<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 SEPTEMBER 30, 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)
<TABLE>
<S> <C>
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)
</TABLE>
(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. [X] Yes [ ] No
The number of shares outstanding of each of the issuer's series of common
stock as of October 31, 1999:
<TABLE>
<S> <C>
Genzyme General Division Common Stock....................... 84,130,309
Genzyme Molecular Oncology Division Common Stock............ 13,357,763
Genzyme Surgical Products Division Common Stock............. 14,835,161
Genzyme Tissue Repair Division Common Stock................. 25,532,809
</TABLE>
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE> 2
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, SEPTEMBER 30, 1999
NOTE REGARDING FORWARD-LOOKING STATEMENTS:
This report contains forward-looking statements regarding our:
- Planned product development activities;
- Projected expenditures;
- Anticipated receipt of regulatory approvals;
- Plans for sales and marketing;
- Projected cash needs;
- Expected financial results;
- Planned acquisition of Cell Genesys, Inc.; and
- Considerations regarding the disposition of GZMO designated shares.
These statements are based upon the current assumptions of our management
and are only expectations of future results. These statements are also subject
to risks and uncertainties, and our actual results may differ significantly from
those that are described in this report. These risks and uncertainties include:
- Our ability to successfully complete preclinical and clinical development
of our products and services;
- Our ability to manufacture sufficient amounts of our products for
clinical trials and commercialization activities;
- Our ability to obtain timely regulatory approval of our products and
services;
- Our ability to obtain and maintain adequate patent and other proprietary
rights protection of our products and services;
- The content and timing of decisions made by the FDA and other regulatory
agencies regarding our products and services;
- The accuracy of our estimates of the size and characteristics of the
markets to be addressed by our products and services;
- Market acceptance of our products and services;
- Our ability to obtain reimbursement for our products and services from
third party payers;
- Our ability to establish and maintain strategic collaborations and
distribution arrangements;
- The continued funding of our joint ventures;
- The accuracy of our information regarding the products and resources of
our competitors and potential competitors;
- Our ability, as well as the ability our subsidiaries, significant
suppliers, distributors, customers and partners, to be Year 2000
compliant by the end of this year; and
- The likelihood that the regulatory and other approvals required to
complete the Cell Genesys acquisition will be obtained.
<PAGE> 3
We have filed more detailed descriptions of these risks and uncertainties
in some of our recent filings with the SEC. We encourage you to review these
descriptions, which can be found in the following places:
- Exhibit 13.1 to our annual report on Form 10-K for the year ended
December 31, 1998 under the heading "Management's Discussion and Analysis
of Genzyme Corporation and Subsidiaries' Financial Condition and Results
of Operations -- Factors Affecting Future Operating Results."
- Exhibit 13.1 to our annual report on Form 10-K for the year ended
December 31, 1998 under the heading "Management's Discussion and Analysis
of Genzyme General Division's Financial Condition and Results of
Operations -- Factors Affecting Future Operating Results."
- Exhibit 13.3 to our annual report on Form 10-K for the year ended
December 31, 1998 under the heading "Management's Discussion and Analysis
of Genzyme Molecular Oncology Division's Financial Condition and Results
of Operations -- Factors Affecting Future Operating Results."
- Exhibit 99.3 to our current report on Form 8-K filed with the SEC on June
11, 1999 under the heading "Risk Factors Relating to Genzyme Surgical
Products Division Common Stock -- Risks Related to Genzyme Surgical
Products."
- Exhibit 13.2 to our annual report on Form 10-K for the year ended
December 31, 1998 under the heading "Management's Discussion and Analysis
of Genzyme Tissue Repair Division's Financial Condition and Results of
Operations -- Factors Affecting Future Operating Results."
NOTE REGARDING REFERENCES TO GENZYME DIVISIONS:
Throughout this report, the words "we," "us," "our" and "Genzyme" refer to
Genzyme Corporation and all of its operating divisions taken as a whole, and
"our board of directors" refers to the board of directors of Genzyme
Corporation.
In addition, we refer to our four operating divisions as follows:
- Genzyme General Division = "Genzyme General"
- Genzyme Molecular Oncology Division = "Genzyme Molecular Oncology"
- Genzyme Surgical Products Division = "Genzyme Surgical Products"
- Genzyme Tissue Repair Division = "Genzyme Tissue Repair"
We also refer to the series of Genzyme common stock that reflect the value
and track the performance of these divisions by their Nasdaq trading symbols:
- Genzyme General Division Common Stock = "GENZ Stock"
- Genzyme Molecular Oncology Division Common Stock = "GZMO Stock"
- Genzyme Surgical Products Division Common Stock = "GZSP Stock"
- Genzyme Tissue Repair Division Common Stock = "GZTR Stock"
"Genzyme" is a registered trademark and service mark of Genzyme
Corporation. All rights reserved.
<PAGE> 4
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, SEPTEMBER 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements........................................ 2
GENZYME GENERAL
Unaudited, Combined Statements of Operations for the Three
and Nine Months Ended September 30, 1999 and 1998........... 2
Unaudited, Combined Balance Sheets as of September 30, 1999
and December 31, 1998....................................... 3
Unaudited, Combined Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and 1998.................... 4
Notes to Unaudited, Combined Financial Statements........... 5
GENZYME MOLECULAR ONCOLOGY
Unaudited, Combined Statements of Operations for the Three
and Nine Months Ended September 30, 1999 and 1998........... 9
Unaudited, Combined Balance Sheets as of September 30, 1999
and December 31, 1998....................................... 10
Unaudited, Combined Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and 1998.................... 11
Notes to Unaudited, Combined Financial Statements........... 12
GENZYME SURGICAL PRODUCTS
Unaudited, Combined Statements of Operations for the Three
and Nine Months Ended September 30, 1999 and 1998........... 13
Unaudited, Combined Balance Sheets as of September 30, 1999
and December 31, 1998....................................... 14
Unaudited, Combined Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and 1998.................... 15
Notes to Unaudited, Combined Financial Statements........... 16
GENZYME TISSUE REPAIR
Unaudited, Combined Statements of Operations for the Three
and Nine Months Ended September 30, 1999 and 1998........... 18
Unaudited, Combined Balance Sheets as of September 30, 1999
and December 31, 1998....................................... 19
Unaudited, Combined Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and 1998.................... 20
Notes to Unaudited, Combined Financial Statements........... 21
GENZYME CORPORATION AND SUBSIDIARIES
Unaudited, Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 1999 and 1998..... 23
Unaudited, Consolidated Balance Sheets as of September 30,
1999 and December 31, 1998.................................. 25
Unaudited, Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1999 and 1998............... 26
Notes to Unaudited, Consolidated Financial Statements....... 27
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 34
ITEM 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 60
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K............................ 60
Signatures....................................................................... 61
</TABLE>
<PAGE> 5
GENZYME GENERAL
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total revenues............................................ $157,669 $142,225 $462,640 $413,900
Operating costs and expenses:
Cost of products and services sold...................... 36,437 54,475 109,328 136,082
Selling, general and administrative..................... 36,388 30,277 114,446 92,736
Research and development................................ 22,884 19,530 68,896 52,039
Amortization of intangibles............................. 1,978 1,879 6,081 5,516
Charge for in-process technology........................ 5,436 -- 5,436 --
-------- -------- -------- --------
Total operating costs and expenses.................... 103,123 106,161 304,187 286,373
-------- -------- -------- --------
Operating income.......................................... 54,546 36,064 158,453 127,527
Other income (expenses):
Equity in net loss of unconsolidated affiliates......... (9,352) (4,919) (24,077) (11,832)
Gain on affiliate sale of stock......................... 1,164 -- 1,770 2,369
Gain on sale of investment in equity securities......... -- -- 1,963 --
Minority interest....................................... 843 993 2,573 2,717
Gain on sale of product line............................ 518 31,202 8,018 31,202
Charge for impaired investment.......................... -- -- (5,487) --
Investment income....................................... 6,970 6,974 23,713 14,660
Interest expense........................................ (5,445) (5,324) (15,631) (10,628)
-------- -------- -------- --------
Total other income (expenses)......................... (5,302) 28,926 (7,158) 28,488
-------- -------- -------- --------
Income before income taxes................................ 49,244 64,990 151,295 156,015
Provision for income taxes................................ (19,273) (24,788) (59,906) (59,389)
-------- -------- -------- --------
Net income................................................ 29,971 40,202 91,389 96,626
Tax benefit allocated from Genzyme Molecular Oncology..... 2,016 1,153 6,326 5,238
Tax benefit allocated from Genzyme Surgical Products...... 3,841 7,741 14,191 14,578
Tax benefit allocated from Genzyme Tissue Repair.......... 2,359 4,656 9,733 12,452
-------- -------- -------- --------
Net income attributable to GENZ Stock..................... $ 38,187 $ 53,752 $121,639 $128,894
======== ======== ======== ========
Per GENZ common share:
Net income per GENZ common share -- basic............... $ 0.46 $ 0.68 $ 1.47 $ 1.64
======== ======== ======== ========
Weighted average shares outstanding....................... 83,621 79,032 82,741 78,492
======== ======== ======== ========
Net income per GENZ common share -- diluted............. $ 0.43 $ 0.64 $ 1.38 $ 1.57
======== ======== ======== ========
Adjusted weighted average shares outstanding.............. 94,331 87,882 93,196 83,887
======== ======== ======== ========
Net income................................................ $ 29,971 $ 40,202 $ 91,389 $ 96,626
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments.............. 6,463 (1,134) (7,349) (1,290)
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising during the period... 18,871 (567) 17,982 (4,210)
Reclassification adjustment for gains included in net
income.............................................. -- -- 1,945 --
-------- -------- -------- --------
Unrealized gains (losses) on securities, net............ 18,871 (567) 19,927 (4,210)
Other comprehensive income (loss)......................... 25,334 (1,701) 12,578 (5,500)
-------- -------- -------- --------
Comprehensive income...................................... $ 55,305 $ 38,501 $103,967 $ 91,126
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
2
<PAGE> 6
GENZYME GENERAL
COMBINED BALANCE SHEETS
(UNAUDITED, AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 203,636 $ 100,012
Short-term investments.................................... 220,701 174,421
Accounts receivable, net.................................. 131,893 137,615
Inventories............................................... 83,700 85,162
Prepaid expenses and other current assets................. 19,776 27,727
Due from Genzyme Molecular Oncology....................... 3,173 4,773
Due from Genzyme Surgical Products........................ 13,676 --
Due from Genzyme Tissue Repair............................ 966 548
Deferred tax assets -- current............................ 39,688 39,725
---------- ----------
Total current assets................................... 717,209 569,983
Property, plant and equipment, net.......................... 363,436 362,743
Long-term investments....................................... 105,759 281,664
Intangibles, net............................................ 78,503 85,851
Deferred tax assets -- noncurrent........................... 25,401 28,138
Investment in equity securities............................. 77,041 51,977
Other....................................................... 31,672 30,035
---------- ----------
Total assets........................................... $1,399,021 $1,410,391
========== ==========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable.......................................... $ 11,465 $ 22,324
Accrued expenses.......................................... 79,713 65,643
Income taxes payable...................................... 26,771 16,532
Deferred revenue.......................................... 1,251 1,231
Current portion of long-term debt and capital lease
obligations............................................ 83,610 82,568
---------- ----------
Total current liabilities.............................. 202,810 188,298
Long-term debt and capital lease obligations................ -- 3,087
Convertible subordinated notes and debentures, net.......... 272,399 271,559
Other....................................................... 1,852 7,480
---------- ----------
Total liabilities...................................... 477,061 470,424
Division equity............................................. 921,960 939,967
---------- ----------
Total liabilities and division equity.................. $1,399,021 $1,410,391
========== ==========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
3
<PAGE> 7
GENZYME GENERAL
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED, AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................. $ 91,389 $ 96,626
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and amortization........................... 33,553 29,801
Accrued interest/amortization on bonds.................. (893) (8,969)
Provision for bad debts................................. 10,683 3,727
Loss on sale of plant and equipment..................... 1,157 --
Equity in net loss of unconsolidated affiliates......... 24,077 11,831
Gain on affiliate sale of stock......................... (1,770) (2,369)
Minority interest in net loss of subsidiaries........... (2,573) (2,717)
Gain on sale of investment in equity securities......... (1,963) --
Charge for impaired investment.......................... 5,487 --
Charge for in-process research and development.......... 5,436 --
Gain on sale of business................................ (8,018) (31,202)
Other................................................... 499 (11)
Increase (decrease) in cash from working capital
changes:
Accounts receivable................................... (6,289) (26,661)
Inventories........................................... (1,939) 23,837
Prepaid expenses and other current assets............. 7,839 (4,483)
Due from Genzyme Molecular Oncology................... 1,600 1,433
Due from Genzyme Surgical Products.................... (13,676) --
Due from Genzyme Tissue Repair........................ (418) (140)
Accounts payable, accrued expenses, income taxes
payable and deferred revenue......................... 44,110 51,454
--------- ---------
Net cash provided by operating activities............. 188,291 142,157
INVESTING ACTIVITIES:
Purchases of investments.................................. (342,087) (382,790)
Sales and maturities of investments....................... 342,010 48,682
Acquisitions of property, plant and equipment............. (32,598) (39,077)
Sales of property, plant and equipment.................... -- 876
Acquisitions, net of acquired cash and assumed
liabilities............................................. (6,500) (8,324)
Proceeds from sale of product line........................ 5,000 24,760
Proceeds from sale of equity investment................... 11,090 --
Investments in unconsolidated affiliates.................. (13,700) (22,783)
Investments in joint ventures............................. (28,912) (7,004)
Repayment of notes receivable............................. 8,360 --
Repayment of loans by affiliates.......................... -- 2,019
Other..................................................... 915 690
--------- ---------
Net cash used in investing activities................. (56,422) (382,951)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... 55,537 33,000
Proceeds from issuance of debt............................ -- 243,459
Payments of debt and capital lease obligations............ (3,525) (13,927)
Net cash allocated to Genzyme Molecular Oncology for
designated shares....................................... -- (5,000)
Net cash allocated to Genzyme Surgical Products........... (50,827) (29,571)
Net cash allocated (to) from Genzyme Tissue Repair for
designated shares....................................... (29,984) 86
Other..................................................... 3,444 2,485
--------- ---------
Net cash provided by (used in) financing activities... (25,355) 230,532
Effect of exchange rate changes on cash..................... (2,890) (438)
--------- ---------
Increase (decrease) in cash and cash equivalents............ 103,624 (10,700)
Cash and cash equivalents at beginning of period............ 100,012 65,301
--------- ---------
Cash and cash equivalents at end of period.................. $ 203,636 $ 54,601
========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
4
<PAGE> 8
GENZYME GENERAL
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
We prepared the unaudited, combined financial statements for Genzyme
General following the requirements of the SEC for interim reporting. As
permitted under those rules, certain notes or other financial information that
is normally required by generally accepted accounting principles can be
condensed or omitted. We have reclassified certain 1998 data to conform to the
1999 presentation.
These financial statements include all normal and recurring adjustments
that we consider necessary for the fair presentation of Genzyme General's
financial position and operating results. Since these are combined financial
statements, you should also read the financial statements and notes for Genzyme
General included in the current report on Form 8-K that we filed with the SEC on
June 30, 1999. Revenues, expenses, assets and liabilities can vary from quarter
to quarter. Therefore, the results and trends in these interim financial
statements may not be the same as those for the full year.
In June 1999, we created Genzyme Surgical Products. The business of Genzyme
Surgical Products previously operated as a business unit of Genzyme General.
These financial statements reflect the financial position, results of operations
and cash flows of Genzyme General as if Genzyme Surgical Products had existed as
a separate division of Genzyme for all periods presented.
2. FINANCIAL INFORMATION
We present financial information specific to Genzyme General in these
unaudited, combined financial statements. Accounting policies and financial
information relevant to Genzyme, Genzyme General, Genzyme Molecular Oncology,
Genzyme Surgical Products and Genzyme Tissue Repair as a whole are presented in
our unaudited, consolidated financial statements.
3. INVENTORIES
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Raw materials.............................. $27,834 $29,497
Work-in-process............................ 43,490 23,359
Finished products.......................... 12,376 32,306
------- -------
Total................................. $83,700 $85,162
======= =======
</TABLE>
4. ACQUISITION OF PEPTIMMUNE
In July 1999, we acquired Peptimmune, Inc., a privately-held company whose
lead development program focuses on a treatment for pemphigus vulgaris. We
allocated this acquisition to Genzyme General. We allocated the aggregate
purchase price of $6.5 million and assumed liabilities of $0.3 million to the
tangible and intangible assets we acquired from Peptimmune based on their
respective fair values (amounts in thousands):
<TABLE>
<S> <C>
Property, plant & equipment................................. $ 128
Deferred tax asset.......................................... 1,229
In-process technology....................................... 5,436
------
Total.................................................. $6,793
======
</TABLE>
The $5.4 million allocated to in-process technology represents the value we
assigned to Peptimmune's programs that are still in the development stage and
for which there is no alternative use. In the third quarter
5
<PAGE> 9
GENZYME GENERAL
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
of 1999, Genzyme General recorded a one-time charge to operations for the amount
of the purchase price allocated to in-process technology.
5. INVESTMENT IN BIOMARIN
In July 1999, Genzyme General purchased an additional 769,230 shares of the
common stock of BioMarin Pharmaceutical Inc. for $10.0 million in a private
placement contemporaneous with the closing of BioMarin's initial public
offering. We currently own approximately 6% of the outstanding shares of
BioMarin common stock. We allocate this investment to Genzyme General.
6. GAIN ON SALE OF PRODUCT LINE
In July 1999, the Diagnostics business unit of Genzyme General sold its
immunochemistry product line to an operating unit of Sybron Laboratory Products
Corp. for $5.0 million in cash. In the third quarter of 1999, Genzyme General
recorded a gain of $0.5 million related to the sale of this product line.
7. NET INCOME PER SHARE
The following table sets forth our computation of basic and diluted
earnings per share of GENZ Stock:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ------------------------
1999 1998 1999 1998
--------- --------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net income -- basic............................... $38,187 $53,752 $121,639 $128,894
Effect of dilutive securities (net of tax):
5 1/4% convertible subordinated notes(1):
Interest expense............................. 2,259 2,009 6,208 2,936
Amortization of purchasers' discount and
offering costs(2).......................... 161 143 443 207
5% convertible subordinated debentures(3):
Interest expense............................. 183 -- 502 --
Amortization of debt offering costs(4)....... 30 -- 83 --
------- ------- -------- --------
Net income -- diluted............................. $40,820 $55,904 $128,875 $132,037
======= ======= ======== ========
</TABLE>
6
<PAGE> 10
GENZYME GENERAL
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ------------------------
1999 1998 1999 1998
--------- --------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Shares used in net income per common
share-basic....................................... 83,621 79,032 82,741 78,492
Effect of dilutive securities:
Employee and director stock options.......... 3,743 2,200 3,485 2,261
Warrants..................................... 24 7 27 7
5 1/4% convertible subordinated notes........ 6,313 6,313 6,313 3,053
5% convertible subordinated debentures....... 630 330 630 74
------- ------- -------- --------
Dilutive potential common shares(5)............. 10,710 8,850 10,455 5,395
------- ------- -------- --------
Shares used in net income per common
share-diluted(5)................................ 94,331 87,882 93,196 83,887
======= ======= ======== ========
Net income per common share -- basic.............. $ 0.46 $ 0.68 $ 1.47 $ 1.64
======= ======= ======== ========
Net income per common share -- diluted(5)......... $ 0.43 $ 0.64 $ 1.38 $ 1.57
======= ======= ======== ========
</TABLE>
- - ---------------
(1) We issued these notes in May 1998.
(2) We are amortizing the purchasers' discount and offering costs of
approximately $7.0 million over the term of these notes, which mature in
June 2005.
(3) We issued these debentures in August 1998.
(4) We are amortizing the offering costs of approximately $0.9 million over the
term of these debentures, which mature in August 2003.
(5) We did not include the securities described in the following table in the
computation of Genzyme General's diluted earnings per share for each period
because these securities had an exercise price greater than the average
market price of GENZ Stock:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1999 1998 1999 1998
------ ------ ------ ------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Shares of GENZ Stock issuable for options..... 1,680 3,611 1,621 3,767
Shares of GENZ Stock issuable for warrants.... -- 80 27 80
----- ----- ----- -----
Total shares with exercise prices greater than
the average market price of GENZ Stock
during the period........................... 1,680 3,691 1,648 3,847
===== ===== ===== =====
</TABLE>
8. SEGMENT REPORTING
Genzyme General has two reportable segments:
- Therapeutics, which develops, manufactures and distributes human
therapeutic products for significant unmet medical needs. The business
derives substantially all of its revenue from sales of Cerezyme(R)
enzyme.
- Diagnostic Products, which provides diagnostic products to niche markets
focusing on in vitro diagnostics.
7
<PAGE> 11
GENZYME GENERAL
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
We have provided information concerning the operations in these reportable
segments in the following table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Therapeutics............................ $123,492 $105,485 $357,756 $297,608
Diagnostic Products................... 14,286 16,168 43,933 50,120
Other................................. 19,364 19,417 59,274 62,897
Eliminations/Adjustments.............. 527 1,155 1,677 3,275
-------- -------- -------- --------
Total................................... $157,669 $142,225 $462,640 $413,900
======== ======== ======== ========
Net Income:
Therapeutics.......................... $ 32,556 $ 23,650 $ 99,337 $ 90,461
Diagnostic Products(1)................ 1,063 19,399 3,263 19,920
Other................................. (2,630) (1,871) (3,958) (2,182)
Eliminations/Adjustments.............. (1,018) (976) (7,253) (11,573)
-------- -------- -------- --------
Total................................... $ 29,971 $ 40,202 $ 91,389 $ 96,626
======== ======== ======== ========
</TABLE>
- - ---------------
(1) Diagnostic Products' net income for the three and nine month periods ended
September 30, 1998 includes a $31.2 million gain on the sale of a product
line in 1998.
There has been no material change in segment assets since December 31,
1998.
9. SUBSEQUENT EVENTS
Information regarding the following events is included in note 10 to our
unaudited, consolidated financial statements:
- Our planned acquisition of Cell Genesys;
- The refinancing of our revolving credit facility;
- Our milestone payment to GelTex Pharmaceuticals, Inc.; and
- Our investment in the convertible preferred stock of Genzyme Transgenics
Corporation.
We incorporate that information into this note by reference.
8
<PAGE> 12
GENZYME MOLECULAR ONCOLOGY
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ --------------------
1999 1998 1999 1998
------- ------- -------- --------
<S> <C> <C> <C> <C>
Total revenues.................................... $ 709 $ 1,985 $ 3,455 $ 6,491
Operating costs and expenses:
Cost of revenues................................ 62 1,211 1,074 3,534
Selling, general and administrative............. 1,168 2,105 4,205 5,260
Research and development........................ 3,815 3,249 12,448 8,772
Amortization of intangibles..................... 2,956 2,956 8,869 9,026
------- ------- -------- --------
Total operating costs and expenses:.......... 8,001 9,521 26,596 26,592
------- ------- -------- --------
Operating loss.................................... (7,292) (7,536) (23,141) (20,101)
Other income (expenses):
Equity in net loss of joint venture............. (1,023) (266) (2,030) (1,244)
Interest income................................. 99 149 416 633
Interest expense................................ (5) (1,089) (8) (3,341)
------- ------- -------- --------
Total other income (expenses)................ (929) (1,206) (1,622) (3,952)
------- ------- -------- --------
Loss before income taxes.......................... (8,221) (8,742) (24,763) (24,053)
Tax benefit....................................... 662 662 1,986 1,986
------- ------- -------- --------
Net loss attributable to GZMO Stock............... $(7,559) $(8,080) $(22,777) $(22,067)
======= ======= ======== ========
Per GZMO common share (basic and diluted)......... $ (0.60) $ (2.06) $ (1.80) $ (5.62)
======= ======= ======== ========
Weighted average shares outstanding............... 12,682 3,929 12,672 3,929
======= ======= ======== ========
Net loss.......................................... $(7,559) $(8,080) $(22,777) $(22,067)
Other comprehensive income (loss), net of tax:
Unrealized gains on securities arising during
the period................................. -- 2 -- 9
------- ------- -------- --------
Comprehensive loss.............................. $(7,559) $(8,078) $(22,777) $(22,058)
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
9
<PAGE> 13
GENZYME MOLECULAR ONCOLOGY
COMBINED BALANCE SHEETS
(UNAUDITED, AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,685 $10,868
Short-term investments.................................... -- 1,032
Accounts receivable, net.................................. 256 5,931
Other current assets...................................... 36 85
------- -------
Total current assets................................... 1,977 17,916
Equipment, net.............................................. 506 791
Intangibles, net............................................ 8,376 17,245
------- -------
Total assets........................................... $10,859 $35,952
======= =======
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accrued expenses.......................................... $ 1,150 $ 1,273
Due to Genzyme General.................................... 3,173 4,773
Payable to joint venture.................................. 3,281 1,181
Deferred revenue.......................................... 630 1,500
------- -------
Total current liabilities.............................. 8,234 8,727
Deferred tax liability...................................... 1,875 3,861
------- -------
Total liabilities...................................... 10,109 12,588
Division equity............................................. 750 23,364
------- -------
Total liabilities and division equity.................. $10,859 $35,952
======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
10
<PAGE> 14
GENZYME MOLECULAR ONCOLOGY
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED, AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................... $(22,777) $(22,067)
Reconciliation of net loss to net cash used in operating
activities:
Depreciation and amortization.......................... 9,063 9,336
Deferred tax benefit................................... (1,986) (1,986)
Non-cash compensation expense.......................... 10 85
Accrued interest/amortization of marketable
securities............................................ 10 110
Gain on sale of equipment.............................. (54) --
Accretion of debt conversion feature................... -- 2,118
Equity in loss of joint venture........................ 2,030 1,244
Increase (decrease) in cash from working capital
changes:
Accounts receivable.................................. 5,675 (525)
Other current assets................................. 49 264
Due to Genzyme General............................... (1,600) (1,433)
Accrued expenses, payable to joint venture and
deferred revenue.................................... (923) 379
-------- --------
Net cash used in operating activities................ (10,503) (12,475)
INVESTING ACTIVITIES:
Purchases of investments.................................. -- (2,057)
Maturities of investments................................. 1,022 4,588
Acquisitions of equipment................................. (43) (510)
Sale of equipment......................................... 188 --
-------- --------
Net cash provided by investing activities............ 1,167 2,021
FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... 155 --
Repayments of debt........................................ -- (5,018)
Cash allocated from Genzyme General....................... -- 5,000
Other..................................................... (2) (10)
-------- --------
Net cash provided by (used in) financing
activities.......................................... 153 (28)
-------- --------
Decrease in cash and cash equivalents....................... (9,183) (10,482)
Cash and cash equivalents at beginning of period............ 10,868 15,010
-------- --------
Cash and cash equivalents at end of period.................. $ 1,685 $ 4,528
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
11
<PAGE> 15
GENZYME MOLECULAR ONCOLOGY
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
We prepared the unaudited, combined financial statements for Genzyme
Molecular Oncology following the requirements of the SEC for interim reporting.
As permitted under those rules, certain notes or other financial information
that is normally required by generally accepted accounting principles can be
condensed or omitted.
These financial statements include all normal and recurring adjustments
that we consider necessary for the fair presentation of Genzyme Molecular
Oncology's financial position and operating results. Since these are combined
financial statements, you should also read the financial statements and notes
for Genzyme Molecular Oncology included in our latest Form 10-K, as amended.
Revenues, expenses, assets and liabilities can vary from quarter to quarter.
Therefore, the results and trends in these interim financial statements may not
be the same as those for the full year.
2. FINANCIAL INFORMATION
We present financial information specific to Genzyme Molecular Oncology in
these unaudited, combined financial statements. Accounting policies and
financial information relevant to Genzyme, Genzyme General, Genzyme Molecular
Oncology, Genzyme Surgical Products and Genzyme Tissue Repair as a whole are
presented in our unaudited, consolidated financial statements.
3. STRESSGEN JOINT VENTURE
We allocate our interest in StressGen/Genzyme LLC, our joint venture with
StressGen Biotechnologies Corp. and the Canadian Medical Discoveries Fund Inc.
to Genzyme Molecular Oncology. Because the fund had the right to require
StressGen and Genzyme Molecular Oncology to repurchase the fund's membership
interest in the joint venture, Genzyme Molecular Oncology has been recording 50%
of the losses incurred by the joint venture. In August 1999, the fund exercised
its option to require Genzyme Molecular Oncology and StressGen to repurchase the
fund's interest in the joint venture and Genzyme Molecular Oncology recorded a
$1.0 million charge to its statement of operations in connection with this
repurchase. In addition, because Genzyme Molecular Oncology's portion of the
cumulative losses of the joint venture exceeded its initial capital
contribution, it has recorded current liabilities of $3.2 million for the nine
month period ended September 30, 1999.
4. NET LOSS PER SHARE
Information regarding Genzyme Molecular Oncology's net loss per share is
included in note 8 to our unaudited, consolidated financial statements. We
incorporate that information into this note by reference.
5. SUBSEQUENT EVENTS
Information regarding the following events is included in note 10 to our
unaudited, consolidated financial statements:
- Our planned acquisition of Cell Genesys;
- The refinancing of our revolving credit facility; and
- Our repurchase of one-half of the Canadian Medical Discoveries Fund's
interest in the StressGen joint venture.
We incorporate that information into this note by reference.
12
<PAGE> 16
GENZYME SURGICAL PRODUCTS
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total revenues.................................. $ 27,385 $ 24,904 $ 81,419 $ 76,332
Operating costs and expenses:
Cost of products sold......................... 16,798 25,823 50,081 55,805
Selling, general and administrative........... 15,114 13,356 46,893 43,905
Research and development...................... 7,131 6,060 21,716 13,073
Amortization of intangibles................... 1,445 1,444 4,306 4,306
-------- -------- -------- --------
Total operating costs and expenses......... 40,488 46,683 122,996 117,089
-------- -------- -------- --------
Operating loss.................................. (13,103) (21,779) (41,577) (40,757)
Other income (expenses):
Equity in net income (loss) of unconsolidated
affiliates................................. (32) 9 (32) (20)
Other......................................... 58 235 101 185
Investment income............................. 2,125 34 2,188 124
Interest expense.............................. (1) (18) (36) (55)
-------- -------- -------- --------
Total other income (expenses).............. 2,150 260 2,221 234
-------- -------- -------- --------
Net loss attributable to GZSP Stock............. $(10,953) $(21,519) $(39,356) $(40,523)
======== ======== ======== ========
Per GZSP common share (basic and diluted)....... $ (0.74)
========
Weighted average shares outstanding............. 14,835
========
Pro forma net loss per GZSP common share (basic
and diluted).................................. $ (1.45) $ (2.66) $ (2.74)
======== ======== ========
Pro forma weighted average shares outstanding... 14,800 14,800 14,800
======== ======== ========
Net loss........................................ $(10,953) $(21,519) $(39,356) $(40,523)
Other comprehensive income (loss), net of tax:
Unrealized losses in securities arising
during the period........................ (2) -- (630) --
-------- -------- -------- --------
Other comprehensive loss...................... (2) -- (630) --
-------- -------- -------- --------
Comprehensive loss............................ $(10,955) $(21,519) $(39,986) $(40,523)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
13
<PAGE> 17
GENZYME SURGICAL PRODUCTS
COMBINED BALANCE SHEETS
(UNAUDITED, AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 33,909 $ --
Short-term investments.................................... 53,513 --
Accounts receivable, net.................................. 16,640 15,663
Inventories............................................... 31,089 22,026
Prepaid expenses and other current assets................. 827 1,932
-------- --------
Total current assets................................... 135,978 39,621
Property, plant and equipment, net.......................... 16,996 16,249
Long-term investments....................................... 62,191 --
Intangibles, net............................................ 173,294 177,897
Other....................................................... 187 449
-------- --------
Total assets........................................... $388,646 $234,216
======== ========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable.......................................... $ 4,793 $ 3,925
Accrued expenses.......................................... 5,042 2,982
Due to Genzyme General.................................... 13,676 --
-------- --------
Total current liabilities.............................. 23,511 6,907
Noncurrent liabilities...................................... 221 221
-------- --------
Total liabilities...................................... 23,732 7,128
Division equity............................................. 364,914 227,088
-------- --------
Total liabilities and division equity.................. $388,646 $234,216
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
14
<PAGE> 18
GENZYME SURGICAL PRODUCTS
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED, AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................... $(39,356) $(40,523)
Reconciliation of net loss to net cash used in operating
activities:
Depreciation and amortization.......................... 5,860 5,943
Accrued interest/amortization on bonds................. 989 --
Loss on sale of plant and equipment.................... 12 --
Provision for bad debts................................ 250 120
Equity in net (income) loss of unconsolidated
affiliate............................................. 32 (164)
Increase (decrease) in cash from working capital
changes:
Accounts receivable.................................. (1,227) (1,174)
Inventories.......................................... (9,063) 6,271
Prepaid expenses and other assets.................... 1,105 (845)
Due to Genzyme General............................... 13,676 --
Accounts payable and accrued expenses................ 2,928 2,186
-------- --------
Net cash used in operating activities................ (24,794) (28,186)
INVESTING ACTIVITIES:
Purchases of investments.................................. (15,161) --
Sales and maturities of investments....................... 25,130 --
Acquisitions of property, plant and equipment............. (2,313) (1,470)
Other..................................................... 230 166
-------- --------
Net cash provided by (used in) investing
activities.......................................... 7,886 (1,304)
FINANCING ACTIVITIES:
Payments of debt and capital lease obligations............ -- (136)
Net cash allocated from Genzyme General................... 50,827 29,571
Other..................................................... (10) (351)
-------- --------
Net cash provided by financing activities............ 50,817 29,084
Increase (decrease) in cash and cash equivalents............ 33,909 (406)
Cash and cash equivalents at beginning of period............ -- 975
-------- --------
Cash and cash equivalents at end of period.................. $ 33,909 $ 569
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
15
<PAGE> 19
GENZYME SURGICAL PRODUCTS
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
We created Genzyme Surgical Products in June 1999. The business of Genzyme
Surgical Products previously operated as a business unit of Genzyme General.
These financial statements reflect the financial position, results of operations
and cash flows of Genzyme Surgical Products as if it had existed as a separate
division of Genzyme for all periods presented.
We prepared the unaudited, combined financial statements for Genzyme
Surgical Products following the requirements of the SEC for interim reporting.
As permitted under those rules, certain notes or other financial information
that is normally required by generally accepted accounting principles can be
condensed or omitted. We have reclassified certain 1998 data to conform to the
1999 presentation.
These financial statements include all normal and recurring adjustments
that we consider necessary for the fair presentation of Genzyme Surgical
Products' financial position and operating results. Since these are combined
financial statements, you should also read the financial statements and notes
for Genzyme Surgical Products included in the current report on Form 8-K that we
filed with the SEC on June 11, 1999. Revenues, expenses, assets and liabilities
can vary from quarter to quarter. Therefore, the results and trends in these
interim financial statements may not be the same as those for the full year.
2. FINANCIAL INFORMATION
We present financial information specific to Genzyme Surgical Products in
these unaudited, combined financial statements. Accounting policies and
financial information relevant to Genzyme, Genzyme General, Genzyme Molecular
Oncology, Genzyme Surgical Products and Genzyme Tissue Repair as a whole are
presented in our unaudited, consolidated financial statements.
3. INVENTORIES
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Raw materials.............................. $14,746 $11,567
Work-in-process............................ 2,242 1,734
Finished products.......................... 14,101 8,725
------- -------
Total................................. $31,089 $22,026
======= =======
</TABLE>
4. NET LOSS PER SHARE
Information regarding Genzyme Surgical Products' net loss per share is
included in note 8 to our unaudited, consolidated financial statements. We
incorporate that information into this note by reference.
5. SEGMENT INFORMATION
Genzyme Surgical Products has two reportable segments:
- Cardiovascular Surgery, which includes chest drainage systems,
instruments and closures used in coronary artery bypass, valve
replacement, and other cardiothoracic surgeries; and
- General Surgery, which includes surgical instruments and Sepra Film(R)
bioresorbable membrane.
16
<PAGE> 20
GENZYME SURGICAL PRODUCTS
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
We have provided information concerning the operations in these reportable
segments in the following table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Cardiovascular Surgery...................... $19,552 $18,462 $56,985 $55,390
General Surgery........................... 5,811 4,492 17,946 14,263
Other..................................... 2,022 1,950 6,488 6,679
------- ------- ------- -------
Total.................................. $27,385 $24,904 $81,419 $76,332
======= ======= ======= =======
Gross Profit:
Cardiovascular Surgery.................... $ 8,094 $ 8,025 $23,128 $25,052
General Surgery(1)........................ 1,795 (9,766) 6,285 (7,248)
Other..................................... 698 822 1,925 2,723
------- ------- ------- -------
Total.................................. $10,587 $ (919) $31,338 $20,527
======= ======= ======= =======
</TABLE>
- - ---------------
(1) In the third quarter of 1998, Genzyme Surgical Products recorded a $10.4
million charge to cost of goods sold to reduce Sepra products inventory to
net realizable value.
There has been no material change in segment assets since December 31,
1998.
6. SUBSEQUENT EVENTS
Information regarding the following events is included in note 10 to our
unaudited, consolidated financial statements:
- The refinancing of our revolving credit facility; and
- Our distribution agreement with Focal, Inc.
We incorporate that information into this note by reference.
17
<PAGE> 21
GENZYME TISSUE REPAIR
COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ --------------------
1999 1998 1999 1998
------- ------- -------- --------
<S> <C> <C> <C> <C>
Total revenues.................................... $ 5,682 $ 4,464 $ 14,370 $ 12,420
Operating costs and expenses:
Cost of services sold........................... 3,558 3,471 9,777 10,481
Selling, general and administrative............. 5,978 6,043 18,407 18,363
Research and development........................ 2,033 2,553 6,004 8,471
------- ------- -------- --------
Total operating costs and expenses:.......... 11,569 12,067 34,188 37,315
------- ------- -------- --------
Operating loss.................................... (5,887) (7,603) (19,818) (24,895)
Other income (expenses):
Equity in net loss of joint venture............. -- (1,601) (3,368) (5,229)
Interest income................................. 210 281 375 955
Interest expense................................ (471) (515) (1,335) (2,044)
------- ------- -------- --------
Total other income (expenses)................ (261) (1,835) (4,328) (6,318)
------- ------- -------- --------
Net loss attributable to GZTR Stock............... $(6,148) $(9,438) $(24,146) $(31,213)
======= ======= ======== ========
Per GZTR common share (basic and diluted):........ $ (0.25) $ (0.47) $ (1.05) $ (1.55)
======= ======= ======== ========
Weighted average shares outstanding............... 24,275 20,289 22,995 20,150
======= ======= ======== ========
Net loss.......................................... $(6,148) $(9,438) $(24,146) $(31,213)
Other comprehensive income (loss), net of tax:
Unrealized gains on securities arising during
the period................................. -- 2 -- 9
------- ------- -------- --------
Comprehensive loss.............................. $(6,148) $(9,436) $(24,146) $(31,204)
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
18
<PAGE> 22
GENZYME TISSUE REPAIR
COMBINED BALANCE SHEETS
(UNAUDITED, AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $14,533 $ 7,732
Accounts receivable, net.................................. 5,467 3,833
Inventories............................................... 2,395 2,645
Other current assets...................................... 990 1,723
------- --------
Total current assets................................... 23,385 15,933
Equipment, net.............................................. 2,603 2,836
Other....................................................... 120 185
------- --------
Total assets........................................... $26,108 $ 18,954
======= ========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable.......................................... $ 417 $ 1,355
Accrued expenses.......................................... 3,843 2,491
Due to Genzyme General.................................... 966 548
Current portion of long-term debt......................... 4,123 18,000
------- --------
Total current liabilities.............................. 9,349 22,394
Convertible note, net....................................... -- 12,579
Long-term debt.............................................. 18,000 --
Other....................................................... 265 377
------- --------
Total liabilities...................................... 27,614 35,350
Division equity............................................. (1,506) (16,396)
------- --------
Total liabilities and division equity.................. $26,108 $ 18,954
======= ========
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
19
<PAGE> 23
GENZYME TISSUE REPAIR
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED, AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................... $(24,146) $(31,213)
Reconciliation of net loss to net cash used in operating
activities:
Depreciation and amortization.......................... 985 1,458
Accretion of debt discount............................. -- 536
Non-cash compensation expense.......................... -- 92
Accrued interest/amortization on bonds................. -- 188
Provision for bad debts................................ 11 257
Equity in net loss of joint venture.................... 3,368 5,229
Other.................................................. -- (113)
Increase (decrease) in cash from working capital
changes:
Accounts receivable.................................. (1,645) (1,710)
Inventories.......................................... 250 (317)
Prepaid expenses and other........................... 660 (579)
Due to Genzyme General............................... 418 140
Accounts payable and accrued expenses................ 641 75
-------- --------
Net cash used in operating activities................ (19,458) (25,957)
INVESTING ACTIVITIES:
Sales and maturities of investments....................... -- 10,614
Acquisition of equipment.................................. (648) (466)
Sale of property, plant and equipment..................... -- 16,500
Investment in joint venture............................... (3,595) (4,983)
Other..................................................... 34 12
-------- --------
Net cash provided by (used in) investing
activities.......................................... (4,209) 21,677
FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net............... 740 1,881
Payments of debt and capital lease obligations............ (144) --
Net cash allocated (to) from Genzyme General.............. 29,984 (86)
Other..................................................... (112) --
-------- --------
Net cash provided by financing activities............ 30,468 1,795
-------- --------
Increase (decrease) in cash and cash equivalents............ 6,801 (2,485)
Cash and cash equivalents at beginning of period............ 7,732 21,120
-------- --------
Cash and cash equivalents at end of period.................. $ 14,533 $ 18,635
======== ========
Supplemental disclosure of non-cash activity:
Debt conversions -- Note 4.
</TABLE>
The accompanying notes are an integral part of these unaudited, combined
financial statements.
20
<PAGE> 24
GENZYME TISSUE REPAIR
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
We prepared the unaudited, combined financial statements for Genzyme Tissue
Repair following the requirements of the SEC for interim reporting. As permitted
under those rules, certain notes or other financial information that is normally
required by generally accepted accounting principles can be condensed or
omitted. We have reclassified certain 1998 data to conform to the 1999
presentation.
The financial statements include all normal and recurring adjustments that
we consider necessary for the fair presentation of Genzyme Tissue Repair's
financial position and operating results. Since these are combined financial
statements, you should also read the financial statements and notes for Genzyme
Tissue Repair included in our latest Form 10-K, as amended. Revenues, expenses,
assets and liabilities can vary from quarter to quarter. Therefore, the results
and trends in these interim financial statements may not be the same as those
for the full year.
2. FINANCIAL INFORMATION
We present financial information specific to Genzyme Tissue Repair in these
unaudited, combined financial statements. Accounting policies and financial
information relevant to Genzyme, Genzyme General, Genzyme Molecular Oncology,
Genzyme Surgical Products and Genzyme Tissue Repair as a whole are presented in
our unaudited, consolidated financial statements.
3. INVENTORIES
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Raw materials.............................. $ 324 $ 264
Work-in-process............................ 2,043 2,381
Finished goods(1).......................... 28 --
------ ------
Total................................. $2,395 $2,645
====== ======
</TABLE>
- - ---------------
(1) Genzyme Tissue Repair began selling biopsy kits in the third quarter of
1999.
4. DEBT CONVERSIONS
We allocate our 6% convertible subordinated note due February 2000 to
Genzyme Tissue Repair. In the first three quarters of 1999, the holder of this
note converted an aggregate of $8,230,000 in principal amount in exchange for a
total of 4,364,861 shares of GZTR Stock. Genzyme Tissue Repair paid $406,379 of
accrued interest to the holder in connection with these conversions.
5. NET LOSS PER SHARE
Information regarding Genzyme Tissue Repair's net loss per share is
included in note 8 to our unaudited, consolidated financial statements. We
incorporate that information into this note by reference.
6. DIACRIN JOINT VENTURE
In May 1999, we reallocated our ownership interest in Diacrin/Genzyme LLC,
our joint venture with Diacrin, Inc. to develop and commercialize products using
porcine fetal cells for the treatment of Parkinson's and Huntington's diseases,
from Genzyme Tissue Repair to Genzyme General in exchange for $25.0 million in
cash. If the joint venture does not achieve certain product development
milestones, Genzyme Tissue Repair will be required to refund up to $20.0 million
to Genzyme General. Any required refund may be paid in cash, GZTR designated
shares, or a combination of both, at Genzyme Tissue Repair's option. GZTR
designated
21
<PAGE> 25
GENZYME TISSUE REPAIR
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
shares are shares of GZTR Stock that are not issued and outstanding, but which
our board of directors may issue, sell or distribute without allocating the
proceeds to Genzyme Tissue Repair.
7. SUBSEQUENT EVENT
Information regarding the refinancing of our revolving credit facility is
included in note 10 to our unaudited, consolidated financial statements. We
incorporate that information into this note by reference.
22
<PAGE> 26
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Net product sales............................... $170,215 $152,453 $499,790 $445,630
Net service sales............................. 19,952 18,526 58,481 55,397
Revenue from research and development
contracts.................................. 1,248 2,415 3,572 7,792
-------- -------- -------- --------
Total revenues............................. 191,415 173,394 561,843 508,819
Operating costs and expenses:
Cost of products sold......................... 44,371 71,547 132,757 166,470
Cost of services sold......................... 12,392 12,290 36,894 36,545
Selling, general and administrative........... 58,648 51,781 183,951 160,264
Research and development...................... 35,925 32,351 109,632 84,918
Amortization of intangibles................... 6,128 6,027 18,501 18,092
Charge for in-process technology.............. 5,436 -- 5,436 --
-------- -------- -------- --------
Total operating costs and expenses......... 162,900 173,996 487,171 466,289
-------- -------- -------- --------
Operating income (loss)......................... 28,515 (602) 74,672 42,530
Other income (expenses):
Equity in net loss of unconsolidated
affiliates................................. (10,407) (6,777) (29,507) (18,325)
Gain on affiliate sale of stock............... 1,164 -- 1,770 2,369
Minority interest............................. 843 993 2,573 2,717
Gain on sale of investment.................... -- -- 1,963 --
Gain on sale of product line.................. 518 31,202 8,018 31,202
Charge for impaired investment................ -- -- (5,487) --
Other......................................... 58 235 101 185
Investment income............................. 9,404 7,438 26,692 16,372
Interest expense.............................. (5,922) (6,946) (17,010) (16,068)
-------- -------- -------- --------
Total other income (expenses).............. (4,342) 26,145 (10,887) 18,452
-------- -------- -------- --------
Income before income taxes...................... 24,173 25,543 63,785 60,982
Provision for income taxes...................... (10,395) (10,576) (27,659) (25,135)
-------- -------- -------- --------
Net income...................................... $ 13,778 $ 14,967 $ 36,126 $ 35,847
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, consolidated
financial statements.
23
<PAGE> 27
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Attributable to Genzyme General:
Net income.................................................. $ 29,971 $ 40,202 $ 91,389 $ 96,626
Tax benefit allocated from Genzyme Molecular Oncology..... 2,016 1,153 6,326 5,238
Tax benefit allocated from Genzyme Surgical Products...... 3,841 7,741 14,191 14,578
Tax benefit allocated from Genzyme Tissue Repair.......... 2,359 4,656 9,733 12,452
-------- -------- -------- --------
Net income attributable to GENZ Stock..................... $ 38,187 $ 53,752 $121,639 $128,894
======== ======== ======== ========
Per GENZ common share:
Net income per Genzyme General common share -- basic...... $ 0.46 $ 0.68 $ 1.47 $ 1.64
======== ======== ======== ========
Weighted average shares outstanding......................... 83,621 79,032 82,741 78,492
======== ======== ======== ========
Net income per GENZ common and common equivalent share --
diluted................................................... $ 0.43 $ 0.64 $ 1.38 $ 1.57
======== ======== ======== ========
Adjusted weighted average shares outstanding................ 94,331 87,882 93,196 83,887
======== ======== ======== ========
Attributable to Genzyme Molecular Oncology:
Net loss attributable to GZMO Stock....................... $ (7,559) $ (8,080) $(22,777) $(22,067)
======== ======== ======== ========
Per GZMO basic and diluted common share:
Net loss.................................................. $ (0.60) $ (2.06) $ (1.80) $ (5.62)
======== ======== ======== ========
Weighted average shares outstanding....................... 12,682 3,929 12,672 3,929
======== ======== ======== ========
Attributable to Genzyme Surgical Products:
Net loss attributable to GZSP Stock....................... $(10,953)
========
Per GZSP basic and diluted common share:
Net loss attributable to GZSP Stock....................... $ (0.74)
========
Weighted average shares outstanding....................... 14,835
========
Pro forma net loss attributable to GZSP Stock............. $(21,519) $(39,356) $(40,523)
======== ======== ========
Pro forma net loss per GZSP common share (basic and
diluted)................................................ $ (1.45) $ (2.66) $ (2.74)
======== ======== ========
Pro forma weighted average shares outstanding............. 14,800 14,800 14,800
======== ======== ========
Attributable to Genzyme Tissue Repair:
Net loss attributable to GZTR Stock....................... $ (6,148) $ (9,438) $(24,146) $(31,213)
======== ======== ======== ========
Per GZTR basic and diluted common share:
Net loss.................................................. $ (0.25) $ (0.47) $ (1.05) $ (1.55)
======== ======== ======== ========
Weighted average shares outstanding....................... 24,275 20,289 22,995 20,150
======== ======== ======== ========
Comprehensive income:
Net income.................................................. $ 13,778 $ 14,967 $ 36,126 $ 35,847
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments.................. 6,463 (1,134) (7,349) (1,290)
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising during the period..... 18,869 (563) 17,352 (4,192)
Reclassification adjustment for gains included in net
income............................................... -- -- 1,945 --
-------- -------- -------- --------
Unrealized gains (losses) on securities, net............ 18,869 (563) 19,297 (4,192)
-------- -------- -------- --------
Other comprehensive income (loss)......................... 25,332 (1,697) 11,948 (5,482)
-------- -------- -------- --------
Comprehensive income...................................... $ 39,110 $ 13,270 $ 48,074 $ 30,365
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited, consolidated
financial statements.
24
<PAGE> 28
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED, AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 253,763 $ 118,612
Short-term investments.................................... 274,214 175,453
Accounts receivable, net.................................. 154,256 163,042
Inventories............................................... 117,184 109,833
Prepaid expenses and other current assets................. 21,629 31,467
Deferred tax assets -- current............................ 39,688 39,725
---------- ----------
Total current assets................................... 860,734 638,132
Property, plant and equipment, net.......................... 383,541 382,619
Long-term investments....................................... 167,950 281,664
Intangibles, net............................................ 259,451 279,516
Deferred tax assets -- noncurrent........................... 23,526 24,277
Investment in equity securities............................. 77,041 51,977
Other....................................................... 31,979 30,669
---------- ----------
Total assets........................................... $1,804,222 $1,688,854
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 16,675 $ 27,604
Accrued expenses.......................................... 89,818 72,389
Income taxes payable...................................... 26,771 16,543
Payable to joint venture.................................. 3,211 1,181
Deferred revenue.......................................... 1,881 2,731
Current portion of long-term debt and capital lease
obligations............................................ 87,733 100,568
---------- ----------
Total current liabilities.............................. 226,089 221,016
Long-term debt and capital lease obligations................ 18,000 3,087
Convertible subordinated notes and debentures, net.......... 272,399 284,138
Other....................................................... 2,338 8,078
---------- ----------
Total liabilities...................................... 518,826 516,319
Stockholders' equity:
Preferred Stock........................................... -- --
GENZ Stock, $.01 par value................................ 841 814
GZMO Stock, $.01 par value................................ 127 126
GZSP Stock $.01 par value................................. 148 --
GZTR Stock, $.01 par value................................ 255 209
Treasury Stock -- at cost................................. (901) (901)
Additional paid-in capital -- Genzyme General............. 440,791 593,042
Additional paid-in capital -- Genzyme Molecular
Oncology............................................... 63,589 63,427
Additional paid-in capital -- Genzyme Surgical Products... 543,449 365,785
Additional paid-in capital -- Genzyme Tissue Repair....... 213,188 174,198
Retained earnings (accumulated deficit)................... 22,328 (13,798)
Accumulated other comprehensive income (loss)............. 1,581 (10,367)
---------- ----------
Total stockholders' equity............................. 1,285,396 1,172,535
---------- ----------
Total liabilities and stockholders' equity............. $1,804,222 $1,688,854
========== ==========
</TABLE>
The accompanying notes are an integral part of these unaudited, consolidated
financial statements.
25
<PAGE> 29
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income................................................ $ 36,126 $ 35,847
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and amortization.......................... 48,706 45,782
Accretion of debt conversion feature................... -- 2,654
Deferred income tax benefit............................ (1,986) (1,986)
Accrued interest/amortization on investments........... 106 (8,671)
Gain on sale of investment............................. (1,963) --
Loss on sale of property, plant and equipment.......... 1,115 --
Provision for bad debts and inventory.................. 10,944 4,104
Equity in net loss of unconsolidated affiliates........ 29,507 18,140
Gain on affiliate sale of stock........................ (1,770) (2,369)
Minority interest in net loss of affiliates............ (2,573) (2,717)
Charge for impaired investment......................... 5,487 --
Gain on sale of product line........................... (8,018) (31,202)
Charge for in-process technology....................... 5,436 --
Other.................................................. 509 54
Increase (decrease) in cash from working capital
changes:
Accounts receivable.................................. (3,486) (30,070)
Inventories.......................................... (10,752) 29,791
Prepaid expenses and other current assets............ 9,653 (5,643)
Accounts payable, accrued expenses, income taxes
payable and deferred revenue........................ 16,495 21,825
--------- ---------
Net cash provided by operating activities............ 133,536 75,539
INVESTING ACTIVITIES:
Purchases of investments.................................. (357,248) (384,847)
Sales and maturities of investments....................... 368,162 63,884
Acquisitions of property, plant and equipment............. (35,602) (25,023)
Sale of property, plant and equipment..................... 188 876
Acquisitions, net of acquired cash and assumed
liabilities............................................ (6,500) (8,324)
Proceeds from sale of product line........................ 5,000 24,760
Proceeds from sale of investment.......................... 11,090 --
Investment in unconsolidated affiliates................... (13,700) (22,783)
Investment in joint ventures.............................. (32,507) (11,987)
Repayment of notes receivable............................. 8,360 --
Repayment of loans by affiliates.......................... -- 2,019
Other..................................................... 1,179 868
--------- ---------
Net cash used in investing activities................ (51,578) (360,557)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... 56,432 34,881
Proceeds from issuance of debt, net....................... -- 243,459
Payments of debt and capital lease obligations............ (3,669) (19,081)
Other..................................................... 3,320 2,124
--------- ---------
Net cash provided by financing activities............ 56,083 261,383
Effect of exchange rate changes on cash..................... (2,890) (438)
--------- ---------
Increase (decrease) in cash and cash equivalents............ 135,151 (24,073)
Cash and cash equivalents at beginning of period............ 118,612 102,406
--------- ---------
Cash and cash equivalents at end of period.................. $ 253,763 $ 78,333
========= =========
Supplemental disclosure of non-cash activity:
Debt Conversions -- Note 3.
</TABLE>
The accompanying notes are an integral part of these unaudited, consolidated
financial statements.
26
<PAGE> 30
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
We prepared our unaudited, consolidated financial statements following the
requirements of the SEC for interim reporting. As permitted under those rules,
certain notes or other financial information that is normally required by
generally accepted accounting principles can be condensed or omitted. We have
reclassified certain 1998 data to conform to the 1999 presentation.
These financial statements include all normal and recurring adjustments
that we consider necessary for the fair presentation of our financial position
and operating results. Since these are consolidated financial statements, you
should also read our financial statements and notes included in our latest Form
10-K, as amended. Revenues, expenses, assets and liabilities can vary from
quarter to quarter. Therefore, the results and trends in these interim financial
statements may not be the same as those for the full year.
2. INVENTORIES
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Raw materials.............................. $ 42,904 $ 41,328
Work-in-process............................ 47,775 27,474
Finished products.......................... 26,505 41,031
-------- --------
Total................................. $117,184 $109,833
======== ========
</TABLE>
3. DEBT CONVERSIONS
We allocate our 6% convertible subordinated note due February 2000 to
Genzyme Tissue Repair. In the first three quarters of 1999, the holder of this
note converted an aggregate of $8,230,000 in principal amount in exchange for a
total of 4,364,861 shares of GZTR Stock. We paid $406,379 of accrued interest to
the holder in connection with these conversions.
4. ACQUISITION OF PEPTIMMUNE
In July 1999, we acquired Peptimmune, a privately-held company whose lead
development program focuses on a treatment for pemphigus vulgaris. We allocated
this acquisition to Genzyme General. We allocated the aggregate purchase price
of $6.5 million and assumed liabilities of $0.3 million to the tangible and
intangible assets we acquired from Peptimmune based on their respective fair
values (amounts in thousands):
<TABLE>
<S> <C>
Property, plant & equipment................................. $ 128
Deferred tax asset.......................................... 1,229
In-process technology....................................... 5,436
------
Total.................................................. $6,793
======
</TABLE>
The $5.4 million allocated to in-process technology represents the value we
assigned to Peptimmune's programs that are still in the development stage and
for which there is no alternative use. In the third quarter of 1999, we recorded
a one-time charge to operations for the amount of the purchase price allocated
to in-process technology.
5. STRESSGEN JOINT VENTURE
We allocate our interest in StressGen/Genzyme LLC, our joint venture with
StressGen Biotechnologies Corp. and the Canadian Medical Discoveries Fund Inc.,
to Genzyme Molecular Oncology. Because the fund
27
<PAGE> 31
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
had the right to require StressGen and Genzyme Molecular Oncology to repurchase
the fund's membership interest in the joint venture, Genzyme Molecular Oncology
has been recording 50% of the losses incurred by the joint venture. In August
1999, the fund exercised its option to require us and StressGen to repurchase
the fund's interest in the joint venture and we recorded a $1.0 million charge
to our statement of operations in connection with this repurchase. In addition,
because our portion of the cumulative losses of the joint venture exceeded our
initial capital contribution, we have recorded current liabilities of $3.2
million for the nine months ended September 30, 1999.
6. INVESTMENT IN BIOMARIN
In July 1999, we purchased an additional 769,230 shares of the common stock
of BioMarin Pharmaceutical Inc. for $10.0 million in a private placement
contemporaneous with the closing of BioMarin's initial public offering. We
currently own approximately 6% of the outstanding shares of BioMarin common
stock. We allocate this investment to Genzyme General.
7. GAIN ON SALE OF PRODUCT LINE
In July 1999, we sold our immunochemistry product line to an operating unit
of Sybron Laboratory Products Corp. for $5.0 million in cash. We had allocated
this product line to Genzyme General. In the third quarter of 1999, we recorded
a gain of $0.5 million related to the sale of this product line.
28
<PAGE> 32
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. NET INCOME PER SHARE
Genzyme General:
The following table sets forth our computation of basic and diluted
earnings per share of GENZ Stock:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ------------------------
1999 1998 1999 1998
--------- --------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net income -- basic............................... $38,187 $53,752 $121,639 $128,894
Effect of dilutive securities (net of tax):
5 1/4% convertible subordinated notes(1):
Interest expense............................. 2,259 2,009 6,208 2,936
Amortization of purchaser's discount and
offering costs(2).......................... 161 143 443 207
5% convertible subordinated debentures(3):
Interest expense............................. 183 -- 502 --
Amortization of debt offering costs(4)....... 30 -- 83 --
------- ------- -------- --------
Net income -- diluted............................. $40,820 $55,904 $128,875 $132,037
======= ======= ======== ========
Shares used in net income per common
share -- basic.................................. 83,621 79,032 82,741 78,492
Effect of dilutive securities:
Employee and director stock options.......... 3,743 2,200 3,485 2,261
Warrants..................................... 24 7 27 7
5 1/4% convertible subordinated notes........ 6,313 6,313 6,313 3,053
5% convertible subordinated debentures....... 630 330 630 74
------- ------- -------- --------
Dilutive potential common shares(5)............. 10,710 8,850 10,455 5,395
------- ------- -------- --------
Shares used in net income per common share --
diluted(5)...................................... 94,331 87,882 93,196 83,887
======= ======= ======== ========
Net income per common share -- basic.............. $ 0.46 $ 0.68 $ 1.47 $ 1.64
======= ======= ======== ========
Net income per common share -- diluted(5)......... $ 0.43 $ 0.64 $ 1.38 $ 1.57
======= ======= ======== ========
</TABLE>
- - ---------------
(1) We issued these notes in May 1998.
(2) The purchasers' discount and offering costs of approximately $7.0 million
over the term of these notes, which mature in June 2005.
(3) We issued debentures in August 1998.
(4) We are amortizing the offering costs of approximately $0.9 million over the
term of these debentures, which mature in August 2003.
(5) We did not include the securities described in the following table in the
computation of Genzyme General's diluted earnings per share for each period
because these securities had an exercise price greater than the average
market price of GENZ Stock:
29
<PAGE> 33
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- --------------
1999 1998 1999 1998
----- ----- ----- -----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Shares of GENZ Stock issuable for options........... 1,680 3,611 1,621 3,767
Shares of GENZ Stock issuable for warrants.......... -- 80 27 80
----- ----- ----- -----
Total shares with exercise prices greater than the
average market price of GENZ Stock during the
period............................................ 1,680 3,691 1,648 3,847
===== ===== ===== =====
</TABLE>
Genzyme Molecular Oncology:
For all periods presented, basic and diluted net loss per GZMO common share
are the same. We did not include the securities described in the following table
in the computation of Genzyme Molecular Oncology's diluted loss per share for
each period because these securities would have an anti-dilutive effect due to
Genzyme Molecular Oncology's net loss per share:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- ---------------
1999 1998 1999 1998
----- ------ ----- ------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Shares of GZMO Stock issuable for options......... 1,823 1,165 1,752 1,071
Warrants to purchase GZMO Stock................... 10 10 10 10
Shares of GZMO Stock issuable upon conversion of
the 5 1/4% convertible subordinated notes....... 682 682 682 682
GZMO designated shares(1)......................... 728 9,446 728 9,446
----- ------ ----- ------
Total shares excluded from the diluted loss per
GZMO share calculation.......................... 3,243 11,303 3,172 11,209
===== ====== ===== ======
</TABLE>
- - ---------------
(1) GZMO designated shares are shares of GZMO Stock that are not issued and
outstanding, but which our board of directors may issue, sell or distribute
without allocating the proceeds to Genzyme Molecular Oncology.
Genzyme Surgical Products:
We disclose pro forma net loss per share for Genzyme Surgical Products for
the three months ended September 30, 1998 and for the nine months ended
September 30, 1999 and 1998 because GZSP Stock was not outstanding for all of
these periods.
For all periods presented, basic and diluted net loss per GZSP common share
are the same regardless of whether the number of shares is calculated on an
actual or pro forma basis. We did not include the securities described in the
following table in the computation of Genzyme Surgical Products' diluted or pro
forma diluted loss per share for each period because these securities would have
an anti-dilutive effect due to Genzyme Surgical Products' net loss per share:
30
<PAGE> 34
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
1999 1998 1999 1998
------ ----- ------ -----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Shares of GZSP Stock issuable for options...... 2,941 -- 2,941 --
Shares of GZSP Stock issuable upon conversion
of the 5 1/4% convertible subordinated notes... 1,130 -- 1,130 --
----- -- ----- --
Total shares excluded from the diluted loss per
GZSP share calculation....................... 4,071 -- 4,071 --
===== == ===== ==
</TABLE>
Genzyme Tissue Repair:
For all periods presented, basic and diluted net loss per GZTR common share
are the same. We did not include the securities described in the following table
in the computation of Genzyme Tissue Repair's diluted loss per share for each
period because these securities would have an anti-dilutive effect due to
Genzyme Tissue Repair's net loss per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1999 1998 1999 1998
------ ------ ------ ------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Shares of GZTR Stock issuable for options....... 4,218 3,223 4,103 3,059
GZTR designated shares(1)....................... 2,260 782 2,260 782
Shares of GZTR Stock issuable upon conversion of
the 6% convertible subordinated note.......... 3,445 4,199 3,445 4,199
----- ----- ----- -----
Total shares excluded from the diluted loss per
GZTR share calculation........................ 9,923 8,204 9,808 8,040
===== ===== ===== =====
</TABLE>
- - ---------------
(1) GZTR designated shares are shares of GZTR Stock that are not issued and
outstanding, but which our board of directors may issue, sell or distribute
without allocating the proceeds to Genzyme Tissue Repair.
9. SEGMENT REPORTING
We have five reportable segments:
- Therapeutics, which develops, manufactures and distributes human
therapeutic products for significant unmet medical needs. The business
derives substantially all of its revenue from sales of Cerezyme(R)
enzyme.
- Diagnostic Products, which provides diagnostic products to niche markets
focusing on in vitro diagnostics.
- Genzyme Molecular Oncology, which is developing cancer products, with a
focus on therapeutic vaccines and angiogenesis inhibitors.
- Genzyme Surgical Products, which develops, manufactures and markets
surgical products for cardiovascular surgery and general surgery.
- Genzyme Tissue Repair, which develops and markets biological products for
orthopedic injuries, such as cartilage repair, and severe burns.
31
<PAGE> 35
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
We have provided information concerning the operations in these reportable
segments in the following table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Genzyme General:
Therapeutics....................... $123,492 $105,485 $357,756 $297,608
Diagnostic Products................ 14,286 16,168 43,933 50,120
Genzyme Molecular Oncology............ 709 1,985 3,455 6,491
Genzyme Surgical Products............. 27,385 24,904 81,419 76,332
Genzyme Tissue Repair................. 5,682 4,464 14,370 12,420
Other................................. 19,364 19,417 59,274 62,897
Eliminations/Adjustments.............. 497 971 1,636 2,951
-------- -------- -------- --------
Total................................... $191,415 $173,394 $561,843 $508,819
======== ======== ======== ========
Net Income:
Genzyme General:
Therapeutics....................... $ 32,556 $ 23,650 $ 99,337 $ 90,461
Diagnostic Products(1)............. 1,063 19,399 3,263 19,920
Genzyme Molecular Oncology............ (7,559) (8,080) (22,777) (22,067)
Genzyme Surgical Products(2).......... (10,953) (21,519) (39,356) (40,523)
Genzyme Tissue Repair................. (6,148) (9,438) (24,146) (31,213)
Other................................. (2,630) (1,871) (3,958) (2,182)
Eliminations/Adjustments.............. 7,449 12,826 23,763 21,451
-------- -------- -------- --------
Total................................... $ 13,778 $ 14,967 $ 36,126 $ 35,847
======== ======== ======== ========
</TABLE>
- - ---------------
(1) Diagnostic Products' net income for the three and nine month periods ended
September 30, 1998 includes a $31.2 million gain on the sale of a product
line in 1998.
(2) In the third quarter of 1998, Genzyme Surgical Products recorded a $10.4
million charge to cost of goods sold to reduce Sepra products inventory to
net realizable value.
There has been no material change in segment assets since December 31,
1998.
10. SUBSEQUENT EVENTS
Cell Genesys:
In October 1999, we entered into an agreement to acquire Cell Genesys,
Inc., a gene therapy company, for approximately $350 million in GENZ Stock. The
acquisition, which we expect to complete in the first quarter of 2000, is
subject to:
- Approval by Cell Genesys' shareholders;
- Clearance under federal antitrust laws; and
- Other customary closing conditions.
32
<PAGE> 36
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with this acquisition, our board of directors has approved
the allocation of Cell Genesys' cancer programs and product candidates and $60.0
million in cash to Genzyme Molecular Oncology. In exchange for those assets,
Genzyme Molecular Oncology will reserve approximately 12.5 million GZMO
designated shares for the benefit of Genzyme General.
New Credit Facility:
In November 1999, our $225.0 million revolving credit facility matured. We
refinanced this facility with a $50.0 million revolving credit facility that
matures in November 2000 and a $100.0 million revolving credit facility that
matures in November 2002. When we refinanced the credit facility, $100.0 million
was outstanding. Of this amount, we:
- Repaid the $82.0 million that was allocated to Genzyme General; and
- Refinanced the $18.0 million that was allocated to Genzyme Tissue Repair
under the new credit facility.
Genzyme Transgenics:
In November 1999, we purchased $12.5 million in shares of Series B
convertible preferred stock of Genzyme Transgenics Corporation. We can convert
these shares into shares of Genzyme Transgenics common stock at any time at a
price of $6.30 per share. We will receive an escalating annual dividend of
between 11% and 12% on amounts that we convert into common stock.
Focal:
In October 1999, we entered into an agreement with Focal, Inc. under which
Genzyme Surgical Products will distribute and sell Focal's surgical sealants in
North America for selected indications following FDA approval. In November 1999,
we purchased 810,372 shares of Focal common stock for $5.0 million. We are also
committed, at Focal's option, to make future equity investments of up to $15.0
million subject to certain conditions.
GelTex:
In November 1999, we made a $10.0 milestone payment to GelTex
Pharmaceuticals, Inc. as required under our joint venture agreements.
StressGen:
In August 1999, the Canadian Medical Discoveries Fund exercised its option
to require us and StressGen to repurchase the fund's interest in
StressGen/Genzyme LLC. We repurchased one-half of the fund's interest in the
joint venture in October 1999 for approximately $3.9 million by issuing to the
fund 617,200 shares of GZMO Stock.
33
<PAGE> 37
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains five sets of financial statements: one that presents
our results on a consolidated basis and one for each of our four operating
divisions. The discussion that follows is a summary of the factors our
management believes are necessary for an understanding of each of the five sets
of financial statements.
A. RESULTS OF OPERATIONS
GENZYME CORPORATION
The components of our consolidated statements of operations are described
in the following table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
-------- -------- -------- -------- -------- --------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Total revenues............ $191,415 $173,394 10% $561,843 $508,819 10%
Cost of products sold..... 44,371 71,547 (38)% 132,757 166,470 (20)%
Cost of services sold..... 12,392 12,290 1% 36,894 36,545 1%
Selling, general and
administrative.......... 58,648 51,781 13% 183,951 160,264 15%
Research and
development............. 35,925 32,351 11% 109,632 84,918 29%
Amortization of
intangibles............. 6,128 6,027 2% 18,501 18,092 2%
Purchase of in-process
research and
development............. 5,436 -- N/A 5,436 -- N/A
-------- -------- -------- --------
Total operating costs
and expenses....... 162,900 173,996 (6)% 487,171 466,289 4%
-------- -------- -------- --------
Operating income (loss)... 28,515 (602) N/A 74,672 42,530 76%
Other income (expenses),
net..................... (4,342) 26,145 (117)% (10,887) 18,452 (159)%
-------- -------- -------- --------
Income before income
taxes................... 24,173 25,543 (5)% 63,785 60,982 5%
Provision for income
taxes................... (10,395) (10,576) (2)% (27,659) (25,135) 10%
-------- -------- -------- --------
Net income................ $ 13,778 $ 14,967 (8)% $ 36,126 $ 35,847 1%
======== ======== ======== ========
</TABLE>
REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
-------- -------- -------- -------- -------- --------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Product revenue........... $170,215 $152,453 12% $499,790 $445,630 12%
Service revenue........... 19,952 18,526 8% 58,481 55,397 6%
-------- -------- -------- --------
Total product and
service revenue.... 190,167 170,979 11% 558,271 501,027 11%
Research and development
revenue................. 1,248 2,415 (48)% 3,572 7,792 (54)%
-------- -------- -------- --------
Total revenues....... $191,415 $173,394 10% $561,843 $508,819 10%
======== ======== ======== ========
</TABLE>
Product Revenue:
We derive product revenue from sales by Genzyme General of therapeutic and
diagnostic products and sales by Genzyme Surgical Products of cardiovascular and
general surgery products. Our increase in product revenue during both periods is
largely due to increased sales of Cerezyme(R) enzyme, which is a therapy for the
34
<PAGE> 38
treatment of Gaucher disease. The increase in sales of Cerezyme(R) enzyme is
attributable to our identification of new Gaucher disease patients throughout
the world. We also sell Ceredase(R) enzyme for the treatment of Gaucher disease,
but we have successfully converted virtually all Gaucher disease patients to a
treatment regimen using Cerezyme(R) enzyme. We have provided information
regarding the growth in sales of our Gaucher disease therapies during both
periods in the following table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
-------- -------- -------- -------- -------- --------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Sales of Cerezyme(R)
enzyme and
Ceredase(R)enzyme....... $121,058 $105,485 15% $351,716 $297,609 18%
% of total product
revenue................... 71% 69% 70% 67%
</TABLE>
Our results of operations are highly dependent on sales of Cerezyme(R)
enzyme and a reduction in revenue from sales of this product would adversely
affect our results of operations. Revenue from Cerezyme(R) enzyme would be
impacted negatively if competitors developed alternative treatments for Gaucher
disease and the alternative products gained commercial acceptance. We are aware
of companies that have initiated efforts to develop competitive products and
other companies may do so in the future.
Service Revenue:
We derive service revenue from four principal sources:
- Genetic testing services performed by Genzyme General;
- Genzyme Tissue Repair's Carticel(R) chondrocytes for the treatment of
cartilage damage;
- Genzyme Tissue Repair's Epicel(TM) skin grafts for the treatment of
severe burns; and
- Genomics services using Genzyme Molecular Oncology's SAGE(TM) gene
expression technology.
Our service revenue increased during the three month period ended September
30, 1999 as a result of increases in the provision of genetic testing services
as well as increased sales of Carticel(R) chondrocytes and Epicel(TM) skin
grafts. Sales of genomics services decreased during this period.
During the nine month period ended September 30, 1999, increases in revenue
from genetic testing services and Carticel(R) chondrocytes resulted in an
increase in service revenues. Sales of Epicel(TM) skin grafts and genomics
services decreased during this period.
The increase in genetic testing service revenue during both periods is a
result of growth in sales of our DNA and cancer testing services. The increase
in sales of Carticel(R) chondrocytes during both periods is a result of
continued increases in the numbers of patients treated and surgeons trained as
well as an increase in the number of insurance reimbursement approvals. Revenue
from Epicel(TM) skin grafts varies widely from quarter to quarter depending on
the number of patients requiring severe burn care.
International Product and Service Sales:
A substantial portion of our revenue is generated outside of the United
States, as described in the following table. Most of these revenues are
attributable to sales of Cerezyme(R) enzyme.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ --------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
------- ------- -------- -------- -------- --------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
International product and
service revenue........... $74,929 $66,592 13% $224,129 $202,308 11%
% of total product and
service revenue............. 39% 39% 40% 40%
</TABLE>
35
<PAGE> 39
MARGINS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
-------- -------- -------- -------- -------- --------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Product margin............ $125,844 $ 80,906 56% $367,033 $279,160 31%
% of product revenue...... 74% 53% 73% 63%
Service margin............ 7,560 6,236 21% 21,587 18,852 15%
% of service revenue...... 38% 34% 37% 34%
Total gross margin........ $133,404 $ 87,142 53% $388,620 $298,012 30%
% of total product and
service revenue......... 70% 51% 70% 59%
</TABLE>
We provide a broad range of health care products and services. As a result,
our gross margins vary significantly based on the category of product or
service. Sales of therapeutic products, including Cerezyme(R) enzyme, result in
higher margins than surgical and diagnostic products.
During the third quarter of 1998, we recorded a $25.2 million charge to
cost of products sold. The components of this charge are:
- A $14.8 million charge allocated to Genzyme General to write down excess
inventory used to make Ceredase(R) enzyme. We took this charge following
our determination that, based on the status of our efforts to convert
Gaucher disease patients to a treatment regimen using Cerezyme(R) enzyme,
our existing supply of Ceredase(R) enzyme was sufficient to meet
estimated patient needs.
- A $10.4 million charge allocated to Genzyme Surgical Products to write
down our inventory of Sepra products to net realizable value. The Sepra
products are our line of products and product candidates designed to
limit post-operative adhesions.
Without the effect of this charge, our product margin for the three months ended
September 30, 1998 would have been 70% and our total gross margin during that
period would have been 66%. For the nine months ended September 30, 1998, our
product margin would have been 68% and our total gross margin would have been
65% absent this charge.
Excluding the charge described above, the increases in product margin and
total gross margin during both periods are a result of increased sales of
Cerezyme(R) enzyme.
Our service margin also increased during both periods. These increases are
attributable to:
- An increase in sales of DNA and cancer testing services;
- Increased sales of Carticel(R) chondrocytes and, in the three-month
period, Epicel(TM) skin grafts; and
- A reduction in labor, materials and production costs for Carticel(R)
chondrocytes and Epicel(TM) skin grafts.
These increases were offset, however, by reduced margins from our genomics
services business due to lower sales volume.
OPERATING EXPENSES
The increase in selling, general and administrative expenses in both
periods is related to:
- Increased staffing to support the growth in several of Genzyme General's
product lines;
- An increased reserve for doubtful accounts in Genzyme General's genetic
testing business;
- Costs associated with the market introduction of Thyrogen(R) hormone in
January 1999; and
36
<PAGE> 40
- An increase in professional service fees in connection with the creation
of Genzyme Surgical Products as a separate division of Genzyme.
The increase in research and development expenses in both periods is a
result of:
- Increased costs in connection with the results of ATIII LLC, our joint
venture with Genzyme Transgenics Corporation for the development and
commercialization of transgenic recombinant human antithrombin III; and
- Increased spending on our program to develop alpha-galactosidase for the
treatment of Fabry disease.
In the fourth quarter of 1998, we began amortizing a milestone payment that
we made to GelTex Pharmaceuticals, Inc. upon FDA approval of Renagel(R) capsules
for the reduction of serum phosphorus in patients with end-stage renal disease
on hemodialysis. As a result, amortization of intangibles increased slightly
during both periods.
OTHER INCOME AND EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
-------- ------- -------- -------- -------- --------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Equity in net loss of
unconsolidated
affiliates............... $(10,407) $(6,777) 54% $(29,507) $(18,325) 61%
Gain on affiliate sale of
stock...................... 1,164 -- N/A 1,770 2,369 (25)%
Minority interest.......... 843 993 (15)% 2,573 2,717 (5)%
Gain on sale of
investment............... -- -- -- 1,963 -- N/A
Gain on sale of product
line..................... 518 31,202 (98)% 8,018 31,202 (74)%
Charge for impaired
investment............... -- -- -- (5,487) -- N/A
Other...................... 58 235 (75)% 101 185 (45)%
Investment income.......... 9,404 7,438 26% 26,692 16,372 63%
Interest expense........... (5,922) (6,946) (15)% (17,010) (16,068) 6%
-------- ------- ---- -------- -------- ----
Total other income
(expense), net...... $ (4,342) $26,145 (117)% $(10,887) $ 18,452 (159)%
======== ======= ==== ======== ======== ====
</TABLE>
Equity in Net Loss of Unconsolidated Affiliates:
We currently own approximately 36% of the common stock of Genzyme
Transgenics and record in net loss of unconsolidated affiliates our portion of
its results. We also record the results of the following joint ventures in net
loss of unconsolidated affiliates:
<TABLE>
<CAPTION>
JOINT VENTURE PARTNER(S) EFFECTIVE DATE PRODUCT/INDICATION GENZYME DIVISION
- - ------------- -------------------- -------------- ---------------------- ----------------
<S> <C> <C> <C> <C>
RenaGel LLC GelTex June 1997 Renagel(R) capsules Genzyme General
Pharmaceuticals, for the reduction of
Inc. serum phosphorus in
patients with
end-stage renal
disease on
hemodialysis
BioMarin/ BioMarin September 1998 Alpha-L-iduronidase Genzyme General
Genzyme LLC Pharmaceutical Inc. for the treatment of
mucopolysaccharidosis-I
Pharming/ Pharming Group, N.V. October 1998 Human Genzyme General
Genzyme LLC alpha-glucosidase for
the treatment of Pompe
disease
</TABLE>
37
<PAGE> 41
<TABLE>
<CAPTION>
JOINT VENTURE PARTNER(S) EFFECTIVE DATE PRODUCT/INDICATION GENZYME DIVISION
- - ------------- -------------------- -------------- ---------------------- ----------------
<S> <C> <C> <C> <C>
Diacrin/ Diacrin, Inc. October 1996 Products using porcine Genzyme Tissue
Genzyme LLC fetal cells for the Repair (until
treatment of May 1999);
Parkinson's and Genzyme General
Huntington's diseases (after May 1999)
StressGen/ StressGen July 1997 Stress gene therapies Genzyme
Genzyme LLC Biotechnologies for the treatment of Molecular
Corp.; Canadian cancer Oncology
Medical Discoveries
Fund Inc. (until
October 1999)
</TABLE>
Our equity in net loss of unconsolidated affiliates increased in the three
months ended September 30, 1999 as a result of:
- Increased losses from our joint ventures with Pharming and Diacrin;
- The formation of our joint venture with BioMarin; and
- A $1.0 million charge in connection with our repurchase of one-half of
the Canadian Medical Discoveries Fund's interest in the StressGen joint
venture.
These increases were offset in part by decreased losses from Genzyme
Transgenics and RenaGel LLC.
For the nine months ended September 30, 1999, our equity in net loss of
unconsolidated affiliates increased as a result of the factors described above,
except that RenaGel LLC experienced increased losses in this period.
Gain on Affiliate Sale of Stock:
In June 1998, June 1999 and September 1999, we recorded gains on our
investment in Genzyme Transgenics as a result of their issuance of additional
shares of common stock.
Minority Interest:
We consolidate the results of ATIII LLC and record Genzyme Transgenics'
portion of the losses of that joint venture as minority interest. Minority
interest decreased in both periods, notwithstanding increases in ATIII LLC's
losses, because Genzyme Transgenics' portion of those losses decreased.
Gain on Sale of Investment:
We recorded a gain of $2.0 million in January 1999 upon the sale of our
remaining shares of Techne Corporation common stock.
Gain on Sale of Product Line:
In July 1999, we recorded a gain of $0.5 million in connection with the
sale of our immunochemistry product line to an operating unit of Sybron
Laboratory Products Corp.
In June 1999, we recorded a gain of $7.5 million representing the payment
of a note receivable that we received as partial consideration for the sale of
Genetic Design, Inc. in 1996. We had previously fully reserved the amount of
this note because we considered the repayment of the note to be uncertain.
In July 1998, we recorded a gain of $31.2 million in connection with the
sale of our research products business to Techne Corporation.
38
<PAGE> 42
Charge for Impaired Investment:
In June 1999, we recorded a $5.5 million charge in connection with a
strategic investment in a collaborator's common stock because we considered the
decline in the value of that stock to be other than temporary.
Investment Income:
Our investment income for both periods increased because our cash balances
were higher. The increase in cash balances is attributable to our issuance in
June 1998 of $250.0 million in principal amount of 5 1/4% convertible
subordinated notes and increased cash generated from operations.
Interest Expense:
Our interest expense decreased slightly in the three months ended September
30, 1999, but increased 6% in the nine months ended September 30, 1999 primarily
as a result of our issuance of the 5 1/4% convertible subordinated notes.
Tax Provision and Allocated Tax Benefits:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
-------- -------- -------- -------- -------- --------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Tax provision............. $(10,395) $(10,576) (2)% $(27,659) $(25,135) 10%
Tax rate.................. 43% 41% 43% 41%
</TABLE>
Our tax rates for both periods vary from the U.S. statutory tax rate as a
result of our:
- Provision for state income taxes;
- Use of a foreign sales corporation;
- Nondeductible amortization of intangibles;
- Use of tax credits; and
- Share of losses of unconsolidated affiliates.
GENZYME GENERAL
In June 1999, we created Genzyme Surgical Products. The business of Genzyme
Surgical Products previously operated as a business unit of Genzyme General. The
discussion that follows reflects the results of operations of Genzyme General as
if Genzyme Surgical Products had existed as a separate division of Genzyme for
all periods presented.
39
<PAGE> 43
The components of Genzyme General's combined statements of operations are
described in the following table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
-------- -------- -------- -------- -------- --------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Total revenues............ $157,669 $142,225 11% $462,640 $413,900 12%
Cost of products and
services sold............. 36,437 54,475 (33)% 109,328 136,082 (20)%
Selling, general and
administrative.......... 36,388 30,277 20% 114,446 92,736 23%
Research and
development............. 22,884 19,530 17% 68,896 52,039 32%
Amortization of
intangibles............. 1,978 1,879 5% 6,081 5,516 10%
Charge for in-process
technology.............. 5,436 -- N/A 5,436 -- N/A
-------- -------- -------- --------
Total operating costs
and expenses....... 103,123 106,161 (3)% 304,187 286,373 6%
-------- -------- -------- --------
Operating income.......... 54,546 36,064 51% 158,453 127,527 24%
Other income (expenses),
net..................... (5,302) 28,926 (118)% (7,158) 28,488 (125)%
-------- -------- -------- --------
Income before income
taxes................... 49,244 64,990 (24)% 151,295 156,015 (3)%
Provision for income
taxes................... (19,273) (24,788) (22)% (59,906) (59,389) 1%
-------- -------- -------- --------
Net income................ 29,971 40,202 (25)% 91,389 96,626 (5)%
Allocated tax benefits.... 8,216 13,550 (39)% 30,250 32,268 (6)%
-------- -------- -------- --------
Net income attributable to
GENZ Stock.............. $ 38,187 $ 53,752 (29)% $121,639 $128,894 (6)%
======== ======== ======== ========
</TABLE>
REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
-------- -------- -------- -------- -------- --------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Product revenue........... $142,860 $127,550 12% $418,401 $369,299 13%
Service revenue........... 14,270 13,471 6% 42,696 41,278 3%
-------- -------- -------- --------
Total product and
service revenue.... 157,130 141,021 11% 461,097 410,577 12%
Research and development
revenue................. 539 1,204 (55)% 1,543 3,323 (54)%
-------- -------- -------- --------
Total revenues....... $157,669 $142,225 11% $462,640 $413,900 12%
======== ======== ======== ========
</TABLE>
40
<PAGE> 44
The following table sets forth Genzyme General's product and service
revenues on a segment basis:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
-------- -------- -------- -------- -------- --------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Therapeutics.............. $126,451 $107,372 18% $365,678 $305,472 20%
Diagnostics
Product revenue......... 14,327 16,171 (11)% 43,976 50,156 (12)%
Service revenue......... 14,270 13,471 6% 42,696 41,278 3%
-------- -------- -------- --------
Total Diagnostics......... 28,597 29,642 (4)% 86,672 91,434 (5)%
-------- -------- -------- --------
Other..................... 2,082 4,007 (48)% 8,747 13,671 (36)%
-------- -------- -------- --------
Total product and service
revenues................ $157,130 $141,021 11% $461,097 $410,577 12%
======== ======== ======== ========
</TABLE>
Therapeutics:
Genzyme General's increase in product revenue during both periods is
largely due to increased sales of Cerezyme(R) enzyme, which is attributable to
its identification of new Gaucher disease patients throughout the world. Genzyme
General also sells Ceredase(R) enzyme for the treatment of Gaucher disease, but
it has successfully converted virtually all Gaucher disease patients to a
treatment regimen using Cerezyme(R) enzyme. We have provided information
regarding the growth in sales of Genzyme General's Gaucher disease therapies
during both periods in the following table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
-------- -------- -------- -------- -------- --------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Sales of Cerezyme(R)
enzyme and
Ceredase(R)enzyme....... $121,058 $105,485 15% $351,716 $297,609 18%
% of total product
revenue................... 85% 83% 84% 81%
</TABLE>
Genzyme General's results of operations are highly dependent on sales of
Cerezyme(R) enzyme and a reduction in revenue from sales of this product would
adversely affect its results of operations. Revenue from Cerezyme(R) enzyme
would be impacted negatively if competitors developed alternative treatments for
Gaucher disease and the alternative products gained commercial acceptance.
Genzyme General is aware of companies that have initiated efforts to develop
competitive products and other companies may do so in the future.
Therapeutics revenue for both periods also include sales of:
- Thyrogen(R) hormone, which is an adjunctive diagnostic tool for well
differentiated thyroid cancer; and
- Lipids and peptides for drug delivery.
Diagnostics:
The decrease in diagnostics revenue for both periods reflect the sale of
the research products business to Techne Corporation in July 1998 and the
immunochemistry product line to an operating unit of Sybron Laboratory Products
in July 1999. Diagnostics revenue include royalties on product sales by Techne's
biotechnology group. Excluding revenue from the businesses that were sold,
during the three months ended September 30, 1999 diagnostics revenue increased
2% over the corresponding period in 1998, and during the nine months ended
September 30, 1999, diagnostics revenues increased 10% over the corresponding
period in 1998.
Revenue from the provision of genetic testing services also increased in
both periods as a result of growth in sales of DNA and cancer testing services.
41
<PAGE> 45
International Product and Service Sales:
A substantial portion of Genzyme General's revenue is generated outside of
the United States, as described in the following table. Most of these revenues
are attributable to sales of Cerezyme(R) enzyme.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ --------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
------- ------- -------- -------- -------- --------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
International product and
service revenue........... $65,963 $59,283 11% $197,011 $178,724 10%
% of total product and
service revenue............. 42% 42% 43% 44%
</TABLE>
MARGINS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
-------- ------- -------- -------- -------- --------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Product margin............. $115,257 $81,828 41% $335,695 $258,636 30%
% of product revenue....... 81% 64% 80% 70%
Service margin............. 5,436 4,718 15% 16,074 15,859 1%
% of service revenue....... 38% 35% 38% 38%
Total gross margin......... $120,693 $86,546 39% $351,769 $274,495 28%
% of total product and
service revenue.......... 77% 61% 76% 67%
</TABLE>
During the third quarter of 1998, Genzyme General recorded a $14.8 million
charge to cost of products sold to write down excess inventory used to make
Ceredase(R) enzyme. Without the effect of this charge, Genzyme General's product
margin for the three months ended September 30, 1998 would have been 76% and its
total gross margin during that period would have been 72%. For the nine months
ended September 30, 1998, Genzyme General's product margin would have been 74%
and its total gross margin would have been 70% absent this charge.
Excluding the charge described above, the increases in product margin and
total gross margin during both periods are a result of increased sales of
Cerezyme(R) enzyme.
Our service margin also increased during both periods as a result of
increases in sales of DNA and cancer testing services.
OPERATING EXPENSES
The increase in selling, general and administrative expenses in both
periods is related to:
- Increased staffing to support the growth in several of Genzyme General's
product lines;
- An increased reserve for doubtful accounts in Genzyme General's genetic
testing business; and
- Costs associated with the market introduction of Thyrogen(R) hormone in
January 1999.
The increase in research and development expense in both periods is a
result of:
- Increased costs in connection with the results of ATIII LLC; and
- Increased spending on Genzyme General's program to develop
alpha-galactosidase for the treatment of Fabry disease.
42
<PAGE> 46
In the fourth quarter of 1998, Genzyme General began amortizing a milestone
payment that it made to GelTex upon FDA approval of Renagel(R) capsules. As a
result, amortization of intangibles increased slightly during both periods.
Other Income and Expenses
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ --------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
------- ------- -------- -------- -------- --------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Equity in net loss of
unconsolidated
affiliates................ $(9,352) $(4,919) 90% $(24,077) $(11,832) 103%
Gain on affiliate sale
of stock.................... 1,164 -- N/A 1,770 2,369 (25)%
Minority interest........... 843 993 (15)% 2,573 2,717 (5)%
Gain on sale
of investment............. -- -- -- 1,963 -- N/A
Gain on sale of product
line...................... 518 31,202 (98)% 8,018 31,202 (74)%
Charge for impaired
investment................ -- -- -- (5,487) -- N/A
Investment income........... 6,970 6,974 0% 23,713 14,660 62%
Interest expense............ (5,445) (5,324) 2% (15,631) (10,628) 47%
------- ------- -------- --------
Total other income
(expense), net....... $(5,302) $28,926 (118)% $ (7,158) $ 28,488 (125)%
======= ======= ======== ========
</TABLE>
Equity in Net Loss of Unconsolidated Affiliates:
Genzyme General records a portion of the results of Genzyme Transgenics in
net loss of unconsolidated affiliates. Genzyme General also records in net loss
of unconsolidated affiliates the results of its joint ventures with GelTex,
BioMarin, Pharming and Diacrin.
Genzyme General's equity in net loss of unconsolidated affiliates increased
in the three months ended September 30, 1999 as a result of:
- Increased losses from the joint venture with Pharming;
- The formation of our joint venture with BioMarin; and
- The reallocation of the joint venture with Diacrin from Genzyme Tissue
Repair to Genzyme General in May 1999.
These increases were offset in part by decreased losses from Genzyme
Transgenics and RenaGel LLC.
For the nine months ended September 30, 1999, our equity in net loss of
unconsolidated affiliates increased as a result of the factors described above,
except that RenaGel LLC experienced increased losses in this period.
Gain on Affiliate Sale of Stock:
In June 1998, June 1999 and September 1999, Genzyme General recorded gains
on its investment in Genzyme Transgenics as a result of its issuance of
additional shares of common stock.
Minority Interest:
Genzyme General consolidates the results of ATIII LLC and records Genzyme
Transgenics' portion of the losses of that joint venture under minority
interest. Minority interest decreased in both periods, notwithstanding increases
in ATIII LLC's losses, because Genzyme Transgenics' portion of those losses
decreased.
43
<PAGE> 47
Gain on Sale of Investment:
Genzyme General recorded a gain of $2.0 million in January 1999 upon the
sale of its remaining shares of Techne common stock.
Gain on Sale of Product Line:
In July 1999, Genzyme General recorded a gain of $0.5 million in connection
with the sale of its immunochemistry product line to Sybron Laboratory Products.
In June 1999, Genzyme General recorded a gain of $7.5 million representing
the payment of a note receivable that it received as partial consideration for
the sale of Genetic Design in 1996. Genzyme General had previously fully
reserved the amount of this note because it considered the repayment of the note
to be uncertain.
In July 1998, Genzyme General recorded a gain of $31.2 million in
connection with the sale of its research products business to Techne.
Charge for Impaired Investment:
In June 1999, Genzyme General recorded a $5.5 million charge in connection
with a strategic investment in a collaborator's common stock because it
considered the decline in the value of that stock to be other than temporary.
Investment Income:
For the three months ended September 30, 1999, investment income was
similar to that in the corresponding period in 1998. As a result of the issuance
in June 1998 of $250.0 million in principal amount of 5 1/4% convertible
subordinated notes and increased cash generated from operations, investment
income for the nine months ended September 30, 1999 increased 62% over the same
period in 1998.
Interest Expense:
Genzyme General's interest expense increased slightly in the three months
ended September 30, 1999, but increased 47% in the nine months ended September
30, 1999 primarily as a result of the issuance of the 5 1/4% convertible
subordinated notes.
Tax Provision and Allocated Tax Benefits:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
--------- --------- -------- --------- --------- --------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Provision for income taxes... $(19,273) $(24,788) (22)% $(59,906) $(59,389) 1%
Effective tax rate........... 39% 38% 40% 38%
Tax benefits allocated from:
Genzyme Molecular
Oncology................ 2,016 1,153 75% 6,326 5,238 21%
Genzyme Surgical
Products................ 3,841 7,741 (50)% 14,191 14,578 (3)%
Genzyme Tissue Repair...... 2,359 4,656 (49)% 9,733 12,452 (22)%
--------- --------- --------- ---------
Net allocated tax benefits... 8,216 13,550 (39)% 30,250 32,268 (6)%
--------- --------- --------- ---------
Net tax provision............ $(11,057) $(11,238) (2)% $(29,656) $(27,121) 9%
========= ========= ========= =========
Genzyme General net tax
rate....................... 22% 17% 20% 17%
</TABLE>
44
<PAGE> 48
Genzyme General's tax rates for both periods vary from the U.S. statutory
tax rate as a result of its:
- Provision for state income taxes;
- Use of a foreign sales corporation;
- Nondeductible amortization of intangibles;
- Use of tax credits; and
- Share of losses of unconsolidated affiliates.
GENZYME MOLECULAR ONCOLOGY
The components of Genzyme Molecular Oncology's combined statements of
operations are described in the following table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ---------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
-------- -------- -------- --------- --------- --------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Total revenues............... $ 709 $ 1,985 (64)% $ 3,455 $ 6,491 (47)%
Cost of revenues............. 62 1,211 (95)% 1,074 3,534 (70)%
Selling, general and
administrative............. 1,168 2,105 (44)% 4,205 5,260 (20)%
Research and development..... 3,815 3,249 17% 12,448 8,772 42%
Amortization of
intangibles................ 2,956 2,956 0% 8,869 9,026 (2)%
-------- -------- --------- ---------
Total operating costs
and expenses.......... 8,001 9,521 (16)% 26,596 26,592 0%
Operating loss............... (7,292) (7,536) (3)% (23,141) (20,101) 15%
Other income (expenses),
net........................ (929) (1,206) (23)% (1,622) (3,952) (59)%
-------- -------- --------- ---------
Loss before income taxes..... (8,221) (8,742) (6)% (24,763) (24,053) 3%
Tax benefit.................. 662 662 0% 1,986 1,986 0%
-------- -------- --------- ---------
Net loss attributable to GZMO
Stock...................... $(7,559) $(8,080) (6)% $(22,777) $(22,067) 3%
======== ======== ========= =========
</TABLE>
REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
----- ------- -------- ------- ------- --------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Service revenue................... $ -- $ 774 N/A $1,511 $2,022 (25)%
Research and development
revenue........................... -- 1,211 N/A 496 3,869 (87)%
Licensing revenue................. 700 -- N/A 1,425 600 138%
Royalty revenue................... 9 -- N/A 23 -- N/A
---- ------ ------ ------
Total revenues............... $709 $1,985 (64)% $3,455 $6,491 (47)%
==== ====== ====== ======
</TABLE>
Service revenue decreased in both periods as a result of a decline in the
provision of genomics services using Genzyme Molecular Oncology's SAGE(TM) gene
expression technology.
Research and development revenue also decreased during both periods. These
decreases are a result of a reduction in work performed by Genzyme Molecular
Oncology on behalf of StressGen/Genzyme LLC and the completion of research and
development work performed on behalf of Schering-Plough Corporation in 1998.
Licensing revenue increased in both periods as a result of the grant by
Genzyme Molecular Oncology of licenses under its rights to the SAGE(TM) gene
expression technology and the MDM2 protein.
45
<PAGE> 49
COST OF REVENUES
Genzyme Molecular Oncology's cost of revenues includes:
- Work performed on behalf of StressGen/Genzyme LLC;
- Services performed using the SAGE(TM) gene expression technology on
behalf of third parties; and
- Performance of gene therapy research on behalf of Schering-Plough.
Cost of revenues decreased in both periods as a result of the completion of
the Schering-Plough research project and a reduction in the royalty rate payable
by Genzyme Molecular Oncology for using the SAGE(TM) gene expression technology
on behalf of third parties.
SG&A AND R&D EXPENSES
Genzyme Molecular Oncology's selling, general and administrative expenses
decreased in both periods primarily as a result of:
- reduced legal costs associated with the prosecution and maintenance of
its intellectual property portfolio; and
- a one-time charge taken in the third quarter of 1998 to write off costs
incurred in connection with its attempted IPO.
Genzyme Molecular Oncology's research and development expenses increased in
both periods as a result of:
- The initiation of a clinical trial for its melanoma tumor vaccine
product; and
- An increase in the number of research personnel and related expenses
required to support the continued development of its immunotherapy and
antiangiogenesis programs.
Genzyme Molecular Oncology incurs direct SG&A and R&D expenses as well as
cross charges for the actual cost of SG&A and R&D services performed by Genzyme
General on Genzyme Molecular Oncology's behalf.
AMORTIZATION OF INTANGIBLES
Genzyme Molecular Oncology's amortization of intangibles is attributable to
intangible assets acquired in connection with the acquisition of PharmaGenics,
Inc. in June 1997.
OTHER EXPENSES
Genzyme Molecular Oncology's other expenses decreased in both periods
because it had decreased interest expense resulting from the transfer of its
convertible debt to Genzyme General in August 1998. The decrease in interest
expense, however, was offset by a $1.0 million charge taken by Genzyme Molecular
Oncology in the third quarter of 1999 in connection with its repurchase of
one-half of the Canadian Medical Discoveries Fund's interest in the StressGen
joint venture.
GENZYME SURGICAL PRODUCTS
In June 1999, we created Genzyme Surgical Products. The business of Genzyme
Surgical Products previously operated as a business unit of Genzyme General.
Genzyme Surgical Products consists primarily of the products and assets we
acquired upon the purchase of Deknatel Snowden Pencer, Inc. in 1996, the Sepra
products, and our research and development programs in biomaterials and gene and
cell therapy for cardiovascular disease. Genzyme General transferred $150.0
million in cash, cash equivalents and investments to Genzyme Surgical Products
in connection with the creation of Genzyme Surgical Products as a separate
division of Genzyme. In exchange for this transfer, approximately 14.8 million
shares of GZSP Stock were issued and distributed as a dividend to holders of
GENZ Stock. The following discussion reflects the results of
46
<PAGE> 50
operations of Genzyme Surgical Products as if it had existed as a separate
division of Genzyme for all periods presented.
The components of Genzyme Surgical Products' combined statements of
operations are described in the following table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
-------- -------- -------- -------- -------- --------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Total revenues.............. $ 27,385 $ 24,904 10% $ 81,419 $ 76,332 7%
Cost of products sold....... 16,798 25,823 (35)% 50,081 55,805 (10)%
Selling, general and
administrative............ 15,114 13,356 13% 46,893 43,905 7%
Research and development.... 7,131 6,060 18% 21,716 13,073 66%
Amortization of
intangibles............... 1,445 1,444 0% 4,306 4,306 0%
-------- -------- -------- --------
Total operating costs and
expenses.................. 40,488 46,683 (13)% 122,996 117,089 5%
-------- -------- -------- --------
Operating loss.............. (13,103) (21,779) (40)% (41,577) (40,757) 2%
Other income (expenses),
net....................... 2,150 260 727% 2,221 234 849%
-------- -------- -------- --------
Net loss attributable to
GZSP Stock................ $(10,953) $(21,519) (49)% $(39,356) $(40,523) (3)%
======== ======== ======== ========
</TABLE>
REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
------- ------- -------- ------- ------- --------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Cardiovascular surgery
products.................... $19,552 $18,466 6% $56,985 $55,392 3%
General surgery products...... 5,811 4,492 29% 17,946 14,263 26%
Plastics/other surgery
products.................... 2,022 1,946 4% 6,488 6,677 (3)%
------- ------- ------- -------
Total revenues........... $27,385 $24,904 10% $81,419 $76,332 7%
======= ======= ======= =======
</TABLE>
Cardiovascular surgery products include chest drainage and fluid management
systems, surgical closures, biomaterials, and instruments for conventional and
minimally invasive cardiac surgery. The increase in cardiovascular surgery
product revenues for both periods is primarily attributable to increased sales
of instruments for minimally invasive cardiac surgery.
The increase in general surgery products revenue for both periods is due
primarily to the increase in sales of Sepra Film(R) bioresorbable membrane.
Sales of Sepra Film(R) bioresorbable membrane for the three months ended
September 30, 1999 were $3.0 million compared to $2.2 million in the same period
of last year. Sales of Sepra Film(R) bioresorbable membrane for the nine months
ended September 30, 1999 were $9.4 million compared to $6.4 million in the same
period of last year.
Other surgery product revenue consists of sales of Genzyme Surgical
Products' Snowden-Pencer line of instruments for plastic surgery and products
sold to original equipment manufacturers, including sutures.
International sales as a percentage of total sales for the three months
ended September 30, 1999 were 28% as compared to 26% in the same period of 1998.
International sales as a percentage of total sales for the nine months ended
September 30, 1999 were 29% as compared to 28% for the same period of 1998.
47
<PAGE> 51
MARGINS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
-------- ------- -------- -------- -------- --------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Gross margins.............. $10,587 $(919) 1,252% $ 31,338 $ 20,527 53%
% of total revenues........ 39% (4)% 38% 27%
</TABLE>
Genzyme Surgical Products sells a broad range of products. As a result,
Genzyme Surgical Products' gross margins may vary significantly depending on the
particular market conditions of each product line.
During the third quarter of 1998, Genzyme Surgical Products recorded a
$10.4 million charge to cost of products sold to write down its inventory of
Sepra products to net realizable value. Without the effect of this charge,
Genzyme Surgical Products' gross margin for the three months ended September 30,
1998 would have been 38% and for the nine months ended September 30, 1998 would
have been 41%.
Excluding the charge described above, gross margins increased slightly in
the three months ended September 30, 1999 as a result of increased sales of
Genzyme Surgical Products' line of products for minimally invasive cardiac
surgery.
Excluding the charge described above, gross margins decreased in the nine
months ended September 30, 1999 as a result of a decrease in fluid management
product margins, offset in part by increased sales of Genzyme Surgical Products'
line of products for minimally invasive cardiac surgery.
SG&A AND R&D EXPENSES
Genzyme Surgical Products' selling, general and administrative expenses
increased in both periods as a result of higher fringe benefit expenses and
other costs associated with the creation of Genzyme Surgical Products as a
separate division of Genzyme.
Genzyme Surgical Products' research and development expenses for both
periods in 1998 include a $1.7 million charge taken in the third quarter to
write off costs related to equipment that it used to manufacture the Sepra
products. Excluding this charge, the increase in R&D costs for both periods is a
result of the initiation of several clinical trials for its products. In the
nine month period ended September 30, 1999, the increase in R&D costs is also
attributable to a $2.0 million milestone payment to a collaborator that was
recorded in June 1999.
Genzyme Surgical Products incurs direct SG&A and R&D expenses as well as
cross charges for the actual cost of SG&A and R&D services performed by Genzyme
General on Genzyme Surgical Products' behalf.
OTHER INCOME AND EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
------- ----- -------- ------- ----- --------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Equity in net income (loss) of
unconsolidated affiliate........ $ (32) $ 9 (456)% $ (32) $(20) 60%
Other............................. 58 235 (75)% 101 185 (45)%
Investment income................. 2,125 34 6,150% 2,188 124 1,665%
Interest expense.................. (1) (18) (94)% (36) (55) (35)%
------ ---- ------ ----
Total other income (expense),
net........................ $2,150 $260 727% $2,221 $234 849%
====== ==== ====== ====
</TABLE>
The increases in other income and expenses for both periods is primarily
due to an increase in investment income. Investment income increased because
Genzyme Surgical Products had a higher average cash balance
48
<PAGE> 52
as a result of the allocation of $150.0 million in cash, cash equivalents and
investments from Genzyme General to Genzyme Surgical Products in June 1999.
GENZYME TISSUE REPAIR
The components of Genzyme Tissue Repair's combined statements of operations
are described in the following table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ --------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
------- ------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Total revenues.............. $ 5,682 $ 4,464 27% $ 14,370 $ 12,420 16%
Cost of services sold....... 3,558 3,471 3% 9,777 10,481 (7)%
Selling, general and
administrative............ 5,978 6,043 (1)% 18,407 18,363 0%
Research and development.... 2,033 2,553 (20)% 6,004 8,471 (29)%
------- ------- -------- --------
Total operating cost and
expenses.................. 11,569 12,067 (4)% 34,188 37,315 (8)%
Operating loss.............. (5,887) (7,603) (23)% (19,818) (24,895) (20)%
Other income (expenses),
net....................... (261) (1,835) (86)% (4,328) (6,318) (31)%
------- ------- -------- --------
Net loss attributable to
GZTR Stock................ $(6,148) $(9,438) (35)% $(24,146) $(31,213) (23)%
</TABLE>
REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
------ ------ -------- ------- ------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Carticel(R) chondrocytes...... $3,619 $2,723 33% $10,359 $ 7,715 34%
Epicel(TM) skin grafts........ 2,063 1,741 18% 3,926 4,705 (17)%
Other......................... -- -- 85 -- 100%
------ ------ ------- -------
Total revenues........... $5,682 $4,464 27% $14,370 $12,420 16%
====== ====== ======= =======
</TABLE>
During the three month period ended September 30, 1999, Genzyme Tissue
Repair's service revenue increased as a result of increases in sales of
Carticel(R) chondrocytes and Epicel(TM) skin grafts.
During the nine month period ended September 30, 1999, increases in revenue
from Carticel(R) chondrocytes resulted in an increase in service revenues. Sales
of Epicel(TM) skin grafts decreased during this period.
The increase in sales of Carticel(R) chondrocytes during both periods is a
result of continued increases in the numbers of patients treated and surgeons
trained as well as an increase in the number of insurance reimbursement
approvals. Revenue from Epicel(TM) skin grafts varies widely from quarter to
quarter depending on the number of patients requiring severe burn care.
GROSS MARGIN
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
------- ----- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Total gross margin............... $2,124 $993 114% $4,593 $1,939 137%
% of total revenue............... 37% 22% 32% 16%
</TABLE>
49
<PAGE> 53
Genzyme Tissue Repair's gross margins improved in both periods as a result
of:
- Increased sales of Carticel(R) chondrocytes and, in the three-month
period, Epicel(TM) skin grafts;
- Reductions in labor and manufacturing expenses; and
- Decreased material expenses.
SG&A AND R&D EXPENSES
Genzyme Tissue Repair's selling, general and administrative expenses
remained flat in both periods. Its research and development expenses decreased
in both periods due to the termination of its TGF-beta and other research and
development programs.
OTHER INCOME AND EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1999 1998 % CHANGE 1999 1998 % CHANGE
------ -------- -------- ------- ------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Equity in net loss of joint
venture...................... $ -- $(1,601) (100)% $(3,368) $(5,229) (36)%
Interest income................ 210 281 (25)% 375 955 (61)%
Interest expense............... (471) (515) (9)% (1,335) (2,044) (35)%
----- ------- ------- -------
Total other income
expense, net............ $(261) $(1,835) (86)% $(4,328) $(6,318) (31)%
===== ======= ======= =======
</TABLE>
Equity in net loss of joint venture decreased in both periods as a result
of the reallocation of Genzyme's ownership interest in Diacrin/Genzyme LLC from
Genzyme Tissue Repair to Genzyme General in May 1999. In the period of 1999
prior to the transfer, Genzyme Tissue Repair provided $3.6 million in funding to
the joint venture and realized a net loss of $3.4 million from the joint
venture.
Interest income decreased in both periods as a result of lower average cash
balances.
In the second quarter of 1998, Genzyme Tissue Repair completed the
accretion of the conversion feature of the 6% convertible subordinated note.
Interest expense decreased in both periods as a result. During the first three
quarters of 1999, the holder of this note converted approximately $8.2 million
in principal amount into shares of GZTR Stock.
B. LIQUIDITY AND CAPITAL RESOURCES
GENZYME CORPORATION
At September 30, 1999, we had cash, cash-equivalents, and short- and
long-term investments of $695.9 million, an increase of $120.2 million from
December 31, 1998.
We generated $133.5 million in cash from our operations in the first nine
months of 1999.
Our investing activities used $51.6 million in cash in the first nine
months of 1999. These activities generated:
- $10.9 million from our investment portfolio;
- $5.0 million from the sale of our immunochemistry product line;
- $11.1 million from the sale of Techne common stock; and
- $8.4 million from the payment of a note issued in connection with our
sale of Genetic Design.
50
<PAGE> 54
These activities used:
- $35.6 million to fund capital expenditures;
- $32.5 million to fund our investments in joint ventures;
- $6.5 million to fund our acquisition of Peptimmune;
- $10.0 million to purchase 769,230 shares of common stock of BioMarin;
- $3.4 million to purchase 122,750 shares of Series F preferred stock of
Genovo, Inc.
In the first nine months of 1999, we received $56.4 million in cash from
employee stock plans and used $3.7 million in cash to repay debt and capital
lease obligations.
In February 1997, we issued a 6% convertible subordinated note in a
principal amount of $13.0 million. This note is convertible into shares of GZTR
Stock. In the first three quarters of 1999, the holder of this note converted an
aggregate of $8.2 million in principal into a total of 4,364,861 shares of GZTR
Stock. Genzyme Tissue Repair also paid approximately $406,000 of accrued
interest in connection with these conversions. As of September 30, 1999, $4.1
million in principal on this note remained outstanding. This amount becomes due
in February 2000.
At September 30, 1999, we had $100.0 million outstanding under our
revolving credit facility with a syndicate of commercial banks. Of this amount,
$82.0 million was allocated to Genzyme General and $18.0 million was allocated
to Genzyme Tissue Repair. As described more fully in "Subsequent Events" below,
in November 1999 we refinanced this facility and repaid the $82.0 million that
was allocated to Genzyme General.
We believe that our available cash, investments and cash flow from
operations will be sufficient to fund our planned operations and capital
requirements for the foreseeable future. Although we currently have substantial
cash resources and positive cash flow, we intend to use substantial portions of
our available cash for:
- Product development and marketing;
- Expanding facilities; and
- Working capital.
Our cash reserves will be further reduced to pay principal and interest on
the following debt:
- $250.0 million in principal under our 5 1/4% convertible subordinated
notes due June 2005, which are convertible into GENZ Stock, GZMO Stock
and GZSP Stock;
- $21.2 million in principal under our 5% convertible subordinated
debentures due August 2003, which are convertible into GENZ Stock; and
- $4.1 million in principal under our 6% convertible subordinated note due
February 2000, which is convertible into GZTR Stock.
If we use cash to pay or redeem this debt, including the interest due on
it, our cash reserves will be diminished.
To satisfy these and other commitments, we may have to obtain additional
financing. We cannot guarantee that we will be able to obtain any additional
financing, extend any existing financing arrangement, or obtain either on
favorable terms.
GENZYME GENERAL
At September 30, 1999, Genzyme General had cash, cash-equivalents, and
short- and long-term investments of $530.1 million, a decrease of $26.0 million
from December 31, 1998.
51
<PAGE> 55
Genzyme General generated $188.3 million in cash from operations in the
first nine months of 1999.
Genzyme General's investing activities used $56.4 million in cash in the
first nine months of 1999. These activities generated:
- $5.0 million from the sale of Genzyme General's immunochemistry product
line;
- $11.1 million from the sale of Techne common stock; and
- $8.4 million from the payment of a note issued in connection with the
sale of Genetic Design.
These activities used:
- $32.6 million to fund capital expenditures;
- $28.9 million to fund Genzyme General's investments in joint ventures;
- $6.5 million to fund the acquisition of Peptimmune;
- $10.0 million to purchase 769,230 shares of common stock of BioMarin;
- $3.4 million to purchase 122,750 shares of Series F preferred stock of
Genovo.
In the first nine months of 1999, we received $55.5 million in cash from
employee stock plans. Genzyme General's financing activities used the following
cash during this period:
- $3.5 million to repay debt and capital lease obligations;
- $50.8 million paid to Genzyme Surgical Products in connection with the
creation of Genzyme Surgical Products as a separate division of Genzyme;
- $25.0 million paid to Genzyme Tissue Repair in exchange for the
reallocation of our ownership interest in Diacrin/Genzyme LLC from
Genzyme Tissue Repair to Genzyme General; and
- $5.0 million in cash paid to Genzyme Tissue Repair under an equity line
of credit.
At September 30, 1999, $82.0 million of funds outstanding under our
revolving credit facility were allocated to Genzyme General. As described more
fully under "Subsequent Events" below, this amount was repaid in November 1999.
In 1998, our board of directors made $30.0 million of Genzyme General's
cash available to Genzyme Molecular Oncology under an equity line of credit.
Under the terms of this equity line, Genzyme Molecular Oncology may draw down
funds as needed each quarter in exchange for GZMO designated shares. GZMO
designated shares are shares of GZMO Stock that are not issued and outstanding,
but which our board of directors may issue, sell or distribute without
allocating the proceeds to Genzyme Molecular Oncology. Genzyme Molecular
Oncology has not yet drawn any funds under this equity line. In addition, our
board of directors has also approved the allocation of an additional $60.0
million in cash from Genzyme General to Genzyme Molecular Oncology in connection
with our acquisition of Cell Genesys, Inc. Additional disclosure relating to our
acquisition of Cell Genesys is included below under the heading "Subsequent
Events."
In 1998, our board of directors also made $50.0 million of Genzyme
General's cash available to Genzyme Tissue Repair under an equity line of
credit. Under the terms of this equity line, Genzyme Tissue Repair may draw down
funds as needed each quarter in exchange for GZTR designated shares. GZTR
designated shares are shares of GZTR Stock that are not issued and outstanding,
but which our board of directors may issue, sell or distribute without
allocating the proceeds to Genzyme Tissue Repair. In February 1999, Genzyme
Tissue Repair made a $5.0 million draw under this equity line in exchange for
1,633,399 GZTR designated shares. In May 1999, the amount available under this
equity line was reduced by $25.0 million in connection with the reallocation of
our ownership interest in Diacrin/Genzyme LLC from Genzyme Tissue Repair to
Genzyme General.
In June 1999, Genzyme General transferred $150.0 million in cash, cash
equivalents and investments to Genzyme Surgical Products in connection with the
creation of Genzyme Surgical Products as a separate
52
<PAGE> 56
division of Genzyme. In exchange for this transfer, approximately 14.8 million
shares of GZSP Stock were issued and distributed as a dividend to holders of
GENZ Stock.
We believe that Genzyme General's available cash, investments and cash flow
from operations will be sufficient to fund its planned operations and capital
requirements for the foreseeable future. Although Genzyme General currently has
substantial cash resources and positive cash flow, it intends to use substantial
portions of its available cash for:
- Product development and marketing;
- Expanding facilities; and
- Working capital.
Genzyme General's cash reserves will be further reduced to pay principal
and interest on the following debt:
- $21.2 million in principal under our 5% convertible subordinated
debentures due August 2003, which are convertible into GENZ Stock; and
- $250.0 million in principal under our 5 1/4% convertible subordinated
notes due June 2005, which are convertible into GENZ Stock.
If Genzyme General uses cash to pay or redeem this debt, including the
interest due on it, its cash reserves will be diminished. In addition, Genzyme
General's cash resources will be reduced to the extent that the liabilities of
Genzyme Molecular Oncology, Genzyme Surgical Products or Genzyme Tissue Repair
affect our consolidated results of operations.
To satisfy these and other commitments, Genzyme General may have to obtain
additional financing. We cannot guarantee that Genzyme General will be able to
obtain any additional financing, extend any existing financing arrangement, or
obtain either on favorable terms.
GENZYME MOLECULAR ONCOLOGY
At September 30, 1999, Genzyme Molecular Oncology had cash, cash
equivalents and short-term investments of $1.7 million, a decrease of $10.2
million from December 31, 1998. Substantially all of this decrease is
attributable to operating activities.
We anticipate that Genzyme Molecular Oncology's current cash resources,
together with amounts available from the following sources, will be sufficient
to fund its operations through 2000:
- The $30.0 million equity line of credit from Genzyme General;
- Revenues generated from the SAGE(TM) gene expression technology; and
- Revenues from license agreements.
As described more fully under "Subsequent Events" below, our board of
directors has also approved the allocation of an additional $60.0 million in
cash from Genzyme General to Genzyme Molecular Oncology in connection with our
acquisition of Cell Genesys. Based on current spending plans, including spending
on programs that will be allocated to Genzyme Molecular Oncology when and if the
Cell Genesys acquisition is completed, we believe that Genzyme Molecular
Oncology will have sufficient resources to fund its operations through 2001.
We expect Genzyme Molecular Oncology to have significant operating losses
for the next several years. Genzyme Molecular Oncology plans to spend
substantial amounts of money on, among other things:
- Commercialization of the SAGE(TM) gene expression technology;
- Research and development;
- Preclinical and clinical testing; and
53
<PAGE> 57
- Pursuing regulatory approvals.
We cannot guarantee that the efforts underlying these expenditures will be
successful or that Genzyme Molecular Oncology's operations will ever be
profitable. It may be years before it generates any significant revenue from
sales of products or services other than those based on the SAGE(TM) gene
expression technology.
Genzyme Molecular Oncology's cash needs may differ from those planned as a
result of many factors, including the:
- Results of research and development and clinical testing;
- Achievement of milestones under existing strategic alliances;
- Ability to establish and maintain additional strategic alliances and
licensing arrangements;
- Enforcement of patent and other intellectual property rights;
- Development of competitive products and services; and
- Ability to satisfy regulatory requirements of the FDA and other
government authorities.
Genzyme Molecular Oncology may require significant additional financing to
continue operations. We cannot guarantee that Genzyme Molecular Oncology will be
able to obtain any additional financing or find it on favorable terms. If
Genzyme Molecular Oncology has insufficient funds or is unable to raise
additional funds, it may delay, scale back or eliminate certain of its programs.
Genzyme Molecular Oncology may also have to give rights to third parties to
commercialize technologies or products that it would otherwise commercialize
itself.
GENZYME SURGICAL PRODUCTS
At September 30, 1999, Genzyme Surgical Products had cash, cash
equivalents, and short- and long-term investments of $149.6 million. Genzyme
Surgical Products had no cash, cash equivalents, and short- and long-term
investments at December 31, 1998.
Genzyme Surgical Products used $24.8 million in cash for operations in the
first nine months of 1999.
Genzyme Surgical Products' investing activities generated $7.9 million in
cash in the first nine months of 1999. These activities generated $10.0 million
from its investment portfolio and used $2.3 million to fund capital
expenditures.
As a result of the allocation of assets from Genzyme General in connection
with the creation of Genzyme Surgical Products as a separate division of
Genzyme, financing activities generated $50.8 million in the first nine months
of 1999.
In June 1999, Genzyme General transferred $150.0 million in cash, cash
equivalents and investments to Genzyme Surgical Products in connection with the
creation of Genzyme Surgical Products as a separate division of Genzyme. In
exchange for this transfer, approximately 14.8 million shares of GZSP Stock were
issued and distributed as a dividend to holders of GENZ Stock.
Genzyme Surgical Products believes that its cash resources, together with
the revenues generated from its products and distribution agreements, will be
sufficient to finance its planned operations and capital requirements through
2001. Although Genzyme Surgical Products currently has substantial cash
resources, it intends to use substantial portions of its available cash for:
- Research and development;
- Product development and marketing, including for the Sepra products;
- Expanding facilities; and
- Working capital.
54
<PAGE> 58
In addition, if Genzyme Surgical Products exercises its option to purchase
the limited partnership interests in Genzyme Development Partners, L.P. and uses
cash to pay all or a portion of the purchase price, Genzyme Surgical Products
cash resources will be diminished.
Genzyme Surgical Products' cash needs may differ from those planned as a
result of many factors, including the:
- Results of research and development efforts;
- Ability to establish and maintain strategic alliances;
- Ability to enter into licensing arrangements and additional distribution
arrangements;
- Costs involved in enforcing patent claims and other intellectual property
rights;
- Market acceptance of novel approaches and therapies;
- Development of competitive products; and
- Ability to satisfy regulatory requirements of the FDA and other
governmental authorities.
Genzyme Surgical Products may require significant additional financing to
continue operations beyond 2001. We cannot guarantee that Genzyme Surgical
Products will be able to obtain any additional financing or find it on favorable
terms. If Genzyme Surgical Products has insufficient funds or is unable to raise
additional funds, it may delay, scale back or eliminate certain of its programs.
Genzyme Surgical Products may also have to give rights to third parties to
commercialize technologies or products that it would otherwise commercialize
itself.
GENZYME TISSUE REPAIR
At September 30, 1999, Genzyme Tissue Repair had cash and cash equivalents
of $14.5 million, an increase of $6.8 million from December 31, 1998.
Genzyme Tissue Repair used $19.5 million in cash for operations in the
first nine months of 1999. This is primarily due to Genzyme Tissue Repair's net
loss of $24.1 million during that period.
In the first nine months of 1999, Genzyme Tissue Repair used $4.2 million
in cash as a result of its investing activities. This amount included $3.6
million used to invest in Diacrin/Genzyme LLC and $0.6 million used to purchase
equipment.
Genzyme Tissue Repair's financing activities generated $30.5 million in
cash in the first nine months of 1999. This included $25.0 million allocated
from Genzyme General in connection with the transfer of our interest in
Genzyme/Diacrin LLC from Genzyme Tissue Repair to Genzyme General and $5.0
million allocated to Genzyme Tissue Repair under its equity line from Genzyme
General.
At September 30, 1999, $18.0 million of funds outstanding under our
revolving credit facility were allocated to Genzyme Tissue Repair. As more fully
described in "Subsequent Events" below, this amount was refinanced in November
1999.
During the first three quarters of 1999, the holder of our 6% convertible
subordinated note due February 2000 converted $8.2 million in principal amount
into 4,364,861 shares of GZTR Stock. Genzyme Tissue Repair paid approximately
$406,000 of accrued interest to the holder in connection with these conversions.
The principal and remaining interest on this note becomes due in February 2000.
We anticipate that Genzyme Tissue Repair's current cash resources, together
with the $20.0 million that remains available under an equity line of credit
from Genzyme General, will be sufficient to fund its operations through the end
of 2000.
In addition, $20.0 million of the cash allocated to Genzyme Tissue Repair
in connection with the transfer to Genzyme General of our interest of the
Diacrin joint venture is subject to the successful achievement of product
development milestones by the joint venture. Genzyme Tissue Repair may repay any
of this amount
55
<PAGE> 59
to Genzyme General in cash, GZTR designated shares, or a combination of both, at
its option. If these milestones are not achieved, and Genzyme Tissue Repair
elects to repay Genzyme General in cash, its cash reserves will be substantially
diminished.
Genzyme Tissue Repair's cash needs may differ from those planned as a
result of many factors, including the:
- Ability to satisfy regulatory requirements of the FDA and other
government agencies;
- Results of research and development and clinical testing;
- Enforcement of patent and other intellectual property rights; and
- Development of competitive products and services.
Genzyme Tissue Repair will require substantial additional funds in order to
continue operations at current levels beyond 2000. We cannot guarantee that
Genzyme Tissue Repair will be able to obtain any additional financing or find it
on favorable terms. If Genzyme Tissue Repair has insufficient funds or is unable
to raise additional funds, it may be required to delay, scale back or eliminate
certain of its programs. Genzyme Tissue Repair may also have to give rights to
third parties to commercialize technologies or products that it would otherwise
commercialize itself.
EURO-THE NEW EUROPEAN CURRENCY
On January 1, 1999, a number of European countries adopted the Euro as
their common legal currency. This conversion has had no material effect on our:
- Competitive position;
- Computer systems;
- Ability to conduct our business;
- Material contracts;
- Derivatives and other financial instruments;
- Exchange rate risk; or
- Tax rate.
We incorporate by reference our disclosure related to the Euro conversion,
which is set forth under the heading "Management's Discussion and Analysis of
Genzyme Corporation and Subsidiaries' Financial Condition and Results of
Operations -- Euro -- the New European Currency" in Exhibit 13.1 to our latest
Form 10-K, as amended.
YEAR 2000
Many computer systems and other equipment with embedded chips or processors
experience problems handling dates beyond the year 1999. As a result, older
programs may experience operating difficulties that cause date-sensitive
transaction errors or failures unless they are modified or upgraded to
adequately address the problem. The potential impact of the Year 2000 problem
cannot be fully appreciated at this time.
We are conducting a Year 2000 compliance program intended to identify and
minimize our exposure to Year 2000 problems. The compliance program is a
coordinated effort being conducted by each of our divisions, business units and
departments. We are using our own MIS personnel to conduct the program and
56
<PAGE> 60
have not used any independent verification or validation processes in connection
with the program. Our program involves four phases:
- Conducting an inventory of our Year 2000 issues;
- Prioritizing identified systems, programs and equipment based on
materiality to our operations;
- Assessing Year 2000 compliance; and
- Resolving Year 2000 issues through upgrades, replacements or repairs.
We have conducted an inventory of our information technology and
non-information technology systems, programs and equipment. We evaluated
systems, programs and equipment based on their importance to our business, risk
of failure, time horizon to failure, and other factors. We then placed these
systems, programs and equipment into one of the following seven categories:
(1) Mission critical;
(2) Mission important;
(3) Process critical;
(4) Process important;
(5) Process convenient;
(6) Reporting; and
(7) Other.
We have completed the first three phases of the program for all of our own
systems, programs and equipment and are currently in the fourth phase of the
compliance program. We have determined that our Year 2000 exposures are
primarily in the following areas:
- Information systems;
- Financial and administrative applications;
- Manufacturing applications and equipment; and
- Research and development support systems, programs and equipment.
We have resolved the Year 2000 issues for the systems, programs and
equipment that fall into categories (1) through (4) above. We are also
developing contingency plans with respect to categories (1) through (3). Our
contingency plans include purchasing extra raw materials, making appropriate
staffing arrangements and ordering extra fuel. We plan to resolve Year 2000
issues for systems, programs and equipment in category (5) by the end of 1999,
and for systems, programs and equipment in categories (6) and (7) as time
permits. To date, we have not deferred any significant information technology
projects as a result of our Year 2000 compliance efforts.
We are also in the process of surveying third parties that we consider
critical to our business about their Year 2000 readiness. These third parties
include:
- Significant customers;
- Suppliers;
- Significant research or collaborative partners;
- Service providers; and
- Distributors.
We substantially completed the survey in the third quarter of 1999. We sent
surveys to over 1,900 businesses and received responses from approximately 77%
of the group. Importantly, we received responses
57
<PAGE> 61
from all of our critical suppliers and distributors. We are attempting to
mitigate our risks with respect to these parties' Year 2000 compliance. We have
identified alternative resources for our essential operations and are in the
process of securing these resources. We are also stock-piling raw materials and
finished goods.
We may incur significant costs in assessing, resolving and mitigating Year
2000 compliance issues. Each of our departments, business units and divisions
incurs its own costs in connection with readiness efforts. We do not separately
track the internal costs of our Year 2000 compliance efforts, so these costs are
unknown. We estimate, however, that we have spent approximately $1.0 million to
date in replacing, upgrading or repairing systems, programs and equipment.
Although the aggregate additional costs of our Year 2000 program cannot be known
at this time, our management currently expects that the additional costs will be
less than $0.5 million. The actual costs will depend on numerous factors,
including the nature and amount of remediation work to be performed and internal
staff costs. We intend to fund all of our Year 2000 compliance program costs
through operations. These estimates do not include costs incurred in connection
systems, programs or equipment that were replaced or upgraded in the normal
course of business for which the timing was not accelerated due to Year 2000
issues.
We cannot guarantee that our Year 2000 issues will be resolved by the end
of 1999. If we fail to identify and resolve all significant Year 2000 issues in
a timely manner, we could experience interruptions or failures of our normal
business activities or operations, which would have a material adverse effect on
the our business, results of operations and financial condition. Our business,
results of operations and financial condition could also be materially adversely
affected by the failure of third parties that are significant to our business to
be Year 2000 compliant. Any interruptions or failures of our normal business
activities or operations could result in:
- Delays in the distribution of finished goods or receipt of raw materials;
- Disruptions in manufacturing activities;
- Disruptions of clinical programs;
- Delays in product development activities; or
- Errors or delays in customer order or invoice processing.
Our compliance program is an ongoing process, and the estimated costs and
timetables discussed above are subject to change.
MARKET RISK
We are exposed to potential loss from financial market risks that may occur
as a result of changes in interest rates, equity prices and foreign exchange
rates. Our exposure to these risks has not materially changed since December 31,
1998.
We incorporate by reference our disclosure related to these risks, which is
set forth under the heading "Management's Discussion and Analysis of Genzyme
Corporation and Subsidiaries' Financial Condition and Results of
Operations -- Market Risk" in Exhibit 13.1 to our latest Form 10-K, as amended.
SUBSEQUENT EVENTS
CELL GENESYS:
In October 1999, we entered into an agreement to acquire Cell Genesys for
approximately $350 million in GENZ Stock. The acquisition, which we expect to
complete in the first quarter of 2000, is subject to:
- Approval by Cell Genesys' shareholders;
- Clearance under federal antitrust laws; and
- Other customary closing conditions.
58
<PAGE> 62
In connection with this acquisition, our board of directors has approved
the allocation of Cell Genesys' cancer programs and product candidates and $60.0
million in cash to Genzyme Molecular Oncology. In exchange for those assets,
Genzyme Molecular Oncology will reserve approximately 12.5 million GZMO
designated shares for the benefit of Genzyme General. We are currently
considering how to treat these designated shares. We may:
- Sell the shares to financial or strategic investors with an interest in
Genzyme Molecular Oncology; or
- Sell the shares in a registered public offering.
If we do not sell the shares, we will distribute them as a dividend to
holders of GENZ Stock.
We cannot guarantee that the acquisition of Cell Genesys will be completed
or that it will be completed at the anticipated time. In addition, we have not
undertaken any efforts to dispose of the GZMO designated shares and we cannot
guarantee that any disposition or sale can occur on terms and conditions
acceptable to Genzyme General and Genzyme Molecular Oncology.
NEW CREDIT FACILITY:
In November 1999, our $225.0 million revolving credit facility matured. We
refinanced this facility with a $50.0 million revolving credit facility that
matures in November 2000 and a $100.0 million revolving credit facility that
matures in November 2002. When we refinanced the credit facility, $100.0 million
was outstanding. Of this amount, we:
- Repaid the $82.0 million that was allocated to Genzyme General; and
- Refinanced the $18.0 million that was allocated to Genzyme Tissue Repair
under the new credit facility.
GENZYME TRANSGENICS
In November 1999, we purchased $12.5 million in shares of Series B
convertible preferred stock of Genzyme Transgenics. We can convert these shares
into shares of Genzyme Transgenics common stock at any time at a price of $6.30
per share. We will receive an escalating annual dividend of between 11% and 12%
on amounts that we convert into common stock.
FOCAL:
In October 1999, we entered into an agreement with Focal, Inc. under which
Genzyme Surgical Products will distribute and sell Focal's surgical sealants in
North America for selected indications following FDA approval. In November 1999,
we purchased 810,372 shares of Focal common stock for $5.0 million. We are also
committed, at Focal's option, to make future equity investments of up to $15.0
million subject to certain conditions.
GELTEX:
In November 1999, we made a $10.0 milestone payment to GelTex as required
under our joint venture agreements.
STRESSGEN:
In August 1999, the Canadian Medical Discoveries Fund exercised its option
to require us and StressGen to repurchase the fund's interest in
StressGen/Genzyme LLC. We repurchased one-half of the fund's interest in the
joint venture in October 1999 for approximately $3.9 million by issuing to the
fund 617,200 shares of GZMO Stock.
59
<PAGE> 63
ITEM 3. QUANTITATIVE AND QUALITATIVE ANALYSIS OF MARKET RISK
We are exposed to potential loss from financial market risks that may occur
as a result of changes in interest rates, equity prices and foreign exchange
rates. Our exposure to these risks has not materially changed since December 31,
1998.
We incorporate by reference our disclosure related to these risks, which is
set forth under the heading "Management's Discussion and Analysis of Genzyme
Corporation and Subsidiaries' Financial Condition and Results of
Operations -- Market Risk" in Exhibit 13.1 to our latest Form 10-K, as amended.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<C> <S>
3.1 Restated Articles of Organization of Genzyme Corporation, as
amended. Filed as Exhibit 1 to our registration statement on
Form 8-A, which we filed with the SEC on June 18, 1997 (File
No. 0-14680). We incorporate this exhibit by reference into
this report.
3.2 By-Laws of Genzyme Corporation, as amended. Filed with this
report.
4.1 Series Designation for Genzyme Molecular Oncology Division
Common Stock. Filed as Exhibit 2 to our registration
statement on Form 8-A, which we filed with the SEC on June
18, 1997 (File No. 0-14680). We incorporate this exhibit by
reference into this report.
4.2 Series Designation for Genzyme Surgical Products Division
Common Stock. Filed as Exhibit 2 to our registration
statement on Form 8-A, which we filed with the SEC on June
11, 1999 (File No. 0-14680). We incorporate this exhibit by
reference into this report.
4.3 Series Designation for Series A, Series B, Series C and
Series D Participating Preferred Stock. Filed as Exhibit 2
to Amendment No. 1 of our registration statement on Form
8-A, which we filed with the SEC on June 11, 1999 (File No.
0-14680). We incorporate this exhibit by reference into this
report.
4.4 Amended and Restated Renewed Rights Agreement. Filed as
Exhibit 4 to Amendment No. 1 of our registration statement
on Form 8-A, which we filed with the SEC on June 11, 1999
(File No. 0-14680). We incorporate this exhibit by reference
into this report.
27.1 Financial Data Schedule for the nine month period ended
September 30, 1999 (for EDGAR filing purposes only). Filed
with this report.
27.2 Financial Data Schedule for the nine month period ended
September 30, 1998 (for EDGAR filing purposes only). Filed
with this report.
</TABLE>
(b) Reports on Form 8-K
On October 21, 1999, we filed a current report on Form 8-K to disclose
under Item 5 that:
- We entered into an agreement to acquire Cell Genesys for approximately
$350 million in GENZ Stock; and
- Our board of directors approved the allocation of Cell Genesys' cancer
programs and $60.0 million in cash to Genzyme Molecular Oncology in
exchange for the reservation of approximately 12.5 million GZMO
designated shares.
60
<PAGE> 64
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, SEPTEMBER 30, 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
By: /s/ MICHAEL S. WYZGA
------------------------------------
Michael S. Wyzga
Senior Vice President, Finance;
Chief Financial Officer; and
Chief Accounting Officer
DATE: November 15, 1999
61
<PAGE> 65
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, SEPTEMBER 30, 1999
EXHIBIT INDEX
<TABLE>
<C> <S>
3.1 Restated Articles of Organization of Genzyme Corporation, as
amended. Filed as Exhibit 1 to our registration statement on
Form 8-A, which we filed with the SEC on June 18, 1997 (File
No. 0-14680). We incorporate this exhibit by reference into
this report.
3.2 By-Laws of Genzyme Corporation, as amended. Filed with this
report.
4.1 Series Designation for Genzyme Molecular Oncology Division
Common Stock. Filed as Exhibit 2 to our registration
statement on Form 8-A, which we filed with the SEC on June
18, 1997 (File No. 0-14680). We incorporate this exhibit by
reference into this report.
4.2 Series Designation for Genzyme Surgical Products Division
Common Stock. Filed as Exhibit 2 to our registration
statement on Form 8-A, which we filed with the SEC on June
11, 1999 (File No. 0-14680). We incorporate this exhibit by
reference into this report.
4.3 Series Designation for Series A, Series B, Series C and
Series D Participating Preferred Stock. Filed as Exhibit 2
to Amendment No. 1 of our registration statement on Form
8-A, which we filed with the SEC on June 11, 1999 (File No.
0-14680). We incorporate this exhibit by reference into this
report.
4.4 Amended and Restated Renewed Rights Agreement. Filed as
Exhibit 4 to Amendment No. 1 of our registration statement
on Form 8-A, which we filed with the SEC on June 11, 1999
(File No. 0-14680). We incorporate this exhibit by reference
into this report.
27.1 Financial Data Schedule for the nine month period ended
September 30, 1999 (for EDGAR filing purposes only). Filed
with this report.
27.2 Financial Data Schedule for the nine month period ended
September 30, 1998 (for EDGAR filing purposes only). Filed
with this report.
</TABLE>
<PAGE> 1
EXHIBIT 3.2
BY-LAWS
OF
GENZYME CORPORATION
ARTICLE I
MEETINGS OF STOCKHOLDERS
SECTION 1. PLACE. Meetings of the stockholders shall be held at the
principal office of the corporation in Massachusetts or at such other place as
may be named in the notice.
SECTION 2. ANNUAL MEETINGS. The annual meeting of the stockholders
shall be held on the fourth Thursday of May or on such other date within six
months after the end of the fiscal year of the corporation and at such hour and
place as the directors or an officer designated by the directors shall
determine. In the event that the annual meeting has not been held on such date,
a special meeting in lieu of the annual meeting may be held with all of the
force and effect of an annual meeting.
SECTION 3. SPECIAL MEETINGS. Special meetings of the stockholders may
be called only by the president or by the directors, and shall be called by the
clerk or, in case of the death, absence, incapacity or refusal of the clerk, by
any other officer, upon written application of one or more stockholders who hold
not less than 90% (or such lesser percentage as may be required by law) in
interest of the capital stock entitled to vote thereat.
SECTION 4. NOTICE. A written notice of the date, place and hour of all
meetings of stockholders stating the purposes of the meeting shall be given by
the clerk or an assistant clerk (or by any other officer who is entitled to call
such a meeting) at least seven (7) days before the meeting to each stockholder
entitled to vote thereat and to each stockholder who is entitled to such notice,
by leaving such notice with him or at his residence or usual place of business,
or by mailing it, postage prepaid, and addressed to such stockholder at his
address as it appears in the records of the corporation. Notwithstanding the
foregoing, in the case of any special meeting called upon the written
application of stockholders, such meeting shall be called not less than sixty
(60) days nor more than ninety (90) days after such application is received by
the corporation and written notice thereof shall be given in accordance with the
preceding sentence at least twenty (20) days before the meeting. Whenever notice
of a meeting is required to be given a stockholder under applicable law, the
articles of organization or these by-laws, a written waiver thereof, executed
before or after the meeting by such stockholder or his attorney thereunto
authorized and filed with the records of the meeting, shall be deemed equivalent
to such notice.
<PAGE> 2
SECTION 5. STOCKHOLDER NOMINATIONS OF DIRECTORS. Only persons who are
nominated in accordance with the following procedures shall be eligible for
election as directors at any annual or special meeting. Nominations of persons
for election as directors may be made by or at the direction of the directors,
or by any stockholder entitled to vote for the election of directors at the
meeting who complies with the notice procedures set forth in this section. Such
nominations, other than those made by or at the direction of the board, shall be
made pursuant to timely notice in writing to the chairman of the board, if any,
the president, the treasurer or the clerk. To be timely, a stockholder's notice
must be delivered to or mailed and received at the principal executive offices
of the corporation the earlier of: (a) not less than 90 days nor more than 120
days prior to the anniversary date of the prior year's annual meeting, provided,
however, that this subsection (a) shall not apply if (i) there was no annual
meeting in the prior year or (ii) the date of the current year's annual meeting
is more than 30 days from the anniversary date of the prior year's annual
meeting; or (b) 60 days prior to the annual meeting; provided, however, that
(except as to an annual meeting held on the date specified in these by-laws,
such date not having been changed since the last annual meeting), if less than
65 days' notice or prior public disclosure of the date of the meeting is given
or made to stockholders, notice by the stockholder to be timely must be so
received not later than the close of business on the 15th day following the day
on which such notice of the date of the meeting was mailed or such public
disclosure was made. Such stockholder's notice shall set forth (a) as to each
person whom the stockholder proposes to nominate for election or re-election as
a director, (i) the name, age, business address and residence address of the
person, (ii) the principal occupation or employment of the person, (iii) the
class and number of shares of capital stock of the corporation which are
beneficially owned by the person and (iv) any other information relating to the
person that is required to be disclosed in solicitations for proxies for
election of directors pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended; and (b) as to the stockholder giving the notice (i) the
name and record address of such stockholder and (ii) the class and number of
shares of capital stock of the corporation which are beneficially owned by such
stockholder. No person shall be eligible for election as a director at any
annual or special meeting of stockholders unless nominated in accordance with
the procedures set forth herein.
The chairman of the meeting shall, if the facts warrant, determine that
a nomination was not made in accordance with the foregoing procedure, and if he
should so determine, he shall so declare to the meeting and the defective
nomination shall be disregarded.
SECTION 6. ADVANCE NOTICE OF STOCKHOLDER-PROPOSED BUSINESS AT ANNUAL
MEETINGS. At an annual meeting of the stockholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be brought
properly before an annual meeting, business must be either (a) specified in the
notice of meeting (or any supplement thereto) given by or at the direction of
the president or the directors, (b) otherwise properly brought before the
meeting by or at the direction of the board, or (c) otherwise properly brought
before the meeting by a stockholder. In addition to any other applicable
requirements, for business to be brought properly before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in writing to
the chairman of the board, if any, the president, the clerk or the treasurer. To
be timely, a stockholder's notice must be delivered to or mailed and received at
the
<PAGE> 3
principal executive offices of the corporation the earlier of: (a) not less than
90 days nor more than 120 days prior to the anniversary date of the prior year's
annual meeting, provided, however, that this subsection (a) shall not apply if
(i) there was no annual meeting in the prior year or (ii) the date of the
current year's annual meeting is more than 30 days from the anniversary date of
the prior year's annual meeting; or (b) 60 days prior to the annual meeting;
provided, however, that (except as to an annual meeting held on the date
specified in these by-laws, such date not having been changed since the last
annual meeting), if less than 65 days' notice or prior public disclosure of the
date of the meeting is given or made to stockholders, notice by the stockholder
to be timely must be so received not later than the close of business on the
15th day following the day on which such notice of the date of the annual
meeting was mailed or such public disclosure was made. A stockholder's notice
shall set forth as to each matter the stockholder proposes to bring before the
annual meeting (i) a brief description of the business desired to be brought
before the annual meeting and the reasons for conducting such business at the
annual meeting, (ii) the name and record address of the stockholder proposing
such business, (iii) the class and number of shares of the corporation which are
beneficially owned by the stockholder, and (iv) any material interest of the
stockholder in such business.
Notwithstanding anything in these by-laws to the contrary, no business
shall be conducted at the annual meeting except in accordance with the
procedures set forth in this section, provided, however, that nothing in this
section shall be deemed to preclude discussion by any stockholder of any
business properly brought before the annual meeting in accordance with said
procedure.
The chairman of an annual meeting shall, if the facts warrant,
determine that business was not properly brought before the meeting in
accordance with the provisions of this section, and if he should so determine,
he shall so declare to the meeting and any such business not properly brought
before the meeting shall not be transacted.
SECTION 7. QUORUM. A majority in interest of all stock issued,
outstanding and entitled to vote at a meeting shall constitute a quorum, but a
smaller number may adjourn from time to time without further notice until a
quorum is secured.
SECTION 8. ACTION BY VOTE. When a quorum is present at any meeting, a
plurality of the votes properly cast for election to any office shall effect
such election and a majority of the votes properly cast upon any question other
than an election to an office shall decide the question, except when a larger
vote is required by law, the articles of organization or these by-laws or when
the directors requires a larger vote upon any election or question (to the
extent permitted by law). No ballot shall be required for any election unless
requested by a stockholder present or represented at the meeting and entitled to
vote in the election.
SECTION 9. VOTING. Stockholders entitled to vote shall have one vote
for each share of stock entitled to vote held by them of record according to the
records of the corporation, unless otherwise provided by the articles of
organization. The corporation shall not, directly or indirectly, vote any shares
of its own stock. Stockholders may vote in person or by proxy. To the extent
approved by the directors, a stockholder may
<PAGE> 4
appoint proxies by electronic transmission under procedures designed to permit
determination that such transmission was authorized by the stockholder.
SECTION 10. ACTION BY CONSENT. Except as otherwise required by law, any action
required or permitted to be taken by the stockholders must be taken at a duly
called annual or special meeting of such holders and may not be taken by any
consent in writing by such holders.
ARTICLE II
OFFICERS AND DIRECTORS
SECTION 1. ENUMERATION. The corporation shall have a board of not less
than three directors, except that whenever there shall be fewer than three
stockholders, the number of directors may be less than three but in no event
less than the number of stockholders. The number of directors shall be fixed by
the directors and may be enlarged at any time by vote of a majority of the
directors then in office. The officers of the corporation shall be a president,
a treasurer, a clerk and such other officers as the directors may from time to
time appoint.
SECTION 2. QUALIFICATIONS. Directors and officers need not be
stockholders. No officer need be a director. Two or more offices may be held by
the same person. The clerk shall be a resident of Massachusetts unless a
resident agent shall have been appointed pursuant to the Massachusetts Business
Corporation Law.
SECTION 3. ELECTION. The directors shall be elected in the manner
provided in the articles of organization, by such stockholders as have the right
to vote thereon. The directors at their annual meeting in each year shall elect
a president, a treasurer and a clerk, and may at any time elect such other
officers as they shall determine. Except as hereinafter provided, the president,
the treasurer and the clerk shall hold office until the next annual meeting of
stockholders and until their respective successors are elected and qualified.
Other officers shall serve at the pleasure of the directors.
SECTION 4. REMOVAL. Directors may be removed from office only as
provided in the articles of organization. Officers elected or appointed by the
directors may be removed from their respective offices with or without cause by
vote of a majority of the directors then in office. A director or officer may be
removed for cause only after a reasonable notice and opportunity to be heard
before the body proposing to remove him.
SECTION 5. RESIGNATION. Resignations by officers or directors shall be
given in writing to the president, treasurer, clerk or directors. Such
resignation shall be effective upon receipt unless specified to be effective at
some other time.
SECTION 6. VACANCIES. Continuing directors may act despite a vacancy or
vacancies in the board and shall for this purpose be deemed to constitute the
full board. Any vacancy in the board of directors, however occurring, including
a vacancy resulting from the enlargement of the board, may be filled by the
directors then in office, though less than a quorum. Vacancies in any other
office may be filled by the directors.
<PAGE> 5
ARTICLE III
MEETING OF THE DIRECTORS
SECTION 1. REGULAR MEETINGS. Regular meetings of the directors may be
held without call or notice at such times and places within or without the
Commonwealth of Massachusetts as the directors may fix provided that reasonable
notice of the first regular meeting following any such determination shall be
given to absent directors. An annual meeting of the directors may be held in
each year without call or notice immediately after and at the place of the
meeting at which the board is elected.
SECTION 2. SPECIAL MEETINGS. Special meetings of the directors may be
held at any time and at any place designated in the call of the meeting, when
called by the chairman of the board, if any, the president or by two or more
directors, reasonable notice thereof being given to each director by the clerk
or by the officer or one of the directors calling the meeting.
SECTION 3. NOTICE. No notice need be given for a regular or annual
meeting of the directors. Forty-eight hours' notice by mail, telegraph,
telephone or word of mouth shall be given for a special meeting unless shorter
notice is adequate under the circumstances. A notice or waiver of notice need
not specify the purpose of any special meeting. Notice of a meeting need not be
given to any director, if a written waiver of notice, executed by him before or
after the meeting, is filed with the records of the meeting, or to any director
who attends the meeting without protesting prior thereto or at its commencement
the lack of notice to him.
SECTION 4. QUORUM. A majority of the directors then in office shall
constitute a quorum, but a smaller number may adjourn finally or from time to
time without further notice until a quorum is secured. If a quorum is present, a
majority of the directors present may take any action on behalf of the board
except to the extent that a larger number is required by law, the articles of
organization or these By-laws.
SECTION 5. ACTION BY CONSENT. Any action required or permitted to be
taken at any meeting of the directors may be taken without a meeting if all the
directors consent to the action in writing and the written consents are filed
with the records of the meetings of directors. Such consents shall be treated
for all purposes as a vote at a meeting.
SECTION 6. COMMITTEES. The directors may elect from their number an
executive committee or other committees and may by like vote delegate to
committees so elected some or all of their powers to the extent permitted by
law. Except as the directors may otherwise determine, any such committee may
make rules for the conduct of its business, but unless otherwise provided by the
directors or in such rules, its business shall be conducted as nearly as
possible in the same manner as is provided by these by-laws for the directors.
The directors shall have the power at any time to fill vacancies in any such
committee, to change its membership or to discharge the committee.
<PAGE> 6
ARTICLE IV
POWERS AND DUTIES OF DIRECTORS AND OFFICERS
SECTION 1. DIRECTORS. The business of the corporation shall be managed
by the directors, who may exercise all such powers of the corporation as are not
by law, by the articles of organization or by these by-laws required to be
otherwise exercised. The directors may from time to time to the extent permitted
by law delegate any of their powers to committees, officers, attorneys or agents
of the corporation, subject to such limitations as the directors may impose.
SECTION 2. CHAIRMAN AND PRESIDENT. The directors may appoint a chairman
of the board who, unless otherwise determined by the directors, shall, when
present, preside at all meetings of the directors and shall have such other
powers and duties as customarily belong to the office of chairman of the board
or as may be designated from time to time by the directors. The president shall
be the chief executive officer of the corporation unless the directors designate
another officer, in which event he shall, unless the directors otherwise
determine, be the chief operating officer. The chief executive officer shall,
subject to the direction of the directors, have general supervision and control
of the business of the corporation. Except as provided above regarding the
Chairman and unless the directors specify otherwise, the chief executive officer
shall preside at all meetings of stockholders and of the directors at which he
is present. The president and chief executive officer shall perform such other
duties and shall have such other powers as the directors may designate from time
to time.
SECTION 3. VICE PRESIDENTS. The vice presidents, if any, shall have
such powers and duties as may be designated from time to time by the directors
or by the president.
SECTION 4. TREASURER. Except as the directors shall otherwise
determine, the treasurer shall be the chief financial and accounting officer of
the corporation and shall have such other powers and duties as customarily
belong to the office of treasurer or as may be designated from time to time by
the directors or by the president.
SECTION 5. CLERK. The clerk shall record all proceedings of the
stockholders and directors in a book or books to be kept therefor and shall have
custody of the seal of the corporation.
ARTICLE V
EMPLOYMENT CONTRACTS
The corporation may enter into employment contracts authorized by the
directors extending beyond the terms of the directors. An employment contract
shall be valid despite any inconsistent provision of these by-laws relating to
terms of officers and removal of officers with or without cause but shall not
affect the authority of the directors to remove officers. Any removal or failure
to reelect an officer shall be without prejudice to the officer's contract
rights, if any.
<PAGE> 7
ARTICLE VI
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation shall, to the extent legally permissible, indemnify
each person who may serve or who has served at any time as a director or officer
of the corporation or of any of its subsidiaries, or who at the request of the
corporation may serve or at any time has served as a director, officer or
trustee of, or in a similar capacity with, another organization or an employee
benefit plan, against all expenses and liabilities (including counsel fees,
judgments, fines, excise taxes, penalties and amounts payable in settlements)
reasonably incurred by or imposed upon such person in connection with any
threatened, pending or completed action, suit or other proceeding, whether
civil, criminal, administrative or investigative, in which he may become
involved by reason of his serving or having served in such capacity (other than
a proceeding voluntarily initiated by such person unless he is successful on the
merits, the proceeding was authorized by the corporation or the proceeding seeks
a declaratory judgment regarding his own conduct); provided that no
indemnification shall be provided for any such person with respect to any matter
as to which he shall have been finally adjudicated in any proceeding not to have
acted in good faith in the reasonable belief that his action was in the best
interests of the corporation or, to the extent such matter relates to service
with respect to any employee benefit plan, in the best interests of the
participants or beneficiaries of such employee benefit plan; and provided,
further, that as to any matter disposed of by a compromise payment by such
person, pursuant to a consent decree or otherwise, the payment and
indemnification thereof have been approved by the corporation, which approval
shall not unreasonably be withheld, or by a court of competent jurisdiction.
Such indemnification shall include payment by the corporation of expenses
incurred in defending a civil or criminal action or proceeding in advance of the
final disposition of such action or proceeding, upon receipt of an undertaking
by the person indemnified to repay such payment if he shall be adjudicated to be
not entitled to indemnification under this article, which undertaking may be
accepted without regard to the financial ability of such person to make
repayment.
A person entitled to indemnification hereunder whose duties include
service or responsibilities as a fiduciary with respect to a subsidiary or other
organization shall be deemed to have acted in good faith in the reasonable
belief that his action was in the best interests of the corporation if he acted
in good faith in the reasonable belief that his action was in the best interests
of such subsidiary or organization or of the participants or beneficiaries of,
or other persons with interests in, such subsidiary or organization to whom he
had a fiduciary duty.
Where indemnification hereunder requires authorization or approval by
the corporation, such authorization or approval shall be conclusively deemed to
have been obtained, and in any case where a director of the corporation approves
the payment of indemnification, such director shall be wholly protected, if:
(i) the payment has been approved or ratified (l) by a
majority vote of a quorum of the directors consisting of persons who are not at
that time parties to the proceeding, (2) by a majority vote of a committee of
two or more directors who are not at that time parties to the proceeding and are
selected for this purpose by the full board (in
<PAGE> 8
which selection directors who are parties may participate), or (3) by a majority
vote of a quorum of the outstanding shares of stock of all classes entitled to
vote for directors, voting as a single class, which quorum shall consist of
stockholders who are not at that time parties to the proceeding; or
(ii) the action is taken in reliance upon the opinion of
independent legal counsel (who may be counsel to the corporation) appointed for
the purpose by vote of the directors or in the manner specified in clauses (l),
(2) or (3) of subparagraph (i); or
(iii) the payment is approved by a court of competent
jurisdiction; or
(iv) the directors have otherwise acted in accordance with the
standard of conduct set forth in the Massachusetts Business Corporation Law.
Any indemnification or advance of expenses under this article shall be
paid promptly, and in any event within 30 days, after the receipt by the
corporation of a written request therefor from the person to be indemnified,
unless with respect to a claim for indemnification the corporation shall have
determined that the person is not entitled to indemnification. If the
corporation denies the request or if payment is not made within such 30 day
period, the person seeking to be indemnified may at any time thereafter seek to
enforce his rights hereunder in a court of competent jurisdiction and, if
successful in whole or in part, he shall be entitled also to indemnification for
the expenses of prosecuting such action. Unless otherwise provided by law, the
burden of proving that the person is not entitled to indemnification shall be on
the corporation.
The right of indemnification under this article shall be a contract
right inuring to the benefit of the directors, officers and other persons
entitled to be indemnified hereunder and no amendment or repeal of this article
shall adversely affect any right of such director, officer or other person
existing at the time of such amendment or repeal.
The indemnification provided hereunder shall inure to the benefit of
the heirs, executors and administrators of a director, officer or other person
entitled to indemnification hereunder. The indemnification provided hereunder
may, to the extent authorized by the corporation, apply to the directors,
officers and other persons associated with constituent corporations that have
been merged into or consolidated with the corporation who would have been
entitled to indemnification hereunder had they served in such capacity with or
at the request of the corporation.
The right of indemnification under this article shall be in addition to
and not exclusive of all other rights to which such director or officer or other
persons may be entitled. Nothing contained in this article shall affect any
rights to indemnification to which corporation employees or agents other than
directors and officers and other persons entitled to indemnification hereunder
may be entitled by contract or otherwise under law.
ARTICLE VII
STOCK AND TRANSFER BOOKS
The corporation shall keep in the Commonwealth of Massachusetts at its
principal office (or at an office of its transfer agent or of its clerk or of
its resident agent) stock and
<PAGE> 9
transfer records, which shall contain the names of all stockholders and the
record address and the amount of stock held by each. The corporation for all
purposes may conclusively presume that the registered holder of a stock
certificate is the absolute owner of the shares represented thereby and that his
record address is his proper address. The directors may fix in advance a time,
which shall not be more than sixty days before the date of any meeting of
stockholders or the date for the payment of any dividend or the making of any
distribution to stockholders or the last day on which the consent or dissent of
stockholders may be effectively expressed for any purpose, as the record date
for determining the stockholders having the right to notice of and to vote at
such meeting and any adjournment thereof or the right to receive such dividend
or distribution or the right to give such consent or dissent, and in such case
only stockholders of record on such record date shall have such right,
notwithstanding any transfer of stock on the books of the corporation after the
record date; or without fixing such record date the directors may for any of
such purposes close the transfer books for all or any part of such period.
If no record date is fixed and the transfer books are not closed:
(i) The record date for determining stockholders having the
right to notice of or to vote at a meeting of stockholders shall be at the close
of business on the day next preceding the day on which notice is given or, if
notice is waived, the close of business on the next day preceding the day on
which the meeting is held.
(ii) The record date for determining stockholders for any
other purpose shall be at the close of business on the day on which the board of
directors acts with respect thereto.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the directors may, to the extent permitted by law, fix a
new record date for the adjourned meeting.
ARTICLE VIII
CAPITAL STOCK
SECTION 1. ISSUANCE OF STOCK. Any unissued capital stock from time to
time authorized under the articles of organization may be issued by vote of the
directors.
SECTION 2. SHARES REPRESENTED BY CERTIFICATES AND UNCERTIFICATED
SHARES. The directors may determine that some or all of any or all classes and
series of shares shall be uncertificated shares. Unless the directors have so
determined, a stockholder shall be entitled to a certificate stating the number
and the class and the designation of the series, if any, of the shares held by
him, in such form as shall, in conformity to law, be prescribed from time to
time by the directors. Such certificate shall be signed by the chairman of the
board of directors, the president or a vice president and by the treasurer or an
assistant treasurer. Such signatures may be facsimiles if the certificate is
signed by a transfer agent, or by a registrar, other than a director, officer or
employee of the corporation. In case any officer who has signed or whose
facsimile signature has been placed on such certificate shall have ceased to be
such officer before such certificate is
<PAGE> 10
issued, it may be issued by the corporation with the same effect as if he were
such officer at the time of its issue.
SECTION 3. LOSS OF CERTIFICATES. In the case of the alleged loss or
destruction or the mutilation of a certificate of stock, a duplicate certificate
may be issued in place thereof, upon such conditions as the directors may
prescribe.
ARTICLE IX
SEAL AND FISCAL YEAR
The seal shall be circular in form with the name of the corporation
around the periphery and words and figures "Incorporated 1991 Massachusetts"
within. The fiscal year shall be fixed from time to time by the directors.
ARTICLE X
MASSACHUSETTS CONTROL SHARE ACQUISITION ACT
The provisions of Chapter 110D of the Massachusetts General Laws shall
not apply to the corporation.
ARTICLE XI
EXECUTION OF DOCUMENTS
Except as the directors may generally or in particular cases authorize
the execution thereof in some manner, all deeds, leases, transfers, contracts,
bonds, notes, checks, drafts and other obligations made, accepted or endorsed by
the corporation shall be signed by the chairman of the board, if any, the
president, a vice president, or the treasurer.
ARTICLE XII
AMENDMENT OF BY-LAWS
These by-laws may be amended, altered or repealed in whole or in part,
and new by-laws may be adopted, by vote of the holders of a majority of the
shares of common stock outstanding and entitled to vote. The directors may also
make, amend or repeal these by-laws in whole or in part, except with respect to
any provision thereof which by law, the articles of organization or these
by-laws requires action by the stockholders. Not later than the time of giving
notice of the meeting of stockholders next following the making, amending or
repealing by the directors of any by-law, notice thereof stating the substance
of such change shall be given to all stockholders entitled to vote on amending
the by-laws.
<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 nine months ended September 30, 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 September 30, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 253,763
<SECURITIES> 442,164
<RECEIVABLES> 182,683
<ALLOWANCES> 28,427
<INVENTORY> 117,184
<CURRENT-ASSETS> 860,734
<PP&E> 562,166
<DEPRECIATION> 178,625
<TOTAL-ASSETS> 1,804,222
<CURRENT-LIABILITIES> 226,089
<BONDS> 0
0
0
<COMMON> 1,371
<OTHER-SE> 1,284,025
<TOTAL-LIABILITY-AND-EQUITY> 1,804,222
<SALES> 558,271
<TOTAL-REVENUES> 561,843
<CGS> 132,757
<TOTAL-COSTS> 169,651
<OTHER-EXPENSES> 300,482
<LOSS-PROVISION> 10,915
<INTEREST-EXPENSE> 17,010
<INCOME-PRETAX> 63,785
<INCOME-TAX> 27,659
<INCOME-CONTINUING> 36,126
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,126
<EPS-BASIC> 1.47<F1><F2>
<EPS-DILUTED> 1.38<F1><F2>
<FN>
<F1>This financial data schedule has been restated to reflect the creation of
Genzyme Surgical Products Division on June 28, 1999. Genzyme Surgical Products
was created from programs and products that had previously been included in the
results of Genzyme General Division until the creation date of June 28, 1999.
All Genzyme General Division historical net income (loss) and earnings (loss)
per share amounts have been restated to reflect the creation of this new
division and Genzyme Surgical Products Division is now included as a separate
tracking stock of Genzyme Corporation.
<F2>Genzyme Corporation reports earnings per share based on its four tracking
stocks - Genzyme General Division Common Stock ("GENZ Stock"), Genzyme
Molecular Oncology Division Common Stock ("GZMO Stock") Genzyme Surgical
Products Division Common Stock ("GZSP Stock"), and Genzyme Tissue Repair
Division Common Stock ("GZTR Stock"). The earnings per share data presented
on this schedule reflects the earnings per share data for net income
attributable to GENZ Stock. For the nine months ended September 30, 1999, net
income attributable to Genzyme General Division was $121,639 and net income per
share of GENZ Stock on a basic and diluted basis was $1.47 and $1.38,
respectively. Net loss for Genzyme Molecular Oncology Division for the nine
months ended September 30, 1999 was $(22,777) or $(1.80) per basic and diluted
share of GZMO Stock, Net loss for Genzyme Surgical Products Division for the
nine months ended September 30, 1999 was $(39,356), and pro forma net loss per
basic and diluted share of GZSP Stock was $(2.66). Net loss for Genzyme Tissue
Repair Division for the nine months ended September 30, 1999 was $(24,146) or
$(1.05) per basic and diluted share of GZTR Stock.
</FN>
</TABLE>
<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 nine months ended September 30, 1998 and is qualified in
its Entirety by reference to such (b) financial statements as included in the
form 10-Q for Genzyme Corporation dated September 30, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 78,333
<SECURITIES> 135,810
<RECEIVABLES> 147,194
<ALLOWANCES> 18,605
<INVENTORY> 105,732
<CURRENT-ASSETS> 519,531
<PP&E> 523,853
<DEPRECIATION> 140,534
<TOTAL-ASSETS> 1,624,130
<CURRENT-LIABILITIES> 147,648
<BONDS> 0
0
0
<COMMON> 1,042
<OTHER-SE> 1,076,471
<TOTAL-LIABILITY-AND-EQUITY> 1,624,130
<SALES> 501,027
<TOTAL-REVENUES> 508,819
<CGS> 166,470
<TOTAL-COSTS> 203,015
<OTHER-EXPENSES> 232,855
<LOSS-PROVISION> 4,101
<INTEREST-EXPENSE> 16,068
<INCOME-PRETAX> 60,982
<INCOME-TAX> 25,135
<INCOME-CONTINUING> 35,847
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,847
<EPS-BASIC> 1.64<F1><F2>
<EPS-DILUTED> 1.57<F1><F2>
<FN>
<F1>This financial data schedule has been restated to reflect the creation of
Genzyme Surgical Products Division on June 28, 1999 Genzyme Surgical Products
was created from programs and products that had previously been included in the
results of Genzyme General Division until the creation date of June 28, 1999.
All Genzyme General Division historical net income (loss) and earnings (loss)
per share amounts have been restated to reflect the creation of this new
division and Genzyme Surgical Products Division is now included as a separate
tracking stock of Genzyme Corporation.
<F2>Genzyme Corporation reports earnings per share based on its four tracking
stocks - Genzyme General Division common stock ("GENZ Stock"), Genzyme
Molecular Oncology Division common stock ("GZMO Stock"), Genzyme Surgical
Products Division common stock ("GZSP Stock"), and Genzyme Tissue Repair
Division common stock ("GZTR Stock"). The earnings per share data presented on
this schedule reflects the earnings per share data for net income attributable
to GENZ Stock. For the nine months ended September 30, 1998, net income
attributable to Genzyme General Division was $128,894 and net income per share
of GENZ Stock on a basic and diluted basis was $1.64 and $1.57, respectively.
Net loss for Genzyme Molecular Oncology Division for the nine months ended
September 30, 1998 was $(22,067) or $(5.62) per basic and diluted share of GZMO
Stock. Net loss for Genzyme Surgical Products Division for the nine months
ended September 30, 1998 was $(40,523), and pro forma net loss per basic and
diluted share of GZSP Stock was $(2.74). Net loss for Genzyme Tissue Repair
Division for the nine months ended September 30, 1998 was $(31,213) or $(1.55)
per basic diluted share of GZTR Stock.
</FN>
</TABLE>
