL
Unaudited, Combined Statements of Operations for the Three Months Ended March 31, 1999 and 1998....................... 4
Unaudited, Combined Balance Sheets as of March 31, 1999 and December 31, 1998......................................... 5
Unaudited, Combined Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998....................... 6
Notes to Unaudited, Combined Financial Statements..................................................................... 7
GENZYME TISSUE REPAIR
Unaudited, Combined Statements of Operations for the Three Months Ended March 31, 1999 and 1998....................... 10
Unaudited, Combined Balance Sheets as of March 31, 1999 and December 31, 1998......................................... 11
Unaudited, Combined Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998....................... 12
Notes to Unaudited, Combined Financial Statements..................................................................... 13
GENZYME MOLECULAR ONCOLOGY
Unaudited, Combined Statements of Operations for the Three Months Ended March 31, 1999 and 1998....................... 14
Unaudited, Combined Balance Sheets as of March 31, 1999 and December 31, 1998......................................... 15
Unaudited, Combined Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998....................... 16
Notes to Unaudited, Combined Financial Statements..................................................................... 17
GENZYME CORPORATION AND SUBSIDIARIES
Unaudited, Consolidated Statements of Operations for the Three Months Ended March 31, 1999 and 1998.................. 18
Unaudited, Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998..................................... 20
Unaudited, Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998................... 21
Notes to Unaudited, Consolidated Financial Statements.................................................................. 22
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 25
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.................................................. 33
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K............................................................................ 33
Signatures................................................................................................................. 34
</TABLE>
3
<PAGE> 4
GENZYME GENERAL
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
MARCH 31,
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998
- ----------------------------------------------------------- ----------------------
<S> <C> <C>
Total revenues ........................................... $ 178,119 $ 154,123
Operating costs and expenses:
Cost of products and services sold ................... 52,566 54,477
Selling, general and administrative .................. 51,012 45,111
Research and development ............................. 26,667 18,418
Amortization of intangibles .......................... 3,503 3,199
--------- ---------
Total operating costs and expenses ............. 133,748 121,205
--------- ---------
Operating income ......................................... 44,371 32,918
Other income (expenses):
Equity in net loss of unconsolidated affiliates ...... (7,710) (2,905)
Gain on affiliate sale of stock ...................... 606 --
Minority interest .................................... 866 864
Gain on sale of investment in equity securities....... 1,963 --
Investment income .................................... 7,930 2,920
Interest expense ..................................... (5,050) (1,990)
--------- ---------
Total other income (expenses) ..................... (1,395) (1,111)
--------- ---------
Income before income taxes ............................... 42,976 31,807
Provision for income taxes ............................... (16,391) (12,510)
--------- ---------
Net income ............................................... 26,585 19,297
Tax benefit allocated from Genzyme Tissue Repair ......... 3,962 4,406
Tax benefit allocated from Genzyme Molecular Oncology .... 1,934 1,235
--------- ---------
Net income attributable to GGD Stock ..................... $ 32,481 $ 24,938
========= =========
Per Genzyme General common share:
Net income per Genzyme General common share - basic .... $ 0.40 $ 0.32
========= =========
Weighted average shares outstanding .................... 81,958 78,760
========= =========
Net income per Genzyme General common and common
equivalent share - diluted ........................... $ 0.38 $ 0.31
========= =========
Adjusted weighted average shares outstanding ........... 85,632 81,200
========= =========
Net income ............................................... $ 26,585 $ 19,297
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments ............ (8,826) (698)
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising during the period (2,319) 1,327
Reclassification adjustment for gains (losses)
included in net income .......................... (1,214) --
--------- ---------
Unrealized gains (losses) on securities, net ... (3,533) 1,327
--------- ---------
Other comprehensive income (loss) ..................... (12,359) 629
--------- ---------
Comprehensive income (loss) ........................... $ 14,226 $ 19,926
========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
4
<PAGE> 5
GENZYME GENERAL
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
(UNAUDITED, AMOUNTS IN THOUSANDS) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 61,668 $ 100,012
Short-term investments ........................................ 247,668 174,421
Accounts receivable, net ...................................... 156,461 153,278
Inventories ................................................... 107,910 107,188
Prepaid expenses and other current assets ..................... 31,108 29,659
Due from Genzyme Tissue Repair ................................ 3,994 548
Due from Genzyme Molecular Oncology ........................... 4,526 4,773
Deferred tax assets - current ................................. 39,690 39,725
---------- ----------
Total current assets ....................................... 653,025 609,604
Property, plant and equipment, net ............................... 374,294 378,992
Long-term investments ............................................ 300,985 281,664
Intangibles, net ................................................. 259,934 263,748
Deferred tax assets - noncurrent ................................. 28,245 28,138
Investment in equity securities .................................. 39,305 51,977
Other noncurrent assets .......................................... 33,197 32,184
---------- ----------
$1,688,985 $1,646,307
========== ==========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable .............................................. $ 21,513 $ 26,249
Accrued expenses .............................................. 76,664 70,313
Income taxes payable .......................................... 20,974 16,532
Deferred revenue .............................................. 1,618 1,231
Current portion of long-term debt and capital lease obligations 83,158 82,568
---------- ----------
Total current liabilities ................................... 203,927 196,893
Long-term debt and capital lease obligations ..................... 3,070 3,087
Convertible subordinated notes and debentures .................... 271,813 271,559
Other ............................................................ 8,072 7,701
---------- ----------
Total liabilities ........................................... 486,882 479,240
Division equity .................................................. 1,202,103 1,167,067
---------- ----------
Total liabilities and division equity ........................ $1,688,985 $1,646,307
========== ==========
</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,
- ------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES: 1999 1998
--------- --------
<S> <C> <C>
Net income ............................................................... $ 26,585 $ 19,297
Reconciliation of net income to net cash provided by operating activities:
Depreciation and amortization ......................................... 14,164 13,798
Accrued interest/amortization on bonds ................................ (2,499) (108)
Provision for bad debts and inventory ................................. 2,754 1,494
Equity in net loss of unconsolidated affiliates ....................... 7,710 2,905
Minority interest in net loss of subsidiaries ......................... (866) (864)
Gain on affiliate sale of stock ....................................... (606) --
Gain on sale of investment in equity securities ....................... (1,963) --
Other ................................................................. (410) 133
Increase (decrease) in cash from working capital changes:
Accounts receivable ................................................ (7,597) (6,417)
Inventories ........................................................ (856) 4,574
Prepaid expenses and other current assets .......................... (1,730) (5,277)
Due from Genzyme Tissue Repair ..................................... (3,446) (271)
Due from Genzyme Molecular Oncology ................................ 247 261
Accounts payable, accrued expenses, income taxes payable and
deferred revenue ............................................... 13,573 5,634
--------- --------
Net cash provided by operating activities .......................... 45,060 35,159
INVESTING ACTIVITIES:
Purchases of investments ................................................. (196,387) (39,547)
Sales and maturities of investments ...................................... 105,106 30,071
Proceeds from sale of equity investment .................................. 11,090 --
Acquisitions of property, plant and equipment ............................ (10,288) (11,831)
Sales of property, plant and equipment ................................... -- 584
Acquisitions, net of acquired cash and assumed liabilities ............... -- (6,190)
Investments in joint ventures ............................................ (9,592) (2,088)
Repayment of loans by affiliates ......................................... -- 2,019
Other .................................................................... 3,211 (194)
--------- --------
Net cash used in investing activities .............................. (96,860) (27,176)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock ................................... 19,900 10,356
Payments of debt and capital lease obligations ........................... (350) (452)
Net cash allocated (to) from Genzyme Tissue Repair for designated shares.. (5,000) 76
Other .................................................................... 1,548 285
--------- --------
Net cash provided by financing activities .......................... 16,098 10,265
Effect of exchange rate changes on cash ...................................... (2,642) (1,059)
--------- --------
Increase (decrease) in cash and cash equivalents ............................. (38,344) 17,189
Cash and cash equivalents at beginning of period ............................. 100,012 66,276
--------- --------
Cash and cash equivalents at end of period ................................... $ 61,668 $ 83,465
========= ========
</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 1998 Genzyme 10-K and the financial statements and
footnotes for both Genzyme General and Genzyme included therein. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted according to the rules and
regulations of the Securities and Exchange Commission. Certain items in
the 1998 financial statements have been reclassified to conform with the
1999 presentation.
The financial statements for the three months ended March 31, 1999 and
1998 are unaudited but include, in management's opinion, all adjustments
(consisting only of normally recurring accruals) necessary for a fair
presentation of the results for the periods presented.
2. FINANCIAL INFORMATION
Financial information specific to Genzyme General is presented in these
Genzyme General unaudited, combined financial statements. Financial
information relevant to Genzyme, Genzyme General, GTR and GMO,
collectively, are presented in the unaudited, consolidated financial
statements of Genzyme (the "Unaudited, Consolidated Financial Statements
of Genzyme").
3. INVENTORIES (IN THOUSANDS):
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Raw materials .... $ 37,814 $ 41,064
Work-in-process .. 44,053 25,093
Finished products 26,043 41,031
-------- --------
Total $107,910 $107,188
======== ========
</TABLE>
4. EQUITY LINE OF CREDIT
In 1998, the Board of Directors of Genzyme (the "Genzyme Board") made
$50.0 million in cash available from Genzyme General to GTR under an
equity line of credit (the "GTR Equity Line"). Under the terms of the GTR
Equity Line, GTR may draw down funds as needed each fiscal quarter in
exchange for GTR Designated Shares. GTR Designated Shares are shares of
GTR Stock that are not issued and outstanding, but which the Genzyme
Board may from time to time issue, sell or otherwise distribute without
allocating the proceeds to GTR. In February 1999, GTR made a $5.0 million
draw under the GTR Equity Line in exchange for 1,633,399 GTR Designated
Shares. The GTR Designated Shares are subject to distribution as
described in the "Management and Accounting Policies Governing the
Relationship of Genzyme Divisions," which are set forth in Exhibit 99.1
to the 1998 Genzyme 10-K.
5. GAIN ON SALE OF EQUITY INVESTMENT
In January 1999, Genzyme sold all of its remaining shares of TECHNE
Corporation ("TECHNE") common stock for net proceeds of $11.1 million
and Genzyme General recorded a gain of approximately $2.0 million related
to the sale. Genzyme received these shares in partial consideration for
the sale of its research products business to TECHNE in 1998.
7
<PAGE> 8
GENZYME GENERAL
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
6. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Genzyme General:
Net income attributable to GGD Stock-basic and diluted . $32,481 $24,938
======= =======
Shares used in net income per common share-basic ....... 81,958 78,760
Effect of dilutive securities:
Employee and director stock options .............. 3,642 2,432
Warrants ......................................... 32 8
------- -------
Dilutive potential common shares (a,b) ................. 3,674 2,440
------- -------
Shares used in net income per common share-diluted (a,b) 85,632 81,200
======= =======
Net income per common share - basic .................... $ 0.40 $ 0.32
======= =======
Net income per common share - diluted (a,b) ............ $ 0.38 $ 0.31
======= =======
</TABLE>
(a) Certain securities were not included in the computation of Genzyme
General's diluted earnings per share for the three months ended March
31, 1999 and 1998 because each such security had an exercise price
greater than the average market price of GGD Stock during each
respective period. Such securities include:
<TABLE>
<CAPTION>
Three Months Ended
(Amounts in thousands) March 31,
- ----------------------------------------------------------------------------------
1999 1998
----- -----
<S> <C> <C>
Shares of GGD Stock issuable for options .................... 1,381 3,860
Shares of GGD Stock issuable for warrants ................... 80 80
----- -----
Total shares with exercise prices greater than the average
market price of GGD Stock during the period .......... 1,461 3,940
===== =====
</TABLE>
(b) In computing diluted earnings per share for Genzyme General for the
three months ended March 31, 1999, the following securities were not
included in the calculation because inclusion of such shares would
have an anti-dilutive effect on Genzyme General's net income per
share: (i) approximately 6,313,000 shares of GGD Stock reserved in May
1998 for issuance upon conversion of Genzyme's 5 1/4% convertible
subordinated notes due June 2005 (the "GGD Notes"); and (ii)
approximately 646,000 shares of GGD Stock reserved in September 1998
for issuance upon conversion of Genzyme's 5% convertible subordinated
debentures due August 2003 (the "GGD Debentures").
8
<PAGE> 9
GENZYME GENERAL
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
7. SEGMENT REPORTING
Genzyme General's reportable segments are strategic business units that offer
different products and services. Genzyme General has three reportable segments:
--the Therapeutics business unit, which develops, manufactures and
distributes human therapeutic products for significant unmet medical
needs. The business derives substantially all of its revenue from
Cerezyme[R] enzyme and Ceredase[R] enzyme sales.
--the Surgical Products business unit, which commenced operations in
July 1996 upon the acquisition of Deknatel Snowden Pencer, Inc.,
develops, manufactures and markets surgical products for three
principal business lines: (i) cardiovascular surgery; (ii) general
surgery; and (iii) plastic surgery.
--the Diagnostic Products business unit, which provides diagnostic
products to niche markets focusing on in vitro diagnostics.
Information concerning the operations in these reportable segments is as
follows:
<TABLE>
<CAPTION>
3 Months Ended 3 Months Ended
March 31, March 31,
1999 1998
-----------------------------
<S> <C> <C>
REVENUES:
Therapeutics $ 115,041 $ 93,522
Surgical Products 27,354 24,227
Diagnostic Products 14,692 16,717
Other 20,455 18,604
Eliminations/Adjustments 577 1,053
-------------------------
Total $ 178,119 $ 154,123
=========================
NET INCOME:
Therapeutics $ 33,871 $ 28,922
Surgical Products (6,733) (5,647)
Diagnostic Products 1,129 84
Other (1,780) (1,520)
Eliminations/Adjustments 98 (2,542)
-------------------------
Total $ 26,585 $ 19,297
=========================
</TABLE>
There has been no material change in segment assets since December 31, 1998.
8. CREATION OF NEW DIVISION
In March 1999, Genzyme announced that it intends to create a separate
division, with its own series of common stock, for the existing surgical
products business that is currently part of Genzyme General, subject to
approval of the Genzyme Board.
9. REALLOCATION OF JOINT VENTURE INTEREST
On October 1, 1996, Diacrin/Genzyme LLC was established as a joint venture
between GTR and Diacrin, Inc. ("Diacrin") to develop and commercialize
products and processes using porcine fetal cells for the treatment of
Parkinson's disease and Huntington's disease in humans. In March 1999,
Genzyme announced that it plans to reallocate Genzyme's interest in
Diacrin/Genzyme LLC from GTR to Genzyme General in the second quarter of
1999, subject to the approval of the holders of GTR Stock, in exchange for
$25.0 million of cash and a 3% worldwide royalty on any products sold by
Diacrin/Genzyme LLC (the "Transfer"). Upon approval of the Transfer,
Genzyme General will pay GTR $25.0 million in cash and the funds available
under the GTR Equity Line will be reduced to $20.0 million from $45.0
million. Of the $25.0 million in cash to be paid to GTR for the Transfer,
$5.0 million is non-refundable and $20.0 million represents a pre-payment
related to the achievement of certain future milestones by Diacrin/Genzyme
LLC. If the milestones are not met, GTR is required to repay Genzyme
General for the advanced milestone funds plus interest in cash or GTR
Designated Shares, at GTR's option.
10. SUBSEQUENT EVENT
In April 1999, Genzyme General received approximately $8.3 million ($8.0
million in principal and $0.3 million in interest) in connection with
certain notes receivable that were previously fully reserved due to
uncertainty surrounding collection. Genzyme received these notes in partial
consideration for the sale of Genetic Design, Inc. in 1996. The $8.3
million will be recorded as a gain in the second quarter of 1999.
9
<PAGE> 10
GENZYME TISSUE REPAIR
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) MARCH 31,
- ----------------------------------------------------------- -----------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues:
Net service sales .................................... $ 4,023 $ 3,611
Operating costs and expenses:
Cost of services sold ................................ 2,998 3,234
Selling, general and administrative .................. 6,314 6,313
Research and development ............................. 1,968 3,086
-------- --------
Total operating costs and expenses ................. 11,280 12,633
-------- --------
Operating loss .......................................... (7,257) (9,022)
Other income (expenses):
Equity in net loss of joint venture .................. (2,007) (1,931)
Interest income ...................................... 93 447
Interest expense ..................................... (445) (814)
-------- --------
Total other income (expenses) ...................... (2,359) (2,298)
-------- --------
Net loss attributable to GTR Stock ...................... $ (9,616) $(11,320)
======== ========
Net loss per GTR basic and diluted common share:
Net loss ............................................. $ (0.44) $ (0.57)
======== ========
Weighted average shares outstanding ..................... 21,945 20,002
======== ========
Net loss ................................................ $ (9,616) $(11,320)
Other comprehensive income, net of tax .................. -- --
-------- --------
Comprehensive loss ...................................... $ (9,616) $(11,320)
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
10
<PAGE> 11
GENZYME TISSUE REPAIR
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED, AMOUNTS IN THOUSANDS) MARCH 31, DECEMBER 31,
- ---------------------------------------------------- -----------------------
1999 1998
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 6,377 $ 7,732
Accounts receivable, net ......................... 3,081 3,833
Inventories ...................................... 2,657 2,645
Other current assets ............................. 1,788 1,723
-------- --------
Total current assets ........................... 13,903 15,933
Property, plant and equipment, net .................. 2,900 2,836
Other noncurrent assets ............................. 120 185
-------- --------
Total assets ................................... $ 16,923 $ 18,954
======== ========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable ................................. $ 1,081 $ 1,355
Accrued expenses ................................. 1,872 2,491
Due to Genzyme General ........................... 3,994 548
Current portion of long-term debt ................ 18,000 18,000
-------- --------
Total current liabilities ...................... 24,947 22,394
Convertible note, net ............................... 9,532 12,579
Other noncurrent liabilities ........................ 340 377
-------- --------
Total liabilities .............................. 34,819 35,350
Division equity ..................................... (17,896) (16,396)
-------- --------
Total liabilities and division equity .......... $ 16,923 $ 18,954
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
11
<PAGE> 12
GENZYME TISSUE REPAIR
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
(UNAUDITED, AMOUNTS IN THOUSANDS) MARCH 31,
- ----------------------------------------------------------------------- -------------------
1999 1998
------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ........................................................... $(9,616) $(11,320)
Reconciliation of net loss to net cash used by operating activities:
Depreciation and amortization .................................... 328 569
Non-cash compensation expense .................................... -- 59
Provision for bad debts .......................................... -- 182
Accretion of debt discount ....................................... -- 321
Equity in net loss of joint venture .............................. 2,007 1,931
Increase (decrease) in cash from working capital:
Accounts receivable ............................................ 752 (249)
Inventories .................................................... (12) (470)
Other current assets ........................................... (81) (447)
Accounts payable and accrued expenses .......................... (816) 81
Due to Genzyme General ......................................... 3,446 271
------- --------
Net cash used by operating activities ........................ (3,992) (9,072)
INVESTING ACTIVITIES:
Investment in joint venture ........................................ (2,084) (1,888)
Purchase of property, plant and equipment .......................... (345) (33)
Sale of property, plant and equipment .............................. -- 35
Other .............................................................. 34 6
------- --------
Net cash used by investing activities ........................ (2,395) (1,880)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock ............................. 116 848
Payments of debt and capital lease obligations ..................... (47) --
Cash allocated (to) from Genzyme General for designated shares ..... 5,000 (76)
Other .............................................................. (37) (37)
------- --------
Net cash provided by financing activities .................... 5,032 735
------- --------
Decrease in cash and cash equivalents ................................. (1,355) (10,217)
Cash and cash equivalents at beginning of period ...................... 7,732 21,120
------- --------
Cash and cash equivalents at end of period ............................ $ 6,377 $ 10,903
======= ========
</TABLE>
Supplemental disclosure of non-cash activities:
Debt conversion -- Note 4.
The accompanying notes are an integral part of these unaudited, combined
financial statements.
12
<PAGE> 13
GENZYME TISSUE REPAIR
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
These unaudited, combined financial statements should be read in
conjunction with the 1998 Genzyme 10-K and the financial statements and
footnotes for both GTR and Genzyme included therein. Certain information
and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain items in the 1998 Financial
Statements have been reclassified to conform with the 1999 presentation.
The financial statements for the three months ended March 31, 1999 and
1998 are unaudited but include, in management's opinion, all adjustments
(consisting only of normally recurring accruals) necessary for a fair
presentation of the results for the periods presented.
2. FINANCIAL INFORMATION
Financial information specific to GTR is presented in these GTR
unaudited, combined financial statements. Financial information relevant
to Genzyme, Genzyme General, GTR and GMO, collectively, are presented in
the Unaudited, Consolidated Financial Statements of Genzyme.
3. INVENTORIES (in thousands):
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Raw materials . .......... $ 212 $ 264
Work-in-process .......... 2,445 2,381
------ ------
Total .......... $2,657 $2,645
====== ======
</TABLE>
4. DEBT CONVERSION
In January 1999, the holder of Genzyme's 5% convertible subordinated note
due February 2000 (the "GTR Note") converted $3.0 million in principal
amount in exchange for 1,352,178 shares of GTR Stock. GTR paid $133,000
of accrued interest to the holder in connection with this conversion.
5. GTR EQUITY LINE OF CREDIT
In 1998, the Genzyme Board made $50.0 million in cash available from
Genzyme General to GTR under the GTR Equity Line. Under the terms of the
GTR Equity Line, GTR may draw down funds as needed each fiscal quarter in
exchange for GTR Designated Shares. The GTR Designated Shares are subject
to distribution as described in the "Management and Accounting Policies
Governing the Relationship of Genzyme Divisions," which are set forth in
Exhibit 99.1 to the 1998 Genzyme 10-K. In February 1999, GTR made a $5.0
million draw under the GTR Equity Line in exchange for 1,633,399 GTR
Designated Shares.
6. NET INCOME (LOSS) PER SHARE
Note 5., "Net Income (Loss) Per Share," to the Unaudited, Consolidated
Financial Statements of Genzyme is incorporated herein by reference.
7. REALLOCATION OF JOINT VENTURE INTEREST
In March 1999, Genzyme announced that it plans to reallocate Genzyme's
interest in Diacrin/Genzyme LLC from GTR to Genzyme General in the second
quarter of 1999, subject to the approval of holders of GTR Stock, in
exchange for $25.0 million of cash and a 3% worldwide royalty on any
products sold by Diacrin/Genzyme LLC. Upon approval of the Transfer, GTR
will receive $25.0 million in cash from Genzyme General and the funds
available under the GTR Equity Line will be reduced to $20.0 million from
$45.0 million. Of the $25.0 million in cash to be paid to GTR for the
Transfer, $5.0 million is non-refundable and $20.0 million represents a
pre-payment related to the achievement of certain future milestones by
Diacrin/Genzyme LLC. If the milestones are not met, GTR is required to
repay Genzyme General for the advanced milestone funds plus interest in
cash or GTR Designated Shares, at GTR's option.
13
<PAGE> 14
GENZYME MOLECULAR ONCOLOGY
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) MARCH 31,
- ---------------------------------------------------------------------------------------------
1999 1998
-------- -------
<S> <C> <C>
Revenues:
Service revenue .................................................... $ 900 $ 933
Service revenue - related party .................................... 11 --
Research and development ........................................... 4 750
Research and development - related party ........................... 298 534
Licensing revenue .................................................. 400 600
-------- -------
Total revenues ................................................... 1,613 2,817
Operating costs and expenses:
Cost of services sold .............................................. 346 469
Cost of research and development services sold ..................... 294 752
Selling, general and administrative ................................ 1,619 1,152
Research and development ........................................... 3,905 3,295
Amortization of intangibles ........................................ 2,956 3,025
-------- -------
Total operating costs and expenses ............................... 9,120 8,693
-------- -------
Operating loss ........................................................ (7,507) (5,876)
Other income (expenses):
Equity in net loss of joint venture ................................ (375) (444)
Interest income .................................................... 163 280
Interest expense ................................................... (3) (1,162)
-------- -------
Total other income (expenses) .................................... (215) (1,326)
-------- -------
Loss before income taxes .............................................. (7,722) (7,202)
Tax benefit ........................................................... 662 662
-------- -------
Net loss attributable to GMO Stock .................................... $ (7,060) $(6,540)
======== =======
Net loss per GMO basic and diluted common share:
Net loss ........................................................... $ (0.56) $ (1.66)
======== =======
Weighted average shares outstanding ................................... 12,658 3,929
======== =======
Net loss .............................................................. $ (7,060) $(6,540)
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities arising during the period .. -- 5
-------- -------
Other comprehensive income (loss) .................................. -- 5
-------- -------
Comprehensive loss .................................................... $ (7,060) $(6,535)
======== =======
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
14
<PAGE> 15
GENZYME MOLECULAR ONCOLOGY
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED, AMOUNTS IN THOUSANDS) MARCH 31, DECEMBER 31,
- ---------------------------------------------------------------------
1999 1998
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............. $12,546 $10,868
Short-term investments ................ -- 1,032
Accounts receivable, net .............. 431 5,931
Other current assets .................. 104 85
------- -------
Total current assets ................ 13,081 17,916
Equipment, net ........................... 720 791
Intangibles, net ......................... 14,288 17,245
------- -------
Total assets ........................ $28,089 $35,952
======= =======
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accrued expenses ...................... $ 852 $ 1,273
Due to Genzyme General ................ 4,526 4,773
Payable to joint venture .............. 1,850 1,181
Deferred revenue ...................... 1,350 1,500
------- -------
Total current liabilities ........... 8,578 8,727
Deferred tax liability ................... 3,199 3,861
------- -------
Total liabilities ................... 11,777 12,588
Division equity .......................... 16,312 23,364
------- -------
Total liabilities and division equity $28,089 $35,952
======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
15
<PAGE> 16
GENZYME MOLECULAR ONCOLOGY
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
(UNAUDITED, AMOUNTS IN THOUSANDS) MARCH 31,
- ---------------------------------------------------------------------------------------------------------
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ...................................................................... $ (7,060) $ (6,540)
Reconciliation of net loss to net cash provided (used) by operating activities:
Depreciation and amortization ............................................... 3,028 3,607
Deferred tax benefit ........................................................ (662) (662)
Accretion of debt conversion feature ........................................ -- 706
Equity in loss of joint venture ............................................. 375 444
Accrued interest/amortization of marketable securities ...................... 10 (94)
Non-cash compensation expense ............................................... 10 28
Increase (decrease) in cash from working capital:
Accounts receivable ....................................................... 5,500 (233)
Other current assets ...................................................... (19) 417
Accrued expenses, deferred revenue and other .............................. (277) 16
Due to Genzyme General .................................................... (247) (261)
-------- --------
Net cash provided (used) by operating activities ........................ 658 (2,572)
INVESTING ACTIVITIES:
Purchases of investments ...................................................... -- (1,439)
Maturities of investments ..................................................... 1,022 1,049
Other ......................................................................... -- (54)
-------- --------
Net cash provided (used) by investing activities ........................ 1,022 (444)
FINANCING ACTIVITIES:
Repayments of debt ............................................................ -- (5,000)
Other ......................................................................... (2) (143)
-------- --------
Net cash used by financing activities ................................... (2) (5,143)
-------- --------
Increase (decrease) in cash and cash equivalents ................................. 1,678 (8,159)
Cash and cash equivalents at beginning of period ................................. 10,868 15,010
-------- --------
Cash and cash equivalents at end of period ....................................... $ 12,546 $ 6,851
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
16
<PAGE> 17
GENZYME MOLECULAR ONCOLOGY
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
These unaudited, combined financial statements should be read in
conjunction with the 1998 Genzyme 10-K and the financial statements and
footnotes for both GMO and Genzyme included therein. Certain information
and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain items in the 1998 financial
statements have been reclassified to conform with the 1999 presentation.
The financial statements for the three months ended March 31, 1999 and
1998 are unaudited but include, in management's opinion, all adjustments
(consisting only of normally recurring accruals) necessary for a fair
presentation of the results for the periods presented.
2. FINANCIAL INFORMATION
Financial information specific to GMO is presented in these GMO
unaudited, combined financial statements. Financial information relevant
to Genzyme, Genzyme General, GTR and GMO, collectively, are presented in
the Unaudited, Consolidated Financial Statements of Genzyme.
3. PAYABLE TO JOINT VENTURE
Pursuant to the funding commitment provided in the Collaboration
Agreement related to StressGen/Genzyme LLC, the joint venture between
Genzyme, StressGen Biotechnologies Corporation ("StressGen") and the
Canadian Medical Discoveries Fund, Inc. ("CMDF"), Genzyme and StressGen
are obligated to fund the operations of StressGen/Genzyme LLC in equal
portions after the initial $10.0 million (Canadian) of funding of
StressGen/Genzyme LLC has been expended. Because CMDF has the right to
require Genzyme and StressGen to repurchase CMDF's membership interest,
GMO records 50% of the losses incurred by StressGen/Genzyme LLC. As of
March 31, 1999 and December 31, 1998, GMO's portion of the cumulative
losses of StressGen/Genzyme LLC exceeded its initial capital contribution
of $0.7 million and as a result, GMO has recorded $1.9 million and $1.1
million, respectively, as current liabilities due to the joint venture.
4. NET LOSS PER SHARE
Note 5., "Net Income (Loss) Per Share," to the Unaudited, Consolidated
Financial Statements of Genzyme is incorporated herein by reference.
17
<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) 1999 1998
- ----------------------------------------------------------- ----------------------
<S> <C> <C>
Revenues:
Net product sales ..................................... $ 163,702 $ 139,370
Net service sales ..................................... 18,730 18,244
Revenues from research and development contracts....... 1,312 2,937
--------- ---------
Total revenues ...................................... 183,744 160,551
Operating costs and expenses:
Cost of products sold ................................ 43,818 46,350
Cost of services sold ................................ 12,088 11,830
Selling, general and administrative .................. 58,945 52,576
Research and development ............................. 32,834 25,551
Amortization of intangibles .......................... 6,207 5,972
--------- ---------
Total operating costs and expenses ............. 153,892 142,279
--------- ---------
Operating income ......................................... 29,852 18,272
Other income (expenses):
Equity in net loss of unconsolidated affiliates....... (10,092) (5,280)
Gain on affiliate sale of stock ...................... 606 --
Minority interest .................................... 866 864
Gain on sale of investment in equity securities ...... 1,963 --
Investment income .................................... 8,193 3,647
Interest expense ..................................... (5,498) (3,966)
--------- ---------
Total other income (expenses) ..................... (3,962) (4,735)
--------- ---------
Income before income taxes ............................... 25,890 13,537
Provision for income taxes ............................... (9,833) (5,753)
--------- ---------
Net income ............................................... $ 16,057 $ 7,784
========= =========
</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
<TABLE>
<CAPTION>
THREE MONTHS ENDED
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) MARCH 31,
- ----------------------------------------------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Attributable to Genzyme General:
Net income ..................................................................... $ 26,585 $ 19,297
Tax benefit allocated from Genzyme Tissue Repair ............................... 3,962 4,406
Tax benefit allocated from Genzyme Molecular Oncology .......................... 1,934 1,235
-------- --------
Net income attributable to GGD Stock ........................................... $ 32,481 $ 24,938
======== ========
Per Genzyme General common share:
Net income per Genzyme General common share - basic .......................... $ 0.40 $ 0.32
======== ========
Weighted average shares outstanding ............................................. 81,958 78,760
======== ========
Net income per Genzyme General common and common equivalent share
- diluted ................................................................. $ 0.38 $ 0.31
======== ========
Adjusted weighted average shares outstanding ................................... 85,632 81,200
======== ========
Attributable to Genzyme Tissue Repair:
Net loss attributable to GTR Stock ............................................. $ (9,616) $(11,320)
======== ========
Net loss per GTR basic and diluted common share:
Net loss ..................................................................... $ (0.44) $ (0.57)
======== ========
Weighted average shares outstanding ............................................ 21,945 20,002
======== ========
Attributable to Genzyme Molecular Oncology:
Net loss attributable to GMO Stock ............................................. $ (7,060) $ (6,540)
======== ========
Net loss per GMO basic and diluted common share:
Net loss ..................................................................... $ (0.56) $ (1.66)
======== ========
Weighted average shares outstanding ............................................ 12,658 3,929
======== ========
Comprehensive income:
Net income ..................................................................... $ 16,057 $ 7,784
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments ..................................... (8,826) (698)
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising during the period ........................ (2,319) 1,332
Reclassification adjustment for gains (losses) included in net income ...... (1,214) --
-------- --------
Unrealized gains (losses) on securities, net ........................... (3,533) 1,332
-------- --------
Other comprehensive income (loss) .............................................. (12,359) 634
-------- --------
Comprehensive income ........................................................... $ 3,698 $ 8,418
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, consolidated
financial statements.
19
<PAGE> 20
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED, AMOUNTS IN THOUSANDS) MARCH 31, DECEMBER 31,
- ------------------------------------------------------------------ ---------------------------
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 80,591 $ 118,612
Short-term investments ......................................... 247,668 175,453
Accounts receivable, net ....................................... 159,973 163,042
Inventories .................................................... 110,567 109,833
Prepaid expenses and other current assets ...................... 33,000 31,467
Deferred tax assets - current .................................. 39,690 39,725
----------- -----------
Total current assets ......................................... 671,489 638,132
Property, plant and equipment, net ................................ 377,914 382,619
Long-term investments ............................................. 300,985 281,664
Intangibles, net .................................................. 272,997 279,516
Deferred tax assets - noncurrent .................................. 25,046 24,277
Investment in equity securities ................................... 39,305 51,977
Other noncurrent assets ........................................... 33,317 32,369
----------- -----------
Total assets .................................................. $ 1,721,053 $ 1,690,554
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................... $ 22,594 $ 27,604
Accrued expenses ............................................... 79,388 74,077
Income taxes payable ........................................... 20,985 16,543
Deferred revenue ............................................... 2,968 2,731
Current portion of long-term debt and capital lease obligations 101,158 100,568
Payable to joint venture ....................................... 1,850 1,181
----------- -----------
Total current liabilities .................................... 228,943 222,704
Long-term debt .................................................... 3,070 3,087
Convertible subordinated notes and debentures, net ................ 281,345 284,138
Other ............................................................. 8,412 8,078
----------- -----------
Total liabilities ............................................. 521,770 518,007
Stockholders' equity:
Preferred Stock ................................................ -- --
GGD Stock ...................................................... 825 814
GTR Stock ...................................................... 224 209
GMO Stock ...................................................... 127 126
Treasury Stock - at cost ....................................... (901) (901)
Additional paid-in capital - Genzyme General ................... 973,723 958,820
Additional paid-in capital - Genzyme Tissue Repair ............. 182,299 174,198
Additional paid-in capital - Genzyme Molecular Oncology ........ 63,434 63,427
Retained earnings (accumulated deficit) ........................ 2,278 (13,779)
Accumulated other comprehensive income ......................... (22,726) (10,367)
----------- -----------
Total stockholders' equity .................................... 1,199,283 1,172,547
----------- -----------
Total liabilities and stockholders' equity .................... $ 1,721,053 $ 1,690,554
=========== ===========
</TABLE>
The accompanying notes are an integral part of these unaudited, consolidated
financial statements.
20
<PAGE> 21
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED, AMOUNTS IN THOUSANDS) FOR THE THREE MONTHS ENDED MARCH 31,
- -----------------------------------------------------------------------------------------------------------------
1999 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ....................................................... $ 16,057 $ 7,784
Reconciliation of net income to net
cash provided by operating activities:
Depreciation and amortization ................................. 17,268 17,722
Accrued interest/amortization on bonds ........................ (2,489) (202)
Provision for bad debts and inventory ......................... 2,754 1,676
Deferred income tax benefit ................................... (662) (662)
Equity in net loss of unconsolidated affiliates ............... 10,092 5,280
Gain on affiliate sale of stock ............................... (606) --
Minority interest in net loss of affiliates ................... (866) (864)
Accretion of debt conversion feature .......................... -- 1,027
Gain on sale of investment in equity securities ............... (1,963) --
Other ......................................................... (400) 220
Increase (decrease) in cash from working capital changes:
Accounts receivable ........................................ (1,345) (6,899)
Inventories ................................................ (868) 4,104
Prepaid expenses and other current assets .................. (1,830) (5,307)
Accounts payable, accrued expenses, income taxes payable and
deferred revenue ..................................... 6,584 (364)
--------- ---------
Net cash provided by operating activities .................. 41,726 23,515
INVESTING ACTIVITIES:
Purchases of investments ......................................... (196,387) (40,986)
Sales and maturities of investments .............................. 106,128 31,120
Acquisitions of property, plant and equipment .................... (10,633) (11,864)
Sale of property, plant and equipment ............................ -- 619
Acquisitions, net of acquired cash and assumed liabilities ....... -- (6,190)
Proceeds from sale of equity investment .......................... 11,090 --
Investments in joint ventures .................................... (11,676) (3,976)
Repayment of loans by affiliates ................................. -- 2,019
Other ............................................................ 3,245 (242)
--------- ---------
Net cash used by investing activities ...................... (98,233) (29,500)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock ........................... 20,016 11,204
Payments of debt and capital lease obligations ................... (397) (5,452)
Other ............................................................ 1,509 105
--------- ---------
Net cash provided by financing activities .................. 21,128 5,857
Effect of exchange rate changes on cash .............................. (2,642) (1,059)
--------- ---------
Increase (decrease) in cash and cash equivalents ..................... (38,021) (1,187)
Cash and cash equivalents at beginning of period ..................... 118,612 102,406
--------- ---------
Cash and cash equivalents at end of period ........................... $ 80,591 $ 101,219
========= =========
</TABLE>
Supplemental disclosure of non-cash activity:
Debt conversion -- Note 3.
The accompanying notes are an integral part of these unaudited, consolidated
financial statements.
21
<PAGE> 22
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
These unaudited, consolidated financial statements should be read in
conjunction with the 1998 Genzyme 10-K and the financial statements and
footnotes for Genzyme included therein. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain items in the 1998 financial
statements have been reclassified to conform to the 1999 presentation.
The financial statements for the three months ended March 31, 1999 and
1998 are unaudited but include, in management's opinion, all adjustments
(consisting only of normally recurring accruals) necessary for a fair
presentation of the results for the periods presented.
2. INVENTORIES (IN THOUSANDS):
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Raw materials ............. $ 38,026 $ 41,328
Work-in-process ........... 46,498 27,474
Finished products.......... 26,043 41,031
-------- --------
Total ................ $110,567 $109,833
======== ========
</TABLE>
3. DEBT CONVERSION
In January 1999, the holder of the GTR Note converted $3.0 million in
principal amount in exchange for 1,352,178 shares of GTR Stock. GTR paid
$133,000 of accrued interest to the holder in connection with this
conversion.
4. GAIN ON SALE OF EQUITY INVESTMENT
In January 1999, Genzyme sold all of its remaining shares of TECHNE
common stock for net proceeds of $11.1 million and recorded a gain of
approximately $2.0 million related to the sale.
5. NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Genzyme General:
Net income attributable to GGD Stock-basic and diluted . $32,481 $24,938
======= =======
Shares used in net income per common share-basic ....... 81,958 78,760
Effect of dilutive securities:
Employee and director stock options .............. 3,642 2,432
Warrants ......................................... 32 8
------- -------
Dilutive potential common shares (a,b) ................. 3,674 2,440
------- -------
Shares used in net income per common share-diluted (a,b) 85,632 81,200
======= =======
Net income per common share - basic .................... $ 0.40 $ 0.32
======= =======
Net income per common share - diluted (a,b) ............ $ 0.38 $ 0.31
======= =======
</TABLE>
22
<PAGE> 23
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS
5. NET INCOME (LOSS) PER SHARE (continued)
Genzyme General (continued):
(a) Certain securities were not included in the computation of Genzyme
General's diluted earnings per share for the three months ended March
31, 1999 and 1998 because each such security had an exercise price
greater than the average market price of GGD Stock during each
respective period. Such securities include:
<TABLE>
<CAPTION>
Three Months Ended
(Amounts in thousands) March 31,
- ---------------------------------------------------------------------------------
1999 1998
------ ------
<S> <C> <C>
Shares of GGD Stock issuable for options ................... 1,381 3,860
Shares of GGD Stock issuable for warrants .................. 80 80
----- -----
Total shares with exercise prices greater than the
average market price of GGD Stock during the period ... 1,461 3,940
===== =====
</TABLE>
(b) In computing diluted earnings per share for Genzyme General for the
three months ended March 31, 1999, the following securities were not
included in the calculation because inclusion of such shares would
have an anti-dilutive effect on Genzyme General's net income per
share: (i) approximately 6,313,000 shares of GGD Stock reserved in May
1998 for issuance upon conversion of the GGD Notes; and (ii)
approximately 646,000 shares of GGD Stock reserved in September 1998
for issuance upon conversion of the GGD Debentures.
GTR:
Basic net loss per GTR common share is the same as diluted net loss per GTR
common share for the three months ended March 31, 1999 and 1998. Certain
securities were not included in the computation of GTR's diluted loss per
share for the three months ended March 31, 1999 and 1998 because they would
have an anti-dilutive effect due to GTR's net loss per share for the
relevant period. For the three months ended March 31, 1999 and 1998, these
securities include:
<TABLE>
<CAPTION>
Three Months Ended
(Amounts in thousands) March 31,
- ---------------------------------------------------------------------------------
1999 1998
------ ------
<S> <C> <C>
Shares of GTR Stock issuable for options ................. 3,875 2,711
GTR Designated Shares .................................... 2,310 834
Shares of GTR Stock issuable upon conversion
of the GTR Note ...................................... 6,458 2,577
----- -----
Total shares excluded from the GTR diluted loss
per share calculation ................................ 12,643 6,122
====== =====
</TABLE>
GMO:
Basic net loss per GMO common share is the same as diluted net loss per GMO
common share for the three months ended March 31, 1999 and 1998. Certain
securities were not included in the computation of GMO's diluted loss per
share for the three months ended March 31, 1999 and 1998 because they would
have an anti-dilutive effect due to GMO's net loss per share for the
relevant period. For the three months ended March 31, 1999 and 1998, these
securities include:
<TABLE>
<CAPTION>
Three Months Ended
(Amounts in thousands) March 31,
- ---------------------------------------------------------------------------------
1999 1998
------ ------
<S> <C> <C>
Shares of GMO Stock issuable for options ................. 1,604 870
Warrants to purchase GMO Stock ........................... 10 10
GMO Designated Shares .................................... 1,410 6,000
Shares of GMO Stock issuable upon conversion of
Genzyme's 6% convertible subordinated debentures
due August 2002 ("GMO Debentures") ..................... -- 3,476
----- ------
Total shares excluded from the GMO diluted loss
per share calculation .............................. 3,024 10,356
===== ======
</TABLE>
23
<PAGE> 24
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS
6. SEGMENT REPORTING
Genzyme reportable segments are strategic business units or divisions
that offer different products and services. Genzyme has five reportable
segments:
- the Therapeutics business unit, which develops, manufactures and
distributes human therapeutic products for significant unmet medical
needs. The business derives substantially all of its revenue from
Cerezyme[R] enzyme and Ceredase[R] enzyme sales.
- the Surgical Products business unit, which commenced operations in July
1996 upon the acquisition of Deknatel Snowden Pencer, Inc., develops,
manufactures and markets surgical products for three principal business
lines: (i) cardiovascular surgery; (ii) general surgery; and (iii)
plastic surgery.
- the Diagnostic Products business unit, which provides diagnostic
products to niche markets focusing on in vitro diagnostics.
- GTR develops and markets biological products for orthopedic injuries,
such as cartilage repair, and severe burns.
- GMO is developing cancer products, with a focus on therapeutic vaccines
and angiogenesis inhibitors.
Information concerning the operations in these reportable segments is as
follows:
<TABLE>
<CAPTION>
3 Months Ended 3 Months Ended
March 31, March 31,
1999 1998
<S> <C> <C>
-------------- --------------
REVENUES:
Therapeutics $115,041 $ 93,522
Surgical Products 27,354 24,227
Diagnostic Products 14,692 16,717
GTR 4,023 3,611
GMO 1,613 2,817
Other 20,455 18,604
Eliminations/Adjustments 566 1,053
-------- --------
Total $183,744 $160,551
======== ========
NET INCOME:
Therapeutics $ 33,871 $ 28,922
Surgical Products (6,733) (5,647)
Diagnostic Products 1,129 84
GTR (9,616) (11,320)
GMO (7,060) (6,540)
Other (1,780) (1,520)
Eliminations/Adjustments 6,246 3,805
-------- --------
Total $ 16,057 $ 7,784
======== ========
There has been no material change in segment assets since December 31, 1998.
</TABLE>
7. CREATION OF NEW DIVISION
In March 1999, Genzyme announced that it intends to create a separate
division, with its own series of common stock, for the existing surgical
products business that is currently part of Genzyme General, subject to
approval of the Genzyme Board.
8. SUBSEQUENT EVENT
In April 1999, Genzyme received approximately $8.3 ($8.0 million in
principal and $0.3 million in interest) in connection with certain notes
receivable that were previously fully reserved due to uncertainty
surrounding collection. Genzyme received these notes in partial
consideration for the sale of Genetic Design, Inc. in 1996. The $8.3
million will be recorded as a gain in the second quarter of 1999.
24
<PAGE> 25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999
The following discussion is a summary of the key factors management considers
necessary in reviewing the Company's results of operations, liquidity and
capital resources.
GENZYME CORPORATION AND SUBSIDIARIES
Since the operating results of Genzyme and its subsidiaries reflect the combined
operations of Genzyme General, GTR and GMO, this discussion summarizes the key
factors management considers necessary in reviewing Genzyme's consolidated
results of operations. Detailed discussion and analysis of each division's
results of operations are provided below under separate headings.
RESULTS OF OPERATIONS
GENZYME CORPORATION
REVENUES
Total revenues for the three months ended March 31, 1999 increased 14% to $183.7
million from $160.6 million in the corresponding period of 1998.
Product revenues consist solely of sales by Genzyme General. Product revenues
for the three months ended March 31, 1999 increased 17% to $163.7 million from
$139.4 million in the comparable period of 1998. The increase was primarily due
to increased sales of Cerezyme[R] enzyme. Combined sales of Cerezyme[R] enzyme
and Ceredase[R] enzyme increased 22% in the three months ended March 31, 1999 to
$113.8 million from $93.5 million in the corresponding period of 1998 due to
continued strong growth in the number of patients worldwide receiving enzyme
replacement therapy for the treatment of Gaucher disease.
Service revenues consist primarily of genetic testing services performed by
Genzyme General, sales of GTR's Carticel[R] autologous cultured chondrocytes
("Carticel[R] AuCC") and Epicel[TM] skin grafts as well as the provision of
services relating to GMO's SAGE[TM] differential gene expression technology. For
the three months ended March 31, 1999, service revenues increased 3% to $18.7
million from $18.2 million for the corresponding period of 1998. Service sales
increased for the three months ended March 31, 1999 due primarily to increased
sales of both Carticel[R] AuCC and services relating to the SAGE[TM] technology
and a slight increase in genetic testing service revenue, offset in part by
slight reductions in sales of Epicel[TM] skin grafts.
International sales as a percentage of total product and service sales for the
three months ended March 31, 1999 decreased to 40% from 41% for the
corresponding period of 1998.
MARGINS AND OPERATING EXPENSES
Gross margins for the quarters ended March 31, 1999 and 1998 were 69% and 63%,
respectively. Genzyme provides a broad range of health care products and
services, resulting in a range of gross margins depending on the particular
market conditions of each product or service. Product margins for the three
months ended March 31, 1999 were 73% compared to 67% for the same period of
1998. The increase in product margins is primarily due to increased sales volume
of Cerezyme[R] enzyme. Service margins were 35% for each of the periods ended
March 31, 1999 and 1998. In the three months ended March 31, 1999, increased
service margins attributable to higher sales for GTR and GMO were offset by
decreased genetic testing services margins.
Selling, general and administrative ("SG&A") expenses and amortization of
intangibles for the three months ended March 31, 1999 were $65.2 million as
compared to $58.5 million for the same period in 1998, an increase of 11%. The
increase for both periods was due primarily to increased staffing in support of
the growth in several of Genzyme General's product lines and costs associated
with the market introduction of Thyrogen[R] hormone in January 1999.
Research and development expenses for the three months ended March 31, 1999 were
$32.8 million compared to $25.6 million for the three months ended March 31,
1998, an increase of 29%, due primarily to (i) increased costs in connection
with the results of ATIII LLC, Genzyme's joint venture with Genzyme Transgenics
Corporation ("GTC") for the development and commercialization of transgenic
recombinant human antithrombin III; (ii) increased spending on GMO's small
molecule immunotherapy and anti-angiogenesis programs; (iii) increased spending
on Alpha-galactosidase for Fabry disease and (iv) increased spending on the
gene-graft and cardiomyocyte program.
25
<PAGE> 26
OTHER INCOME AND EXPENSES
Other income and expenses for the three months ended March 31, 1999 was a net
other expense of $4.0 million compared to a net other expense of $4.7 million
for the three months ended March 31, 1998. Equity in net loss of Genzyme's
unconsolidated affiliates increased to $10.1 million for the three months ended
March 31, 1999 from $5.3 million for the three months ended March 31, 1998. The
change is primarily due to (i) increased losses from RenaGel LLC, Genzyme's
joint venture with GelTex Pharmaceuticals, Inc. ("GelTex") for the development
and commercialization of Renagel[R] Capsules, (ii) increased losses resulting
from Diacrin/Genzyme LLC, (iii) Genzyme's portion of the losses of
Pharming/Genzyme LLC, Genzyme's joint venture with Pharming Group N.V. for the
development and commercialization of human alpha glucosidase as a treatment for
Pompe's disease, which became effective on October 9, 1998; and (iv) Genzyme's
portion of the losses of BioMarin/Genzyme LLC, Genzyme's joint venture with
BioMarin Pharmaceutical Inc. ("BioMarin") for the development and
commercialization of alpha-L-iduronidase for the treatment of
mucopolysaccharidosis-I, which was established on September 4, 1998.
For the three months ended March 31, 1999, other income and expense, net, also
includes a gain of $0.6 million on Genzyme's investment in GTC due to issuance
by GTC of its common stock, and a $2.0 million gain on the sale of TECHNE common
stock. There were no comparable amounts in the same period of 1998. For each of
the three months ended March 31, 1999 and 1998, Genzyme recorded minority
interest of $0.9 million, representing the portion of the results of ATIII LLC
allocated to GTC.
Investment income increased to $8.2 million for the three months ended March 31,
1999 from $3.6 million for the same period of 1998. The increase was due to
higher average cash balances resulting primarily from the net proceeds from the
issuance in May 1998 of the GGD Notes and cash generated from operations.
Interest expense was $5.5 million for the three months ended March 31, 1999,
compared to $4.0 million in corresponding period of 1998. The increase was due
primarily to additional interest expense related to the GGD Notes.
The tax provisions for the three months ended March 31, 1999 and 1998 vary from
the U.S. statutory tax rate because of the provision for state income taxes,
nondeductible interest, the foreign sales corporation, nondeductible
amortization of intangibles, tax credits and Genzyme's share of the losses of
unconsolidated affiliates. The effective tax rate for the three months ended
March 31, 1999 decreased to 38% from 43% for the same period of 1998, due to an
increase in tax credits and a decrease in nondeductible amortization and losses
of unconsolidated affiliates.
GENZYME GENERAL
REVENUES
Total revenues for the three months ended March 31, 1999 increased 16% to $178.1
million from $154.1 million in the corresponding period of 1998.
Product revenues for the three months ended March 31, 1999 increased 17% to
$163.7 million from $139.4 million in the comparable period of 1998.
Revenues for the Therapeutics business unit consisted primarily of sales of
Cerezyme[R] enzyme and Ceredase[R] enzyme, which increased 24% to $118.9 million
for the three months ended March 31, 1999 from $95.6 million in the
corresponding periods in 1998 due to increased sales of Cerezyme[R] enzyme.
Combined revenues for Cerezyme[R] enzyme and Ceredase[R] enzyme for the three
months ended March 31, 1999 were $113.8 million as compared to $93.5 million for
the same period of 1998. Genzyme General's results of operations are highly
dependent on these products, which together represented 70% of product sales for
the three months ended March 31, 1999, compared to 67% in the corresponding
period of last year. Therapeutics revenues for the first quarter of 1999 also
include sales of Thyrogen[R] hormone and lipids and peptides for drug delivery.
Revenues for the Surgical Products business unit increased 18% to $30.1 million
in the three months ended March 31, 1999 from $25.6 million in the corresponding
period of last year due primarily to increased sales of Seprafilm[R]
Bioresorbable Membrane, which increased 85% this quarter in comparison to the
same quarter of 1998. For the three months ended March 31, 1999, overall sales
of surgical instruments, sutures and devices increased 7% percent compared with
the same period in 1998.
26
<PAGE> 27
Revenues for the Diagnostics business unit decreased 6% to $28.6 million for the
three months ended March 31, 1999 from $30.5 million in the same period of last
year. The decrease in diagnostics revenues for the quarter reflects the sale of
Genzyme's research products business to TECHNE in July 1998. The research
products business had revenues of approximately $4.0 million per quarter at the
time it was sold. Diagnostic product revenues now include royalties on sales by
TECHNE's biotechnology group. Excluding revenues from the research products
business, diagnostic product sales increased 16% this quarter to $14.7 million
compared to the same period last year. Revenues from genetic testing services
were $13.9 million for the first quarter of 1999, up slightly in comparison to
the corresponding period of 1998.
International sales as a percentage of total product and service sales for the
three months ended March 31, 1999 decreased to 40% from 42% for the
corresponding period of 1998.
MARGINS AND OPERATING EXPENSES
Gross margins for the quarters ended March 31, 1999 and 1998 were 70% and 64%,
respectively, due primarily to increased Cerezyme[R] enzyme sales. Genzyme
General provides a broad range of health care products and services, resulting
in a range of gross margins depending on the particular market conditions of
each product or service. Product margins for the three months ended March 31,
1999 were 73% compared to 67% for the same periods of 1998. The increase in
product margins is primarily due to increased sales volume of Cerezyme[R]
enzyme. Genetic testing service margins for the three months ended March 31,
1999 decreased to 37%, in comparison to 41% for the corresponding period of
1998, due primarily to less capacity utilization in the three months ended March
31, 1999.
SG&A expenses and amortization of intangibles for the three months ended March
31, 1999 were $54.5 million as compared to $48.3 million for the same period in
1998, an increase of 13%. The increase was due primarily to increased staffing
in support of the growth in several product lines and costs associated with the
market introduction of Thyrogen[R] hormone in January 1999.
Research and development expenses for the three months ended March 31, 1999 were
$26.7 million compared to $18.4 million for the three months ended March 31,
1998, an increase of 45%, due primarily to (i) increased costs in connection
with the results of ATIII LLC; (ii) increased spending on Alpha-galactosidase
for Fabry disease and (iii) increased spending on the gene-graft and the
cardiomyocyte program.
OTHER INCOME AND EXPENSES
Other income and expenses for the three months ended March 31, 1999 was a net
other expense of $1.4 million compared to a net other expense of $1.1 million in
the three months ended March 31, 1998. Equity in net loss of Genzyme's
unconsolidated affiliates increased to $7.7 million for the three months ended
March 31, 1999 from $2.9 million for the three months ended March 31, 1998. The
change is primarily due to (i) increased losses from RenaGel LLC; and (ii)
Genzyme's portion of the losses of Pharming/Genzyme LLC and BioMarin/Genzyme
LLC. For the three months ended March 31, 1999, other income and expense, net,
also includes a gain of $0.6 million on Genzyme's investment in GTC due to
issuance by GTC of its common stock and a gain of $2.0 million on the sale of
TECHNE common stock. There were no comparable amounts in the same period of
1998. For each of the three months ended March 31, 1999 and 1998, Genzyme
recorded minority interest of $0.9 million, representing the portion of the
results of ATIII LLC allocated to GTC.
Investment income increased to $7.9 million for the for the three months ended
March 31, 1999 from $2.9 million for the same period of 1998. The increase was
due to higher average cash balances resulting primarily from the net proceeds
from the issuance in May 1998 of the GGD Notes and increased cash provided by
operating activities. Interest expense was $5.1 million for the three months
ended March 31, 1999, compared to $2.0 million for the corresponding period of
1998. The increase was due to additional interest expense related to the GGD
Notes and the GGD Debentures.
The tax provisions for the three months ended March 31, 1999 and 1998 vary from
the U.S. statutory tax rate because of the provision for state income taxes,
nondeductible interest, the foreign sales corporation, nondeductible
amortization of intangibles, tax credits and Genzyme General's share of the
losses of unconsolidated affiliates. The effective tax rate for the three months
ended March 31, 1999 decreased to 38% from 39% for the same period of 1998. For
the three months ended March 31, 1999, tax benefits allocated from GTR and GMO
of $4.0 million and $1.9 million, respectively, reduced Genzyme General's tax
rate to 24.4%
27
<PAGE> 28
and in the corresponding period of 1998, tax benefits allocated from GTR and GMO
of $4.4 million and $1.2 million, respectively, reduced Genzyme General's tax
rate to 22%. The difference is attributable to the fact that the same
approximate dollar benefits from GTR and GMO gave a lower percentage of benefit
on an increased profit before tax.
GENZYME TISSUE REPAIR
REVENUES
Total revenues for the three months ended March 31, 1999 were $4.0 million,
representing an increase of 11% over the same period in 1998. Sales of
Carticel[R] AuCC were $2.9 million for the three months ended March 31, 1999 as
compared to $2.5 million for the three months ended March 31, 1998, an increase
of 18%. This increase is the result of continued growth of domestic sales and
increased European sales. Sales of Epicel[TM] skin grafts decreased slightly to
$1.0 million in the three months ended March 31, 1999 from $1.1 million in the
three months ended March 31, 1998. Revenues from the sale of Epicel[TM] skin
grafts fluctuate from quarter to quarter depending on the need for severe burn
care.
MARGINS AND OPERATING EXPENSES
GTR's gross margin for the three months ended March 31, 1999 was 25%, as
compared to 10% for the three months ended March 31, 1998. The improvement in
gross margin is primarily the result of a reduction in labor and manufacturing
expenses and decreased material expenses.
SG&A expenses remained level at $6.3 million for both the three months ended
March 31, 1999 and 1998. GTR incurs direct SG&A costs as well as an SG&A charge,
based on actual amounts incurred, from Genzyme General for SG&A work performed
by Genzyme General on behalf of GTR. In the three months ended March 31, 1999,
$1.3 million of SG&A services were provided by Genzyme General as compared to
$1.6 million for the same period of 1998.
Research and development expenses for the three months ended March 31, 1999 were
$2.0 million as compared to $3.1 million in the comparable period of 1998,
representing a 36% decrease. This decrease was the result of a cessation of
certain research and development projects. In the three months ended March 31,
1999, $1.5 million of research and development services were provided to GTR by
Genzyme General, compared to $2.2 million in the same period of 1998.
OTHER INCOME AND EXPENSES
Interest income was $0.1 million for the three months ended March 31, 1999,
compared to interest income of $0.4 million in the three months ended March 31,
1998. The decrease was due primarily to lower average cash balances.
Interest expense was $0.4 million for the three months ended March 31, 1999, as
compared to $0.8 million for the same period of 1998. The decrease in interest
expense was the result of the completion of the accretion of the conversion
feature related to the GTR Note in the second quarter of 1998, and the
conversion of $3.6 million of principal amount of the GTR Note into shares of
GTR Stock. Of this amount, $0.6 million of principal amount was converted in the
fourth quarter of 1998 and $3.0 million was converted in January 1999.
On October 1, 1996, Diacrin/Genzyme LLC was established as a joint venture
between GTR and Diacrin to develop and commercialize products and processes
using porcine fetal cells for the treatment of Parkinson's disease and
Huntington's disease in humans. Under the terms of the joint venture agreement,
GTR provided 100% of the initial $10.0 million of the funding requirements and
will provide 75% of the next $40.0 million of funding requirements for products
to be developed by the joint venture. Thereafter, all costs will be shared
equally by the two parties. In the three months ending March 31, 1999, GTR
provided $2.1 million of funding to, and realized a net loss of $2.0 million
from, the joint venture as compared to funding of $1.9 million, and a net loss
of $1.9 million, for the corresponding period in 1998.
28
<PAGE> 29
GENZYME MOLECULAR ONCOLOGY
REVENUES
GMO recorded service revenues of $0.9 million for both the three months ended
March 31, 1999 and 1998. Service revenues consisted of service contracts
relating to the SAGE[TM] technology performed primarily for third parties. GMO
also recorded research and development revenues of $0.3 million in the three
months ended March 31, 1999, as compared to $1.3 million in the three months
ended March 31, 1998. These revenues consisted of work performed on behalf of
StressGen/Genzyme LLC, in both the three months ended March 31, 1999 and 1998,
as well as work performed on behalf of Schering-Plough Corporation in the three
months ended March 31, 1998 for which there was no comparable amount in the
same period of 1999. GMO recorded licensing revenue of $0.4 million in the three
months ended March 31, 1999, as compared to $0.6 million in the three months
ended March 31, 1998. Licensing revenue consists of licenses to the SAGE[TM]
technology and other of GMO's therapeutics and diagnostics technology.
MARGINS AND OPERATING EXPENSES
For the three months ended March 31, 1999, GMO recorded cost of revenues of $0.6
million, as compared to $1.2 million in the three months ended March 31, 1998.
Cost of revenues consisted of work performed on behalf of StressGen/Genzyme LLC,
as well as work performed under SAGE[TM] contracts with third parties, and for
the three months ended March 31, 1998, contract research in gene therapy. The
decrease in cost of revenues was the result of the absence of contract research
for the three months ended March 31, 1999 and a reduction in the amount of
royalties due to a third party on sales of services related to the SAGE[TM]
technology.
GMO recorded $1.6 million of SG&A expenses in the three months ended March 31,
1999, as compared to $1.2 million in the comparable period in 1998. The increase
is due primarily to increased legal expenses related to patents.
Research and development expenses incurred by GMO in the three months ended
March 31, 1999 was $3.9 million, compared to $3.3 million in the same period of
1998. The increase in research and development costs relates to increased
research personnel and related expenses associated with the continued
development of GMO's small molecule, immunotherapy and anti-angiogenesis
programs.
GMO's amortization of intangibles was $3.0 million for both the three months
ended March 31, 1999 and the three months ended March 31, 1998. Amortization of
intangibles is attributable to certain intangible assets acquired in connection
with the acquisition of PharmaGenics, Inc. on June 18, 1997.
OTHER INCOME AND EXPENSES
Interest income and interest expense were $0.2 million and $3,000, respectively,
for the three months ended March 31, 1999. GMO's interest income and interest
expense for the three months ended March 31, 1998, were $0.3 million and $1.2
million, respectively. The decrease in interest income results from lower
average cash balances. The decrease in interest expense is due to the exchange
of the GMO Debentures for the GGD Debentures in August 1998.
GMO recorded an equity in the loss of StressGen/Genzyme LLC of $0.4 million for
both the three months ended March 31, 1999 and the three months ended March 31,
1998.
GMO recorded a tax benefit of $0.7 million for both the three months ended March
31, 1999 and the three months ended March 31, 1998. This tax benefit is the
result of the amortization of the deferred tax liability established upon the
acquisition of PharmaGenics, Inc.
LIQUIDITY AND CAPITAL RESOURCES
GENZYME CORPORATION AND SUBSIDIARIES
As of March 31, 1999, Genzyme had cash, cash equivalents, and short- and
long-term investments of $629.2 million, an increase of $53.5 million from
December 31, 1998. Operating and financing activities provided $41.7 million and
$21.1 million of cash, respectively, investing activities used $98.2 million and
fluctuations in exchange rates caused a reduction in cash of $2.6 million. In
the three months ended March 31, 1999, financing activities provided $20.0
million of cash proceeds from the exercise of stock options and used $0.4
million for the repayment of debt and capital lease obligations. At March 31,
1999, $100.0 million was outstanding under Genzyme's $225 million revolving
credit facility with a syndicate of
29
<PAGE> 30
commercial banks (the "Revolving Credit Facility"), of which $82.0 million was
allocated to Genzyme General and $18.0 million was allocated to GTR. In the
three months ended March 31, 1999, investing activities provided $11.1 million
of cash from the sale of Genzyme's shares of TECHNE common stock. Investing
activities used $90.3 million of cash for the investment portfolio; $10.6
million of cash to fund capital expenditures and $11.7 million of cash to fund
Genzyme's investments in joint ventures.
Genzyme believes that its available cash, investments and cash flow from product
and service sales will be sufficient to finance its planned operations and
capital requirements for the foreseeable future. Although Genzyme currently has
substantial cash resources, it has committed to utilize a portion of its
resources for certain purposes, such as: (i) paying strategic collaborators and
funding joint venture obligations, including a $10.0 million milestone payment
to GelTex in October 1999 and a $10.0 million equity investment in BioMarin upon
completion of their planned initial public equity offering; (ii) product
development and marketing; (iii) expanding facilities; and (iv) marketing
Carticel[R] AuCC, Thyrogen[R] hormone and Genzyme's line of products designed to
limit the incidence and occurrence of post-operative adhesions (the "Sepra
Products"). Genzyme's cash resources will be further reduced to pay principal
and interest on the following debt: (i) $100.0 million payable in November 1999
under the Revolving Credit Facility; (ii) $21.2 million in principal amount
under the GGD Debentures, which are convertible into GGD stock and mature on
August 29, 2003; (iii) $9.4 million in principal amount under the GTR Note,
which is convertible into GTR Stock and matures on February 27, 2000; and (iv)
$250.0 million in principal amount under the GGD Notes, which are convertible
into shares of GGD Stock and GMO stock and which mature on June 1, 2005. To the
extent cash is used to pay or redeem these debt instruments, including the
interest payable thereon, Genzyme's cash resources will be diminished. Genzyme
may also require additional capital to finance its activities. There can be no
assurance that such financing will be available on terms acceptable to Genzyme,
if at all.
GENZYME GENERAL
As of March 31, 1999, Genzyme General had cash, cash equivalents, and short- and
long-term investments of $610.3 million, an increase of $54.2 million from
December 31, 1998. Operating and financing activities provided $45.1 million and
$16.1 million of cash, respectively, investing activities used $96.9 million and
fluctuations in exchange rates caused a reduction in cash of $2.6 million. In
the three months ended March 31, 1999, financing activities provided $19.9
million of cash proceeds from the exercise of stock options and used $0.4
million of cash for the repayment of debt and capital lease obligations. At
March 31, 1999, $82.0 million of funds allocated to Genzyme General under the
Revolving Credit Facility remained outstanding. In the three months ended March
31, 1999, investing activities provided $11.1 million of cash from the sale of
Genzyme's investment in TECHNE common stock. Investing activities used a net of
$91.3 million of cash for the investment portfolio; $10.3 million of cash to
fund capital expenditures; $9.6 million of cash to fund Genzyme General's
investments in joint ventures; and $3.2 million to fund other noncurrent assets.
In 1998, the Genzyme Board made $50.0 million of Genzyme General's cash
available to GTR under the GTR Equity Line. Under the terms of the GTR Equity
Line, GTR may draw down funds as needed each fiscal quarter in exchange for GTR
Designated Shares. In February 1999, GTR made a $5.0 million draw under the GTR
Equity Line in exchange for 1,633,399 GTR Designated Shares.
In March 1999, Genzyme announced that it plans to reallocate Genzyme's interest
in Diacrin/Genzyme LLC from GTR to Genzyme General, subject to the approval of
holders of GTR Stock, in exchange for $25.0 million of cash and a 3% worldwide
royalty on any products sold by Diacrin/Genzyme LLC. Upon approval of the
Transfer, GTR will receive $25.0 million in cash from Genzyme General, and the
funds available under the GTR Equity Line will be reduced to $20.0 million from
$45.0 million. Of the $25.0 million in cash to be paid to GTR for the Transfer,
$5.0 million is non-refundable and $20.0 million represents a pre-payment
related to the achievement of certain future milestones by Diacrin/Genzyme LLC.
If the milestones are not met, GTR is required to repay Genzyme General for the
advanced milestone funds plus interest in cash or GTR Designated Shares, at
GTR's option.
In 1998, the Genzyme Board made $30.0 million of Genzyme General's cash
available to GMO under an equity line of credit (the "GMO Equity Line"). Under
the terms of the GMO Equity Line, GMO may draw down funds as needed each fiscal
quarter in exchange for GMO Designated Shares. GMO has not yet drawn any funds
under the GMO Equity Line in 1999.
In March 1999, Genzyme announced that it intends to create a separate division,
with its own series of common stock, for the existing surgical products business
that is part of Genzyme General, subject to approval of the Genzyme Board. To
the extent Genzyme General contributes cash to this division, its cash resources
will be diminished.
Genzyme General believes that its available cash, investments and cash flow from
product and service sales will be sufficient to finance its planned operations
and capital requirements for the foreseeable future. Although Genzyme General
currently has substantial cash resources, it has committed to utilize a portion
of its resources for certain purposes, such as: (i) paying strategic
collaborators and funding joint venture obligations, including a $10.0 million
milestone payment to GelTex in October 1999 and a $10.0 million equity
investment in BioMarin upon completion of their planned initial public equity
offering; (ii) product development and marketing; (iii) expanding facilities;
and (iv) marketing Thyrogen[R] hormone and the Sepra Products. Genzyme General's
cash resources will be further reduced to pay principal and interest on the
following debt: (i) $82.0 million under the Revolving Credit Facility; (ii)
$21.2 million in principal amount under the GGD Debentures, which are
convertible into shares of GGD Stock and mature on August 29, 2003; and (iii)
$250.0 million in principal amount under the GGD Notes, which are convertible
into shares of GGD Stock and mature on June 1, 2005. To the extent cash is used
to pay or redeem these debt instruments, including the interest payable thereon,
Genzyme General's cash will also be diminished. Further, to the extent the
liabilities or contingencies of GTR and GMO affect Genzyme's resources or
financial condition, such liabilities or contingencies could affect the
financial condition or results of operations of Genzyme General. Genzyme General
may require additional capital to
30
<PAGE> 31
finance any activities. There can be no assurance that such financing will be
available on terms acceptable to Genzyme General, if at all.
GENZYME TISSUE REPAIR
As of March 31, 1999, GTR had cash and cash equivalents of $6.4 million, a
decline of $1.4 million from December 31, 1998. In the three months ended March
31, 1999, GTR used $4.0 million of cash for operations. Investing activities
used $2.4 million of cash, which included $2.1 million used to fund GTR's
investment in Diacrin/Genzyme LLC and $0.3 million used for purchases of
property, plant and equipment. Financing activities provided $5.0 million of
cash, which consisted of $5.0 million allocated to GTR under the GTR Equity Line
and $0.1 million of cash proceeds from employee stock plans.
As of March 31, 1999, $18.0 million of funds allocated to GTR in December 1996
under the Revolving Credit Facility remained outstanding. This $18.0 million is
due to be repaid in November 1999.
In March 1999, Genzyme announced that it plans to reallocate Genzyme's interest
in Diacrin/Genzyme LLC from GTR to Genzyme General, in the second quarter of
1999, subject to the approval of holders of GTR Stock, in exchange for $25.0
million of cash and a 3% worldwide royalty on any products sold by
Diacrin/Genzyme LLC. Upon approval of the Transfer, GTR will receive $25.0
million in cash from Genzyme General and the funds available under the GTR
Equity Line will be reduced to $20.0 million from $45.0 million. Of the $25.0
million in cash to be paid to GTR for the Transfer, $5.0 million is
non-refundable and $20.0 million represents a pre-payment related to the
achievement of certain future milestones by Diacrin/Genzyme LLC. If the
milestones are not met, GTR is required to repay Genzyme General for the
advanced milestone funds plus interest in cash or GTR Designated Shares, at
GTR's option.
GTR believes its available cash and investments, and amounts available under the
GTR Equity Line will be sufficient to finance planned operations and capital
requirements through the end of 1999. GTR must raise significant additional
capital in order to continue operations at current levels beyond 1999. GTR's
plans to raise additional capital include the consideration of the sale of
additional equity securities, strategic alliances with third parties to fund
further developments and marketing of Carticel[R] AuCC and other business
transactions that would generate capital resources to assure continuation of
GTR's operations and research programs. If these initiatives are not successful,
GTR may be required to delay, scale back or eliminate certain of its programs,
or to license third parties to commercialize technologies or products that GTR
would otherwise undertake itself.
GENZYME MOLECULAR ONCOLOGY
As of March 31, 1999, GMO had cash, cash equivalents, and short-term investments
of $12.5 million, an increase of $1.7 million from December 31, 1998. Operating
activities provided $0.7 million of cash. Financing activities provided $1.0
million of cash due to the maturity of investments.
GMO believes that the existing cash balances, revenues generated from SAGE[TM]
agreements, committed research funding from collaborators and cash available
under the GMO Equity line, will enable GMO to maintain its current and planned
operations through 2000. To the extent CMDF exercises its option to require
Genzyme to purchase a portion of CMDF's membership interest in StressGen/Genzyme
LLC, GMO's cash resources will be diminished. Substantial additional funds will
be required to complete development and commercialization of GMO's products and
services (other than services related to the SAGE[TM] technology). In addition,
GMO's cash requirements may vary materially from those now planned as a result
of numerous factors, including the progress of GMO's research and development
programs, achievement of milestones under strategic alliance arrangements, the
ability of GMO to establish and maintain additional strategic alliances and
licensing arrangements, the progress of development efforts of GMO's strategic
partners, competing technological and market developments, the costs involved in
enforcing patent claims and other intellectual property rights, the development
of competitor products and services and the cost and timing of regulatory
approvals. Insufficient funds may require GMO to delay, scale back or eliminate
certain of its programs or to license third parties to commercialize
technologies or products that GMO would otherwise undertake itself.
31
<PAGE> 32
EURO-THE NEW EUROPEAN CURRENCY
Since December 31, 1998, there have been no material changes related to
Genzyme's outstanding derivatives and forward contracts, or any other material
contracts as a result of the Euro conversion nor have there been any material
changes in Genzyme's competitive position as a result of the conversion. The
Company's disclosures related to the Euro conversion are described in the 1998
Genzyme 10-K under the heading "Management's Discussion and Analysis of Genzyme
Corporation and Subsidiaries Financial Condition and Results of Operations --
"Euro -- the New European Currency," set forth in Exhibit 13.1 to the 1998
Genzyme 10-K and which is incorporated herein by reference.
YEAR 2000
There have been no material changes in the Company's Year 2000 compliance
program or its potential Y2K exposures since December 31, 1998. The Company's
disclosures related to Year 2000 issues are described in the 1998 Genzyme 10-K
under the heading "Management's Discussion and Analysis of Genzyme Corporation
and Subsidiaries Financial Condition and Results of Operations -- Year 2000,"
set forth in Exhibit 13.1 to the 1998 Genzyme 10-K and which is incorporated
herein by reference.
MARKET RISK
There have been no material changes in the Company's market risk since December
31, 1998. The Company's disclosure related to market risks are described in the
1998 Genzyme 10-K under the heading "Management's Discussion and Analysis of
Genzyme Corporation and Subsidiaries' Financial Condition and Results of
Operation -- "Market Risk," set forth in Exhibit 13.1 to the 1998 Genzyme 10-K
and which is incorporated herein by reference.
SUBSEQUENT EVENT
In April 1999, Genzyme General received approximately $8.3 million ($8.0 million
in principal and $0.3 million in interest) in connection with certain notes
receivable that were previously fully reserved due to uncertainty surrounding
collection. Genzyme received these notes in partial consideration for the sale
of Genetic Design, Inc. in 1996. The $8.3 million will be recorded as a gain in
the second quarter of 1999.
32
<PAGE> 33
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, MARCH 31, 1999
ITEM 3. QUANTITATIVE AND QUALITATIVE ANALYSIS OF MARKET RISK
There have been no material changes in the Company's market risk since December
31, 1998. The Company's market risk disclosures are described in the 1998
Genzyme 10-K under the heading "Management's Discussion and Analysis of Genzyme
Corporation and Subsidiaries' Financial Condition and Results of Operations -
Market Risk," which is set forth in Exhibit 13.1 to the 1998 Genzyme 10-K and is
incorporated herein by reference.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule for Genzyme Corporation for the three
months ended March 31, 1999 (for EDGAR filing purposes only).
Filed herewith.
(b) Reports on Form 8-K
On March 17, 1999, Genzyme Corporation filed a Current Report on
Form 8-K to announce that the Genzyme Board had authorized the
renewal of Genzyme's shareholder rights plan. This plan became
effective on March 28, 1999, which was the date on which the
previous rights plan expired.
33
<PAGE> 34
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, MARCH 31, 1999
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENZYME CORPORATION
DATE: May 17, 1999 By: /s/ Michael S. Wyzga
------------------------
Michael S. Wyzga
Senior Vice President,
Corporate Controller
and Chief Accounting Officer
34
<PAGE> 35
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, MARCH 31, 1999
EXHIBIT INDEX
27 Financial Data Schedule for Genzyme Corporation for the three months ended
March 31, 1999 (for EDGAR filing purposes only). Filed herewith.
35
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF GENZYME CORPORATION AND ITS
SUBSIDIARIES FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS AS INCLUDED IN THE FORM
10-Q FOR GENZYME CORPORATION DATED MARCH 31, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 80,591
<SECURITIES> 247,668
<RECEIVABLES> 177,780
<ALLOWANCES> 17,807
<INVENTORY> 110,567
<CURRENT-ASSETS> 671,489
<PP&E> 536,314
<DEPRECIATION> 158,400
<TOTAL-ASSETS> 1,721,053
<CURRENT-LIABILITIES> 228,943
<BONDS> 284,415
1,176
0
<COMMON> 0
<OTHER-SE> 1,198,107
<TOTAL-LIABILITY-AND-EQUITY> 1,721,053
<SALES> 163,702
<TOTAL-REVENUES> 183,744
<CGS> 43,818
<TOTAL-COSTS> 55,906
<OTHER-EXPENSES> 95,630
<LOSS-PROVISION> 2,356
<INTEREST-EXPENSE> 5,498
<INCOME-PRETAX> 25,890
<INCOME-TAX> 9,833
<INCOME-CONTINUING> 16,057
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,057
<EPS-PRIMARY> 0.40<F1>
<EPS-DILUTED> 0.38<F1>
<FN>
<F1>GENZYME CORPORATION REPORTS EARNINGS PER SHARE BASED ON ITS THREE TRACKING
STOCKS - GENZYME GENERAL DIVISION COMMON STOCK ("GGD STOCK"), GENZYME TISSUE
REPAIR DIVISION COMMON STOCK ("GTR STOCK") AND GENZYME MOLECULAR ONCOLOGY
DIVISION COMMON STOCK ("GMO STOCK"). THE EARNINGS PER SHARE DATA PRESENTED ON
THIS SCHEDULE REFLECTS THE EARNINGS PER SHARE DATA FOR NET INCOME ATTRIBUTABLE
TO GGD STOCK. FOR THE THREE MONTHS ENDED MARCH 31, 1999, NET INCOME
ATTRIBUTABLE TO GENZYME GENERAL DIVISION WAS $32,481 AND NET INCOME PER SHARE
OF GGD STOCK ON A BASIC AND DILUTED BASIS WAS $0.40 AND $0.38, RESPECTIVELY.
NET LOSS FOR GENZYME TISSUE REPAIR DIVISION FOR THE THREE MONTHS ENDED MARCH
31, 1999 WAS $(9,616) OR $(0.44) PER BASIC AND DILUTED SHARE OF GTR STOCK.
NET LOSS FOR GENZYME MOLECULAR ONCOLOGY DIVISION FOR THE THREE MONTHS ENDED
MARCH 31, 1999 WAS $(7,060) OR $(0.56) PER BASIS AND DILUTED SHARE OF GMO STOCK.
</FN>
</TABLE>
