<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
AMENDMENT NO. 1 TO
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2000
-------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from --------- to ---------
Commission file number 0-14680
----------------------
GENZYME CORPORATION
-------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 06-1047163
(State or other jurisdiction of IRS Employer
incorporation or organization) Identification No.)
ONE KENDALL SQUARE, CAMBRIDGE, MASSACHUSETTS 02139
-------------------------------------------------------------------------------
(Address of principal executive offices) (zip code)
(617) 252-7500
-------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X No
--- ---
The number of shares outstanding of each of the issuer's series of common stock
as of April 30, 2000:
Genzyme General Division Common Stock 84,804,000
Genzyme Molecular Oncology Division Common Stock 13,625,593
Genzyme Surgical Products Division Common Stock 14,902,895
Genzyme Tissue Repair Division Common Stock 28,658,735
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, MARCH 31, 2000
NOTE REGARDING FORWARD-LOOKING STATEMENTS:
This report on Form 10-Q contains forward-looking statements,
including statements regarding our:
- planned creation of a new division and a new publicly traded
stock;
- the planned acquisition of Biomatrix, Inc. and related financing
expectations;
- expected timing of the acquisition;
- the expected allocation of the new series of stock and composition
of the merger consideration;
- expected future revenues, operations and expenditures; and
- projected cash needs.
These statements are based upon the current assumptions of our management and
are only expectations of future results. These statements are subject to
risks and uncertainties, and our actual results may differ significantly from
those that are described in this report on Form 10-Q. 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
development and commercialization activities;
- 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 United States Food
and Drug Administration and other regulatory agencies;
- 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 payors;
- our ability to establish and maintain licenses, 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;
-2-
<PAGE>
- the likelihood that the regulatory and other approvals required to
create a new division and to complete the Biomatrix acquisition will
be obtained and the closing conditions for the merger will be
satisfied or waived;
- conditions in financial markets relevant to the proposed merger and
recapitalization; and
- the operational integration of the other risks generally
associated with mergers and recapitalizations.
For a further description of these risks and other uncertainties, we
encourage you to carefully read Exhibit 99.2, "Factors Affecting Future
Operating Results," to our Annual Report on Form 10-K for the fiscal year
ended December 31, 1999, as amended (our "1999 Form 10-K").
NOTE REGARDING REFERENCES TO GENZYME DIVISIONS
Throughout this Form 10-Q, 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;" and
- Genzyme Tissue Repair Division = "Genzyme Tissue Repair."
We currently have four designated series of common stock. Each of
these series is intended to reflect the value and track the performance of
one of our divisions. We refer to each series of common stock as follows:
- Genzyme General Division Common Stock = "Genzyme General Stock;"
- Genzyme Molecular Oncology Division Common Stock = "Molecular
Oncology Stock;"
- Genzyme Surgical Products Division Common Stock = "Surgical Products
Stock;" and
- Genzyme Tissue Repair Division Common Stock = "Tissue Repair Stock."
NOTE REGARDING INCORPORATION BY REFERENCE
The Securities and Exchange Commission allows us to disclose
important information to you by referring you to other documents we have
filed with the SEC. The information that we refer you to is "incorporated by
reference" into this Form 10-Q. Please read that information.
NOTE REGARDING TRADEMARKS
GENZYME-Registered Trademark-, CEREZYME-Registered Trademark-,
CEREDASE-Registered Trademark-, THYROGEN-Registered Trademark-, SEPRA
FILM-Registered Trademark-, and CARTICEL-Registered Trademark- are registered
trademarks of Genzyme. SAGE-TM-, AND EPICEL-TM- are trademarks of Genzyme.
GENZYME-Registered Trademark- is a service mark of Genzyme,
RENAGEL-Registered Trademark- is a registered trademark of GelTex
Pharmaceuticals, INC. NEUROCELL-TM--PD is a trademark of Diacrin, INC.
ALDURAZYME-TM- is a trademark of BioMarin/Genzyme LLC.
-3-
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, MARCH 31, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C>
ITEM 1. Financial Statements
GENZYME CORPORATION AND SUBSIDIARIES
Unaudited, Consolidated Statements of Operations for the Three Months Ended March 31, 2000 and 1999.... 5
Consolidated Balance Sheets as of March 31, 2000 (unaudited) and December 31, 1999..................... 7
Unaudited, Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2000 and 1999.... 8
Notes to Unaudited, Consolidated Financial Statements.................................................. 9
GENZYME GENERAL
Unaudited, Combined Statements of Operations for the Three Months Ended March 31, 2000 and 1999........ 15
Combined Balance Sheets as of March 31, 2000 (unaudited) and December 31, 1999......................... 17
Unaudited, Combined Statements of Cash Flows for the Three Months Ended March 31, 2000 and 1999........ 18
Notes to Unaudited, Combined Financial Statements...................................................... 19
GENZYME MOLECULAR ONCOLOGY
Unaudited, Combined Statements of Operations for the Three Months Ended March 31, 2000 and 1999........ 23
Combined Balance Sheets as of March 31, 2000 (unaudited) and December 31, 1999......................... 24
Unaudited, Combined Statements of Cash Flows for the Three Months Ended March 31, 2000 and 1999........ 25
Notes to Unaudited, Combined Financial Statements...................................................... 26
GENZYME SURGICAL PRODUCTS
Unaudited, Combined Statements of Operations for the Three Months Ended March 31, 2000 and 1999........ 27
Combined Balance Sheets as of March 31, 2000 (unaudited) and December 31, 1999......................... 28
Unaudited, Combined Statements of Cash Flows for the Three Months Ended March 31, 2000 and 1999........ 29
Notes to Unaudited, Combined Financial Statements...................................................... 30
GENZYME TISSUE REPAIR
Unaudited, Combined Statements of Operations for the Three Months Ended March 31, 2000 and 1999........ 33
Combined Balance Sheets as of March 31, 2000 (unaudited) and December 31, 1999......................... 34
Unaudited, Combined Statements of Cash Flows for the Three Months Ended March 31, 2000 and 1999........ 35
Notes to Unaudited, Combined Financial Statements...................................................... 36
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 38
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk................................... 63
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K ............................................................ 63
Signatures.................................................................................................. 64
</TABLE>
-4-
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------------
2000 1999
---- ----
(UNAUDITED, AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Revenues:
Net product sales .................................................... $ 184,421 $ 163,702
Net service sales .................................................... 20,966 18,730
Revenue from research and development contracts ...................... 2,743 1,312
--------- ---------
Total revenues ................................................... 208,130 183,744
Operating costs and expenses:
Cost of products sold ................................................. 48,259 43,818
Cost of services sold ................................................. 11,851 12,088
Selling, general and administrative ................................... 61,551 58,945
Research and development (including research and development
related to contracts) ................................................ 55,699 32,834
Amortization of intangibles ........................................... 6,098 6,207
--------- ---------
Total operating costs and expenses ............................... 183,458 153,892
--------- ---------
Operating income .......................................................... 24,672 29,852
Other income (expenses):
Equity in net loss of unconsolidated affiliates ....................... (8,133) (10,092)
Gain on affiliate sale of stock ....................................... 20,270 606
Gain on sale of investments in equity securities ...................... -- 1,963
Minority interest ..................................................... 856 866
Gain on sale of assets ................................................ 31 --
Other ................................................................. (29) --
Investment income ..................................................... 9,944 8,193
Interest expense ...................................................... (3,939) (5,498)
--------- ---------
Total other income (expenses) .................................... 19,000 (3,962)
Income before income taxes ................................................ 43,672 25,890
Provision for income taxes ................................................ (11,854) (9,833)
--------- ---------
Net income ................................................................ $ 31,818 $ 16,057
========= =========
Comprehensive income, net of tax:
Net income ................................................................ $ 31,818 $ 16,057
--------- ---------
Other comprehensive income (loss) net of tax:
Foreign currency translation adjustments ............................. (10,223) (8,826)
--------- ---------
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising during the period ............. 80,198 (2,319)
Reclassification adjustment for losses included in net income ... -- (1,214)
--------- ---------
Unrealized gains (losses) on securities, net ............... 80,198 (3,533)
--------- ---------
Other comprehensive income (loss) .................................... 69,975 (12,359)
--------- ---------
Comprehensive income ...................................................... $ 101,793 $ 3,698
========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited,
consolidated financial statements.
-5-
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------------
2000 1999
---- ----
(UNAUDITED, AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Net income (loss) per share:
Allocated to Genzyme General Stock (Revised - See Note 8):
Genzyme General net income ............................................... $ 45,309 $ 33,505
Genzyme Surgical Products net loss........................................ -- (10,745)
Tax benefit allocated from Genzyme Molecular Oncology .................... 1,096 1,934
Tax benefit allocated from Genzyme Surgical Products ..................... 3,420 3,825
Tax benefit allocated from Genzyme Tissue Repair ......................... 1,812 3,962
--------- ---------
Net income allocated to Genzyme General Stock ............................ $ 51,637 $ 32,481
========= =========
Net income per share of Genzyme General Stock:
Basic .................................................................. $ 0.61 $ 0.40
========= =========
Diluted ................................................................ $ 0.57 $ 0.38
========= =========
Weighted average shares outstanding:
Basic .................................................................. 84,502 81,958
========= =========
Diluted ................................................................ 94,726 92,591
========= =========
Allocated to Molecular Oncology Stock:
Net loss ................................................................. $ (5,057) $ (7,060)
========= =========
Net loss per share of Molecular Oncology Stock - basic and diluted ....... $ (0.37) $ (0.56)
========= =========
Weighted average shares outstanding ...................................... 13,495 12,658
========= =========
Allocated to Surgical Products Stock (Revised - See Note 8):
Net loss ................................................................. $ (10,043)
=========
Net loss per share of Surgical Products Stock - basic and diluted ........ $ (0.68)
=========
Weighted average shares outstanding ...................................... 14,855
=========
Allocated to Tissue Repair Stock:
Net loss ................................................................. $ (4,971) $ (9,616)
========= =========
Net loss per share of Tissue Repair Stock - basic and diluted ............ $ (0.17) $ (0.44)
========= =========
Weighted average shares outstanding ...................................... 28,531 21,945
========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited,
consolidated financial statements.
-6-
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 112,194 $ 130,156
Short-term investments ...................................... 252,266 255,846
Accounts receivable, net .................................... 163,236 166,803
Inventories ................................................. 117,991 117,269
Prepaid expenses and other current assets ................... 25,563 18,918
Deferred tax assets-current ................................. 40,780 41,195
----------- -----------
Total current assets ...................................... 712,030 730,187
Property, plant and equipment, net ............................ 386,843 383,181
Long-term investments ......................................... 322,158 266,988
Intangibles, net .............................................. 246,803 253,153
Deferred tax assets-noncurrent ................................ 15,480 18,631
Investments in equity securities .............................. 180,914 97,859
Other noncurrent assets ....................................... 51,814 37,283
----------- -----------
Total assets .............................................. $ 1,916,042 $ 1,787,282
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................ $ 21,355 $ 27,853
Accrued expenses ............................................ 78,187 73,359
Income taxes payable ........................................ 35,567 27,946
Deferred revenue ............................................ 4,972 3,700
Current portion of long-term debt and capital lease
obligations ............................................... 5,644 5,080
----------- -----------
Total current liabilities ................................. 145,725 137,938
Noncurrent liabilities:
Long-term debt .............................................. 18,103 18,000
Convertible notes and debentures ............................ 272,885 272,622
Other noncurrent liabilities ................................ 2,510 2,330
----------- -----------
Total liabilities ......................................... 439,223 430,890
Stockholders' equity:
Preferred Stock ............................................. -- --
Genzyme General Stock, $0.01 par value....................... 848 842
Molecular Oncology Stock, $0.01 par value ................... 137 134
Surgical Products Stock, $0.01 par value..................... 149 148
Tissue Repair Stock $0.01, par value ........................ 287 285
Treasury Stock Genzyme General - at cost .................... (901) (901)
Additional paid-in capital - Genzyme General Stock .......... 475,324 469,776
Additional paid-in capital - Molecular Oncology Stock........ 68,896 67,672
Additional paid-in capital - Surgical Products Stock......... 546,347 542,343
Additional paid-in capital - Tissue Repair Stock............. 223,110 217,103
Retained earnings ........................................... 89,020 57,202
Accumulated other comprehensive income ...................... 73,602 1,788
----------- -----------
Total stockholders' equity .................................... 1,476,819 1,356,392
----------- -----------
Total liabilities and stockholders' equity .................... $ 1,916,042 $ 1,787,282
=========== ===========
</TABLE>
The accompanying notes are an integral part of these unaudited,
consolidated financial statements.
-7-
<PAGE>
GENZYME CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------------
2000 1999
---- ----
(UNAUDITED, AMOUNTS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................... $ 31,818 $ 16,057
Reconciliation of net income to net cash provided by operating activities:
Depreciation and amortization ..................................... 17,198 17,268
Equity in loss of unconsolidated affiliates ....................... 8,133 10,092
Gain on affiliate sale of stock ................................... (20,270) (606)
Gain on sale of investments in equity securities .................. -- (1,963)
Minority interest in net loss of subsidiary ....................... (856) (866)
Accrued interest/amortization of marketable securities ............ (1,430) (2,489)
Provision for bad debts ........................................... 2,299 2,460
Technology license fee ............................................ 250 --
Deferred income tax expense (benefit) ............................. 3,239 (662)
Amortization of deferred rent ..................................... (37) (37)
Other ............................................................. 321 (402)
Increase (decrease) in cash from working capital:
Accounts receivable .......................................... (1,154) (1,397)
Inventories .................................................. (2,754) (521)
Prepaid expenses and other assets ............................ 858 (1,830)
Accounts payable, accrued expenses, income
taxes payable and deferred revenue ........................ 4,814 6,585
--------- ---------
Net cash provided by operating activities .................... 42,429 41,689
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments ............................................. (195,902) (196,387)
Sales and maturities of investments .................................. 144,561 106,128
Proceeds from sale of investments in equity securities ............... -- 11,090
Acquisitions of property, plant and equipment ........................ (15,620) (10,633)
Investments in unconsolidated affiliates ............................. (6,032) (11,676)
Other ................................................................ 848 3,245
--------- ---------
Net cash used in investing activities ........................ (72,145) (98,233)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ................................. 14,714 20,016
Payments of debt ....................................................... (6) (397)
Other .................................................................. (1,478) 1,546
--------- ---------
Net cash provided by financing activities ...................... 13,230 21,165
Effect of exchange rate changes on cash .................................... (1,476) (2,642)
--------- ---------
Decrease in cash and cash equivalents ...................................... (17,962) (38,021)
Cash and cash equivalents at beginning of period ........................... 130,156 118,612
--------- ---------
Cash and cash equivalents at end of period ................................. $ 112,194 $ 80,591
========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited,
consolidated financial statements.
-8-
<PAGE>
GENZYME CORPORATION
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Our unaudited consolidated financial statements for each
period include the balance sheets, results of operations and cash
flows of each of our divisions and corporate operations taken as a
whole. We eliminate all significant intracompany items and
transactions in consolidation. We prepared the unaudited,
consolidated financial statements for Genzyme following the
requirements of the SEC for interim reporting. As permitted under
those rules, certain footnotes or other financial information that
are normally required by generally accepted accounting principles
can be condensed or omitted. We have reclassified certain 1999 data
to conform with our 2000 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
interim financial statements, you should also read the financial
statements and notes included in our 1999 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 future periods.
<PAGE>
2. INVENTORIES (amounts in thousands):
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
(Unaudited)
<S> <C> <C>
Raw materials ............................. $ 38,197 $ 39,958
Work-in-process ........................... 56,555 44,559
Finished products ......................... 23,239 32,752
-------- --------
Total ................................... $117,991 $117,269
======== ========
</TABLE>
3. REGISTRATION STATEMENT
In March 2000, we filed with the SEC a prospectus pursuant to
Rule 424 of the Securities Act of 1933, as amended, covering the
offering of 3,000,000 shares of Molecular Oncology Stock (plus
450,000 shares issuable upon exercise of the underwriter's
over-allotment option). The proceeds of the offering were to be
used by Genzyme Molecular Oncology to fund research, pre-clinical
and clinical development programs, to repay existing indebtedness,
and for working capital and general corporate purposes.
In April 2000, in light of recent market volatility and current
market condition at the time, we terminated the offering of shares of
Molecular Oncology Stock contemplated by the prospectus.
4. INTERDIVISIONAL FINANCING ARRANGEMENTS
In March 2000, Genzyme Tissue Repair made a $5.0 million
draw under its interdivisional financing arrangement with Genzyme
General in exchange for 765,169 Genzyme Tissue Repair designated
shares. As required by our charter, the number of Genzyme Tissue
Repair designated shares was determined using the average closing
price of Tissue Repair Stock for the 20 trading days beginning on
the 30th trading day before the draw. As of March 31, 2000, $15.0
million remained available to Genzyme Tissue Repair under this
arrangement.
5. LICENSING AGREEMENT
In March 2000, Genzyme General recorded $19.5 million as
research and development expense, representing the initial amounts
payable to Synpac (North Carolina), Inc. under a license granted by
Synpac to Genzyme to develop and commercialize Pompase-TM- enzyme
replacement therapy for Pompe disease, which is produced using a
Chinese hamster ovary cell line. In connection with this license,
Genzyme General will pay Synpac certain amounts upon the
achievement of certain development and commercialization
milestones. Genzyme General will also pay Synpac royalties for a
specified period of time based on certain percentages of sales.
In April 2000, Genzyme and Pharming Group N.V. signed a letter
agreement to share in the development and the funding for the
commercialization of an enzyme replacement therapy for Pompe
disease licensed by Genzyme from Synpac in March 2000. Upon
execution of the definitive agreement, Pharming will issue a
convertible note payable to Genzyme General for an aggregate
principal amount of $10.0 million, representing Pharming's share of
the payments previously paid to Synpac by Genzyme.
6. GAIN ON AFFILIATE SALE OF STOCK
In February 2000, Genzyme Transgenics Corporation, an
unconsolidated affiliate, completed an offering of 3.5 million
shares of Genzyme Transgenics common stock, resulting in net
proceeds to Genzyme Transgenics of $75.2 million (after the exercise
of the underwriter's overallotment option). In accordance with our
policy pertaining to affiliate sales of stock, we recognized a
gain of $20.3 million and recorded a net deferred tax expense of
$3.9 million for the three months ended March 31, 2000. The
deferred tax expense is net of a $3.4 million credit for the
reversal of a valuation allowance on a deferred tax asset.
As a result of the issuance of the additional shares by
Genzyme Transgenics, our ownership interest in Genzyme
Transgenics decreased from 33% to 28%.
-9-
<PAGE>
GENZYME CORPORATION
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS
7. TAX PROVISION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, INCREASE/
-------------------- (DECREASE)
2000 1999 % CHANGE
---- ---- --------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C>
Provision for income taxes............... $ 11,854 $ 9,833 21%
Tax rate................................. 27% 38%
</TABLE>
Our tax rates 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.
In the three months ended March 31, 2000, we reversed a $3.4 million
valuation allowance which reduced our tax rate by 7.8%.
8. NET INCOME (LOSS) PER SHARE
REVISION
We had previously reported income (loss) allocated to Genzyme General
Stock and Surgical Products Stock, and earnings per share of Genzyme General
Stock for the three months ended March 31, 1999, as adjusted to retroactively
reflect the changes in earnings allocations resulting from the June 1999
creation and distribution of Surgical Products Stock. The allocation of
Genzyme's historical earnings has been revised to reflect an allocation of
Genzyme's earnings to each series of common stock outstanding in periods
prior to June 1999 and to each series of common stock, including Surgical
Products Stock, thereafter. The impact of these revisions is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1999
-------------------------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C>
GENZYME GENERAL:
PREVIOUSLY REPORTED (pro forma information previously reported as
historical):
Net income allocated to Genzyme General Stock .......................... $ 43,226
========
Net income per share of Genzyme General Stock:
Basic ................................................................ $ 0.53
========
Diluted .............................................................. $ 0.49
========
AS REVISED:
Net income allocated to Genzyme General Stock .......................... $ 32,481
========
Net income per share of Genzyme General Stock:
Basic ................................................................ $ 0.40
========
Diluted .............................................................. $ 0.38
========
GENZYME SURGICAL PRODUCTS:
PREVIOUSLY REPORTED (pro forma information previously reported as
historical):
Net loss allocated to Surgical Products Stock ........................ $(10,745)
========
AS REVISED:
Net loss allocated to Surgical Products Stock ........................ $ --
========
Net loss per share of Surgical Products Stock - basic and diluted .... $ --
========
Weighted average shares outstanding .................................. --
========
</TABLE>
If the shares of Surgical Products Stock initially issued on June 28, 1999
were assumed to be outstanding since January 1, 1999, net income allocated to
Genzyme General Stock, net loss allocated to Surgical Products Stock and
weighted average shares outstanding 1999 would have been as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1999
------------------
<S> <C>
Genzyme General:
Net income allocated to Genzyme General Stock......... $43,226
=======
Weighted average shares outstanding:
Basic............................................... 81,958
Diluted............................................. 92,591
Genzyme Surgical Products:
Net loss allocated to Surgical Products Stock......... $(10,745)
=========
Weighted average shares outstanding-basic and diluted. 14,800
</TABLE>
GENZYME GENERAL STOCK (Revised):
The following table sets forth the computation of basic and diluted
earnings per share of Genzyme General Stock:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
2000 1999
---- ----
(Amounts in thousands,
except per share amounts)
<S> <C> <C>
Genzyme General net income............................................... $45,309 $ 33,505
Genzyme Surgical Products net loss....................................... - (10,745)
Tax benefit allocated from Genzyme Molecular Oncology.................... 1,096 1,934
Tax benefit allocated from Genzyme Surgical Products..................... 3,420 3,825
Tax benefit allocated from Genzyme Tissue Repair......................... 1,812 3,962
------- -------
Net income allocated to Genzyme General Stock - basic ................... 51,637 32,481
Effect of dilutive securities (net of tax):
5 1/4% convertible subordinated notes (1):
Interest expense .................................................. 2,163 2,046
Amortization of debt discount and
offering costs (2):........................................... 154 146
5% convertible subordinated debentures (3):
Interest expense .................................................. 175 165
Amortization of debt offering costs (4) ........................... 30 28
------- -------
Net income allocated to Genzyme General Stock - diluted ................. $54,159 $34,866
======= =======
Shares used in computing net income per common share - basic ............ 84,502 81,958
Effect of dilutive securities:
Employee and director stock options ............................... 3,281 3,642
Warrants .......................................................... -- 32
5 1/4% convertible subordinated notes (1) ......................... 6,313 6,313
5% convertible subordinated debentures (3) ........................ 630 646
------- -------
Dilutive potential common shares (5) .................................... 10,224 10,633
------- -------
Shares used in computing net income per common share-diluted (5) ........ 94,726 92,591
======= =======
Net income per share of Genzyme General Stock:
Basic ................................................................... $ 0.61 $ 0.40
======= =======
Diluted (5) ............................................................. $ 0.57 $ 0.38
======= =======
</TABLE>
----------
(1) We issued these notes in May 1998.
(2) We are amortizing the debt 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 debt 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
because these securities had an exercise price greater than the
average market price of Genzyme General Stock:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
2000 1999
---------------------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Shares of Genzyme General Stock issuable for options....................... 2,965 1,381
Shares of Genzyme General Stock issuable for warrants...................... - 80
-------------- ------------
Total shares with exercise prices greater than the average market price
of Genzyme General Stock during the period............................. 2,965 1,461
============== ============
</TABLE>
MOLECULAR ONCOLOGY STOCK:
In accounting for the acquisition of PharmaGenics, Inc. in
June 1997, Genzyme Molecular Oncology recorded a valuation allowance
against a $2.9 million tax asset related to acquired net operating
losses due to the application of our policy of accounting for income
taxes at the divisional level as if each division were a separate
taxpayer. As a result, Genzyme Molecular Oncology recorded an
additional $2.9 million of goodwill that was not recorded at the
consolidated level. The amortization of this goodwill increases the
loss of Genzyme Molecular Oncology and, therefore, the loss allocated
to Molecular Oncology Stock.
For all periods presented, basic and diluted net loss per share of
Molecular Oncology Stock are the same. We did not include the securities
described in the following table in the computation of the Molecular
Oncology Stock diluted net loss per share for each period because these
securities would have an anti-dilutive effect due to the net loss
allocated to Molecular Oncology Stock:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
2000 1999
---------------------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Shares of Molecular Oncology Stock issuable for options(1)................. 673 1,604
Warrants to purchase Molecular Oncology Stock.............................. 10 10
Shares of Molecular Oncology Stock designated shares issuable upon
conversion of the 5 1/4% convertible
subordinated notes allocated to Genzyme General......................... 682 682
Genzyme Molecular Oncology designated shares (2)........................... 1,006 728
---------- -----------
Total shares excluded from the calculation of diluted net
loss per share of Molecular Oncology Stock.............................. 2,371 3,024
========== ==========
</TABLE>
------------------
(1) Excludes the following securities that had an exercise price
greater than the average market price of Molecular Oncology Stock
during each respective period:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
2000 1999
-------------------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Shares with exercise prices greater than the average market price of
Molecular Oncology Stock during the period........................... 2 1,476
========== ==========
</TABLE>
(2) Genzyme Molecular Oncology designated shares are authorized shares
of Molecular Oncology Stock that are not issued and outstanding,
but which our board or directors may issue, sell, or distribute
without allocating the proceeds to Genzyme Molecular Oncology.
SURGICAL PRODUCTS STOCK (Revised):
We created Genzyme Surgical Products on June 28, 1999. Prior to
this date, the operations of Genzyme Surgical Products were included in
the operations allocated to Genzyme General and, therefore, in the net
income allocated to Genzyme General Stock.
If the shares of Surgical Products Stock initially issued on June 28,
1999 were assumed to be outstanding since January 1, 1999, net loss
allocated to Surgical Products Stock and weighted average shares
outstanding would have been as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1999
------------------
<S> <C>
Net loss allocated to Surgical Products Stock......... $(10,745)
=========
Weighted average shares outstanding-basic and diluted. 14,800
</TABLE>
We do not disclose net loss per share for Surgical Products
Stock for the three months ended March 31, 1999 because Surgical
Products Stock was not outstanding prior to June 28, 1999. For the three
months ended March 31, 2000, basic and diluted net loss per Surgical
Products Stock are the same. We did not include the securities described
in the following table in the computation of Surgical Products Stock
diluted net loss per share for the three months ended March 31, 2000
because these securities would have an anti-dilutive effect due to the
net loss allocated to Surgical Products Stock:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------
2000
--------------
(AMOUNTS IN THOUSANDS)
<S> <C>
Shares of Surgical Products Stock issuable for options (1)................. 554
Shares of Surgical Products designated shares issuable upon
conversion of the 5 1/4 % convertible subordinated
notes allocated to Genzyme General................................. 1,130
Genzyme Surgical Products designated shares(2)............................. 35
-----------
Total shares excluded from the diluted loss per
Surgical Products Stock share calculation............................. 1,719
===========
</TABLE>
--------------------
(1) Excludes the following securities that had an exercise price
greater than the average market price of Surgical Products Stock
during each respective period:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
2000
----------------------
(AMOUNTS IN THOUSANDS)
<S> <C>
Shares with exercise prices greater than the average market price of Surgical
Products Stock during the period............................................... 10
======================
</TABLE>
(2) Surgical Products Stock designated shares are authorized shares
of Surgical Products Stock that are not issued and outstanding,
but which our board may issue, sell, or distribute without
allocating the proceeds to Genzyme Surgical Products.
TISSUE REPAIR STOCK:
For all periods presented, basic and diluted net loss per share of
Tissue Repair Stock is the same. We did not include the securities
described in the following table in the computation of Tissue Repair
Stock diluted net loss per share for each period because these
securities would have an anti-dilutive effect due to the net loss
allocated to Tissue Repair Stock:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
-------------------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Shares of Tissue Repair Stock issuable for options (1)..................... 2,485 3,875
Genzyme Tissue Repair designated shares (3)................................ 2,977 2,310
Shares of Tissue Repair Stock issuable upon conversion
of the 5% convertible subordinated note (2)............................ - 6,458
----------- --------
Total shares excluded from the diluted net loss per Tissue Repair
Stock share calculation................................................ 5,462 12,643
=========== ========
</TABLE>
--------------------
(1) Excludes the following securities that had an exercise price
greater than the average market price of Tissue Repair Stock
during each respective period:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
2000 1999
-------------------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Shares with exercise prices greater than the average market
price of Tissue Repair Stock during the period......................... 2,485 3,714
=========== ========
</TABLE>
(2) The conversion of Genzyme Tissue Repair's 5% convertible
subordinated note was completed in the fourth quarter of
1999.
(3) Genzyme Tissue Repair designated shares are authorized shares of
Tissue Repair Stock that are not issued and outstanding, but
which our board may issue, sell, or distribute without
allocating the proceeds to Genzyme Tissue Repair.
-12-
<PAGE>
GENZYME CORPORATION
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS
9. SEGMENT REPORTING
We present segment information in a manner consistent with the
method we use to report this information to our management. 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-Registered Trademark- enzyme;
- Diagnostic Products, which provides diagnostic products to niche
markets with a focus 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; and
- Genzyme Tissue Repair, which develops and markets biological products
for orthopedic injuries such as cartilage repair and severe burns.
Information concerning the operations in these reportable segments is
as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
2000 1999
--------- ---------
(Amounts in thousands)
<S> <C> <C>
Revenues:
Genzyme General:
Therapeutics $ 133,802 $ 115,041
Diagnostic Products 15,238 14,692
Other 21,422 20,457
Eliminations/Adjustments (1) 164 576
--------- ---------
Total Genzyme General 170,626 150,766
Genzyme Molecular Oncology 2,555 1,613
Genzyme Surgical Products 29,082 27,353
Genzyme Tissue Repair 5,867 4,023
Eliminations/Adjustments (2) -- (11)
--------- ---------
Total $ 208,130 $ 183,744
========= =========
Net Income:
Net income allocated to Genzyme General Stock:
Therapeutics $ 29,263 $ 33,871
Diagnostic Products 715 1,129
Other (171) (2,038)
Eliminations/Adjustments (3) 15,502 543
--------- ---------
Net income for Genzyme General 45,309 33,505
Genzyme Surgical Products net loss (4) - (10,745)
Tax benefits allocated from other Genzyme divisions 6,328 9,721
--------- ---------
Net income allocated to Genzyme General Stock 51,637 32,481
Net loss allocated to Molecular Oncology Stock (5,057) (7,060)
Net loss allocated to Surgical Products Stock (10,043) -
Net loss allocated to Tissue Repair Stock (4,971) (9,616)
Eliminations/Adjustments (5) 252 252
--------- ---------
Total $ 31,818 $ 16,057
========= =========
</TABLE>
----------
(1) Includes primarily amounts related to Genzyme General's corporate research
and development and administrative activities that we do not specifically
allocate to a particular segment of Genzyme General.
(2) Represents the elimination of inter-divisional revenues.
(3) Includes primarily amounts related to Genzyme General's corporate research
and development and administrative activities that we do not specifically
allocate to a particular segment of Genzyme General. The three months
ended March 31, 2000 also includes a gain of $20.3 million relating to a
public offering of common shares by Genzyme Transgenics (See Note 6 above).
(4) Represents losses incurred by Genzyme Surgical Products for the three
months ended March 31, 1999. The allocation of Genzyme's earnings has been
revised to reflect an allocation of Genzyme's earnings to each common
stock actually outstanding prior to June 1999 and to each series of common
stock, including Surgical Products Stock, thereafter (See Note 8 above).
(5) Consists primarily of a difference in amortization due to $2.9 million of
additional goodwill associated with the PharmaGenics, Inc. acquisition
carried at the Genzyme Molecular Oncology level as compared to amounts
carried at the consolidated level and other adjustments related to our
corporate activities that we do not specifically allocate to a particular
segment. The difference in the amortization results from the application
of our policy to account for income taxes at the divisional level as if
each division were a separate taxpayer.
There has been no material change in segment assets since December 31, 1999.
-13-
<PAGE>
GENZYME CORPORATION
NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS
10. ACQUISITION OF BIOMATRIX, INC. AND FORMATION OF GENZYME BIOSURGERY
In March 2000, we entered into an agreement to acquire Biomatrix,
Inc. Upon the effectiveness of our Registration Statement on Form S-4 and
completion of the merger, we will form a new operating division called
Genzyme Biosurgery and create a new series of common stock that is
intended to reflect its value and track its performance. We refer to
this stock as "Biosurgery Stock." In connection with the merger, and
upon Genzyme Shareholder approval, the assets and liabilities allocated
to Genzyme Surgical Products and Genzyme Tissue Repair will be
re-allocated to Genzyme Biosurgery and shares of Surgical Products
Stock and Tissue Repair Stock will be exchanged for Biosurgery Stock.
We will account for the acquisition of Biomatrix as a purchase.
Biomatrix stockholders will receive $37.00 in cash, one share of
Biosurgery Stock or a combination of cash and stock for each share of
Biomatrix common stock they hold. The merger agreement provides that we
will pay cash for up to 28.38% of the outstanding shares of Biomatrix
common stock that receive merger consideration, or up to approximately
$245.0 million.
Holders of Surgical Products Stock will receive 0.6060 share of
Biosurgery Stock in exchange for each share of Surgical Products Stock
they hold and holders of Tissue Repair Stock will receive 0.3352 share
of Biosurgery Stock in exchange for each share of Tissue Repair Stock
they hold.
For more information about the merger and the merger consideration,
we encourage you to carefully read our Registration Statement on Form S-4
(File No. 333-34972) filed with the SEC on April 18, 2000, as amended.
11. NEW ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation--an interpretation of Accounting Principles
Board Opinion No. 25" ("FIN-44"). FIN-44 will be effective on July 1,
2000, but certain conclusions in FIN-44 cover specific events that
occurred after either December 15, 1998 or January 12, 2000.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101") which
summarizes the staff's view in applying generally accepted accounting
principles to selected revenue recognition issues. SAB 101 will be
effective in the fourth quarter of 2000.
We are currently evaluating the guidance provided in FIN-44 and
SAB 101 and do not expect their application to have a material effect on
our financial statements.
12. SUBSEQUENT EVENTS
In April 2000, Focal Inc. exercised its First Option under the stock
purchase agreement between Genzyme and Focal. As required by the terms of
this agreement we purchased $5.0 million of Focal common stock at a price
of $8.14 per share. We have allocated these shares to Genzyme Surgical
Products. We are committed, at Focal's option, to make future additional
equity investments of up to $10.0 million subject to certain conditions.
In April, 2000, we received net proceeds of approximately
$5.1 million in connection with a settlement of a lawsuit. We will
allocate the net proceeds of the settlement of this lawsuit to Genzyme
General. The lawsuit, initiated in 1993, pertained to an accidental spill
of Ceredase[R] enzyme at a fill facility operated by a contractor to
Genzyme General.
In April 2000, Genzyme Molecular Oncology drew $15.0 million of
cash under its interdivisional financing arrangement with Genzyme General
in exchange for 676,254 Genzyme Molecular Oncology designated shares. As
required by our charter, the number of Genzyme Molecular Oncology
designated shares was determined using the average closing price of the
Molecular Oncology Stock for the 20 trading days beginning on the
thirtieth trading day before the draw. Subsequent to the draw, $15.0
million remained available to Genzyme Molecular Oncology under this
arrangement.
-14-
<PAGE>
GENZYME GENERAL
A Division of Genzyme Corporation
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
2000 1999
------ ------
(UNAUDITED, AMOUNTS IN THOUSANDS)
<S> <C> <C>
Revenues:
Net product sales ........................................................... $ 155,339 $ 136,349
Net service sales ........................................................... 15,120 13,892
Revenue from research and development contracts:
Related parties ........................................................ 131 480
Other .................................................................. 36 45
--------- ---------
Total revenues ....................................................... 170,626 150,766
Operating costs and expenses:
Cost of products sold ........................................................ 32,220 27,967
Cost of services sold ........................................................ 8,828 8,755
Selling, general and administrative .......................................... 38,222 35,725
Research and development (including research and development related
to contracts) ............................................................. 42,743 21,065
Amortization of intangibles .................................................. 1,968 2,086
--------- ---------
Total operating costs and expenses ...................................... 123,981 95,598
--------- ---------
Operating income ................................................................. 46,645 55,168
Other income (expenses):
Equity in net loss of unconsolidated affiliates .............................. (8,133) (7,756)
Gain on affiliate sale of stock .............................................. 20,270 606
Gain on sale of investments in equity securities ............................. -- 1,963
Minority interest ............................................................ 856 866
Gain on sale of assets ....................................................... 35 --
Other ........................................................................ (56) --
Investment income ............................................................ 8,087 7,923
Interest expense ............................................................. (3,551) (5,049)
--------- ---------
Total other income (expenses) ........................................... 17,508 (1,447)
--------- ---------
Income before income taxes ....................................................... 64,153 53,721
Provision for income taxes ....................................................... (18,844) (20,216)
--------- ---------
Division net income .............................................................. $ 45,309 $ 33,505
========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited,
combined financial statements.
-15-
<PAGE>
GENZYME GENERAL
A Division of Genzyme Corporation
COMBINED STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
---- ----
(UNAUDITED, AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Comprehensive income, net of tax:
Division net income ................................................................. $ 45,309 $ 33,505
--------- ---------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments ....................................... (10,223) (8,826)
--------- ---------
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising during the period ....................... 78,759 (2,319)
Reclassification adjustment for losses included in division net income .... -- (1,214)
--------- ---------
Unrealized gains (losses) on securities, net ......................... 78,759 (3,533)
--------- ---------
Other comprehensive income (loss)............................................... 68,536 (12,359)
--------- ---------
Comprehensive income ................................................................ $ 113,845 $ 21,146
========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited,
combined financial statements.
-16-
<PAGE>
GENZYME GENERAL
A Division of Genzyme Corporation
COMBINED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................................... $ 77,209 $ 94,523
Short-term investments ......................................................... 187,651 214,240
Accounts receivable, net ....................................................... 138,084 141,949
Inventories .................................................................... 79,475 84,384
Prepaid expenses and other current assets ...................................... 23,359 17,632
Due from Genzyme Molecular Oncology ............................................ 2,459 3,793
Due from Genzyme Surgical Products ............................................. 5,017 6,406
Due from Genzyme Tissue Repair ................................................. 1,243 683
Deferred tax assets-current .................................................... 40,780 41,195
---------- ----------
Total current assets ........................................................ 555,277 604,805
Property, plant and equipment, net ................................................. 365,921 362,548
Long-term investments .............................................................. 295,770 205,142
Intangibles, net ................................................................... 73,160 75,370
Deferred tax assets-noncurrent ..................................................... 16,032 19,844
Investments in equity securities ................................................... 174,431 94,719
Other noncurrent assets ............................................................ 50,384 37,155
---------- ----------
Total assets ................................................................ $1,530,975 $1,399,583
========== ==========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable ............................................................... $ 16,035 $ 23,229
Accrued expenses ............................................................... 66,264 62,514
Income taxes payable ........................................................... 35,567 27,946
Deferred revenue ............................................................... 4,132 3,475
Current portion of long-term debt and capital lease obligations ................ 539 80
---------- ----------
Total current liabilities ................................................... 122,537 117,244
Noncurrent liabilities:
Capital lease obligations ..................................................... 103 --
Convertible notes and debentures .............................................. 272,885 272,622
Other noncurrent liabilities .................................................. 2,110 2,103
---------- ----------
Total liabilities ........................................................... 397,635 391,969
Division equity .................................................................... 1,133,340 1,007,614
---------- ----------
Total liabilities and division equity ....................................... $1,530,975 $1,399,583
========== ==========
</TABLE>
The accompanying notes are an integral part of these unaudited,
combined financial statements.
-17-
<PAGE>
GENZYME GENERAL
A Division of Genzyme Corporation
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------------
2000 1999
---- ----
(UNAUDITED, AMOUNTS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Division net income .......................................................... $ 45,309 $ 33,505
Reconciliation of division net income to net cash provided by operating
activities:
Depreciation and amortization ......................................... 11,896 12,156
Equity in net loss of unconsolidated affiliates ....................... 8,133 7,756
Accrued interest/amortization of marketable securities ................ (2,040) (2,499)
Provision for bad debts ............................................... 2,192 2,408
Gain on affiliate sale of stock ....................................... (20,270) (606)
Minority interest in net loss of subsidiary ........................... (856) (866)
Gain on sale of investments in equity securities ...................... -- (1,963)
Deferred income tax expense ........................................... 3,901 --
Other ................................................................. 317 (422)
Increase (decrease) in cash from working capital:
Accounts receivable .............................................. (781) (6,916)
Inventories ...................................................... 2,909 2,384
Prepaid expenses and other assets ................................ 1,776 (2,315)
Due from Genzyme Molecular Oncology .............................. 1,334 247
Due from Genzyme Surgical Products ............................... 1,389 --
Due from Genzyme Tissue Repair ................................... (560) (3,446)
Accounts payable, accrued expenses, income
taxes payable and deferred revenue ............................ 9,534 15,708
-------- --------
Net cash provided by operating activities ........................ 64,183 55,131
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments ................................................. (160,452) (196,387)
Sales and maturities of investments ...................................... 97,246 105,106
Proceeds from sale of investments in equity securities ................... -- 11,090
Purchase of property, plant and equipment ................................ (14,548) (9,628)
Investments in unconsolidated affiliates ................................. (6,032) (9,592)
Other .................................................................... 2,215 3,702
-------- --------
Net cash used in investing activities ............................ (81,571) (95,709)
CASH FLOWS FROM FINANCING ACTIVITIES:
Allocated proceeds from issuance of Genzyme General Stock .................. 12,713 19,900
Payments of debt ........................................................... (6) (350)
Net cash allocated to Genzyme Surgical Products ............................ (906) (12,421)
Net cash allocated to Genzyme Tissue Repair ................................ (4,949) (5,000)
Other ...................................................................... (5,302) 1,548
-------- --------
Net cash provided by financing activities .......................... 1,550 3,677
Effect of exchange rate changes on cash ........................................ (1,476) (2,642)
-------- --------
Decrease in cash and cash equivalents .......................................... (17,314) (39,543)
Cash and cash equivalents at beginning of period ............................... 94,523 100,012
-------- --------
Cash and cash equivalents at end of period ..................................... $ 77,209 $ 60,469
========= =========
</TABLE>
The accompanying notes are an integral part of these unaudited,
combined financial statements.
-18-
<PAGE>
GENZYME GENERAL
A Division of Genzyme Corporation
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The combined financial statements of Genzyme General for each period
include the balance sheets, results of operations and cash flows of the
businesses we allocate to Genzyme General. We also allocate a portion of
our corporate operations to Genzyme General using methods described in our
allocation policy below. These combined financial statements are prepared
using amounts included in our consolidated financial statements included
in this Form 10-Q. 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 footnotes or
other financial information that are normally required by generally
accepted accounting principles can be condensed or omitted. We have
reclassified certain 1999 data to conform with our 2000 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 interim financial statements, you should also read the financial
statements and notes for Genzyme General included in our 1999
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 future
periods.
We established Genzyme Surgical Products as a separate division of
Genzyme in June 1999. The business of Genzyme Surgical Products
previously operated as a business unit of Genzyme General. These
unaudited, combined financial statements reflect the allocated financial
position, results of operations and cash flows of Genzyme General as if
Genzyme Surgical Products had been accounted for as a separate division
of Genzyme for all periods presented.
<PAGE>
GENZYME GENERAL
A Division of Genzyme Corporation
Notes to Unaudited, Combined Financial Statements
2. INVENTORIES (amounts in thousands):
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
(Unaudited)
<S> <C> <C>
Raw materials ....................... $22,674 $24,057
Work-in-process ..................... 39,253 40,592
Finished products ................... 17,548 19,735
------- -------
Total ............................. $79,475 $84,384
======= =======
</TABLE>
3. INTERDIVISIONAL FINANCING ARRANGEMENTS
In March 2000, Genzyme Tissue Repair made a $5.0 million draw under
its interdivisional financing arrangement with Genzyme General in exchange
for 765,169 Genzyme Tissue Repair designated shares. As required by our
charter, the number of Genzyme Tissue Repair designated shares was
determined using the average closing price of the Tissue Repair Stock for
the 20 trading days beginning on the thirtieth trading day before the
draw. As of March 31, 2000 $15.0 million remained available to Genzyme
Tissue Repair under this arrangement.
-19-
<PAGE>
GENZYME GENERAL
A Division of Genzyme Corporation
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
4. LICENSING AGREEMENT
In March 2000, Genzyme General recorded $19.5 million as research and
development expense, representing the initial amounts payable to Synpac
(North Carolina), Inc. under a license granted by Synpac to Genzyme to
develop and commercialize Pompase-TM- enzyme replacement therapy for
Pompe disease, which is produced using a Chinese hamster ovary cell line.
In connection with this license, Genzyme General will pay Synpac certain
amounts upon the achievement of certain development and commercialization
milestones. Genzyme General will also pay Synpac royalties for a
specified period of time based on certain percentages of sales.
In April 2000, Genzyme and Pharming Group N.V. signed a letter
agreement to share in the development and the funding for the
commercialization of an enzyme replacement therapy for Pompe disease
licensed by Genzyme from Synpac in March 2000. Upon execution of the
definitive agreement, Pharming will issue a convertible note payable to
Genzyme General for an aggregate principal amount of $10.0 million,
representing Pharming's share of the payments previously paid to Synpac by
Genzyme.
5. GAIN ON AFFILIATE SALE OF STOCK
In February 2000, Genzyme Transgenics Corporation, an
unconsolidated affiliate, completed an offering of 3.5 million shares of
Genzyme Transgenics common stock, resulting in net proceeds to Genzyme
Transgenics of $75.2 million (after the exercise of the underwriter's
overallotment option). In accordance with our policy pertaining to
affiliate sales of stock, we recognized a gain of $20.3 million and
recorded a net deferred tax expense of $3.9 million for the three months
ended March 31, 2000. The deferred tax expense is net of a $3.4 million
credit for the reversal of a valuation allowance on a deferred tax
asset. As a result of the issuance of the additional shares by Genzyme
Transgenies, our ownership interest in Genzyme Transgenies decreased
from 33% to 28%.
-20-
<PAGE>
GENZYME GENERAL
A Division of Genzyme Corporation
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
6. TAX PROVISION
<TABLE>
<CAPTION>
THREE MONTHS ENDED INCREASE/
MARCH 31, (DECREASE)
2000 1999 % CHANGE
--------- --------- -----------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C>
Provision for income taxes .... $ 18,844 $ 20,216 (7)%
Effective tax rate ............ 29% 38%
</TABLE>
Genzyme General's tax rates 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.
In the three months ended March 31, 2000, we reversed a $3.4 million
valuation allowance, which reduced our tax rate by 5.3%.
7. SEGMENT REPORTING
We present segment information in a manner consistent with the
method we use to report this information to our management. 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-Registered Trademark- enzyme; and
- Diagnostic Products, which provides diagnostic products to
niche markets with a focus on IN VITRO diagnostics.
Information concerning the operations in these reportable segments is
as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
2000 1999
(Amounts in thousands)
<S> <C> <C>
REVENUES:
Therapeutics ................................................... $133,802 $115,041
Diagnostic Products ............................................ 15,238 14,692
Other .......................................................... 21,422 20,457
Eliminations/Adjustments (1).................................... 164 576
-------- --------
Total ....................................................... $170,626 $150,766
======== ========
</TABLE>
-21-
<PAGE>
GENZYME GENERAL
A Division of Genzyme Corporation
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
7. SEGMENT REPORTING (CONTINUED):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
---- ----
(Amounts in thousands)
<S> <C> <C>
Division net income:
Therapeutics $ 29,263 $33,871
Diagnostic Products 715 1,129
Other (171) (2,038)
Eliminations/Adjustments(1) 15,502 543
-------- --------
Total $ 45,309 $ 33,505
======== ========
</TABLE>
-----------
(1) Includes primarily amounts related to Genzyme General's
corporate research and development and administrative activities
that we do not specifically allocate to a particular segment of
Genzyme General. Division net income for the three months ended
March 31, 2000 also includes a gain of $20.3 million relating to
a public offering of common shares by Genzyme Transgenics
(See Note 6.).
There has been no material change in segment assets since December 31,
1999.
8. NEW ACCOUNTING PRONOUNCEMENTS
We have included information regarding the impact that recently
issued accounting standards will have on our financial statements in
Note 11., "New Accounting Pronouncements," to our unaudited,
consolidated financial statements, which we incorporate by reference
into this note.
9. SUBSEQUENT EVENT
In April 2000, Genzyme Molecular Oncology drew $15.0 million of cash
under its interdivisional financing arrangement with Genzyme General in
exchange for 676,254 Genzyme Molecular Oncology designated shares. As
required by our charter, the number of Genzyme Molecular Oncology
designated shares of Molecular Oncology Stock was determined using the
average closing price of the Molecular Oncology Stock for the 20 trading
days beginning on the thirtieth trading day before the draw. Subsequent
to the draw, $15.0 million remained available to Genzyme Molecular
Oncology under this arrangement.
In April, 2000, we received net proceeds of approximately
$5.1 million in connection with a settlement of a lawsuit. We will
allocate the net proceeds of the settlement of this lawsuit to Genzyme
General. The lawsuit, initiated in 1993, pertained to an accidental spill
of Ceredase[R] enzyme at a fill facility operated by a contractor to
Genzyme General.
-22-
<PAGE>
GENZYME MOLECULAR ONCOLOGY
A Division of Genzyme Corporation
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
2000 1999
---- ----
(UNAUDITED, AMOUNTS IN THOUSANDS)
<S> <C> <C>
Revenues:
Royalty and licensing revenue ................................. 2,555 404
Revenue from research and development contracts -
related party ................................................ -- 298
Service revenue................................................ $ -- $ 900
Service revenue - related party ............................... -- 11
-------- --------
Total revenues ............................................ 2,555 1,613
Operating costs and expenses:
Cost of research and development, royalty and licensing
revenue ...................................................... 56 294
Cost of service revenues ...................................... -- 346
Selling, general and administrative ........................... 1,190 1,619
Research and development ...................................... 4,058 3,905
Amortization of intangibles ................................... 2,956 2,956
-------- --------
Total operating costs and expenses: ....................... 8,260 9,120
-------- --------
Operating loss ..................................................... (5,705) (7,507)
Other income (expenses):
Equity in net loss of joint venture ........................... -- (375)
Invesment income .............................................. 73 163
Interest expense .............................................. (87) (3)
-------- --------
Total other income (expenses) ............................. (14) (215)
-------- --------
Loss before income taxes ........................................... (5,719) (7,722)
Tax benefit ........................................................ 662 662
-------- --------
Division net loss .................................................. $ (5,057) $ (7,060)
======== ========
Comprehensive loss, net of tax:
Division net loss ............................................. $ (5,057) $ (7,060)
Other comprehensive loss, net of tax:
Unrealized gains (losses) on securities arising during
the period .......................................... -- --
-------- --------
Comprehensive loss .................................... $ (5,057) $ (7,060)
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited,
combined financial statements.
-23-
<PAGE>
GENZYME MOLECULAR ONCOLOGY
A Division of Genzyme Corporation
COMBINED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................................... $ 1,542 $ 3,587
Prepaid expenses and other current assets....................................... 453 218
---------- ------------
Total current assets......................................................... 1,995 3,805
Equipment, net..................................................................... 744 467
Intangibles, net................................................................... 2,464 5,420
--------- -----------
Total assets.................................................................. $ 5,203 $ 9,692
======== ==========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accrued expenses................................................................ $ 1,082 $ 676
Due to Genzyme General.......................................................... 2,459 3,793
Deferred revenue................................................................ 840 225
Current portion of long-term debt and capital lease obligation.................. 5,105 5,000
--------- ----------
Total current liabilities..................................................... 9,486 9,694
Noncurrent liabilities:
Deferred tax liability.......................................................... 552 1,213
Other noncurrent liabilities.................................................... 210 -
----------- --------------
Total liabilities............................................................. 10,248 10,907
Division equity.................................................................... (5,045) (1,215)
-------- ---------
Total liabilities and division equity......................................... $ 5,203 $ 9,692
========= ==========
</TABLE>
The accompanying notes are an integral part of these unaudited,
combined financial statements.
-24-
<PAGE>
GENZYME MOLECULAR ONCOLOGY
A Division of Genzyme Corporation
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
2000 1999
---- ----
(UNAUDITED, AMOUNTS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Division net loss ................................................................ $ (5,057) $ (7,060)
Reconciliation of division net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization .................................................. 2,995 3,028
Deferred tax benefit ........................................................... (662) (662)
Equity in net loss of joint venture ............................................ -- 375
Accrued interest/amortization of marketable securities ......................... -- 10
Other .......................................................................... -- 10
Increase (decrease) in cash from working capital changes:
Accounts receivable .......................................................... -- 5,500
Prepaid expenses and other current assets .................................... (235) (19)
Accrued expenses, deferred revenue and other ................................. 1,021 (277)
Due to Genzyme General ....................................................... (1,334) (247)
-------- --------
Net cash provided by (used in) operating activities ........................ (3,272) 658
CASH FLOWS FROM INVESTING ACTIVITY:
Maturities of investments ........................................................ -- 1,022
-------- --------
Net cash provided by investing activity .................................... -- 1,022
CASH FLOWS FROM FINANCING ACTIVITIES:
Allocated proceeds from issuance of Molecular Oncology Stock ..................... 1,228 --
Other ............................................................................ (1) (2)
-------- --------
Net cash provided by (used in) financing activities ........................ 1,227 (2)
-------- --------
Increase (decrease) in cash and cash equivalents .................................... (2,045) 1,678
Cash and cash equivalents at beginning of period .................................... 3,587 10,868
-------- --------
Cash and cash equivalents at end of period .......................................... $ 1,542 $ 12,546
======== ========
Supplemental Non-cash Investing Activity:
Equipment acquired under capital lease obligations.................................. $ 315 $ --
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited,
combined financial statements.
-25-
<PAGE>
GENZYME MOLECULAR ONCOLOGY
A Division of Genzyme Corporation
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The combined financial statements of Genzyme Molecular Oncology
for each period include the balance sheets, results of operations and cash
flows of the businesses we allocate to Genzyme Molecular Oncology. We also
allocate a portion of our corporate operations to Genzyme Molecular Oncology
using methods described in our allocation policy below. These combined
financial statements are prepared using amounts included in our consolidated
financial statements included in this Form 10-Q. 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 footnotes or other financial information that are normally
required by generally accepted accounting principles can be condensed or
omitted. We have reclassified certain 1999 data to conform with our 2000
presentation.
These financial statements include all normal and recurring
adjustments that are considered necessary for the fair presentation of
Genzyme Molecular Oncology's financial position and operating results. Since
these are interim financial statements, you should also read the financial
statements and notes for Genzyme Molecular Oncology included in our 1999
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 future periods.
<PAGE>
GENZYME MOLECULAR ONCOLOGY
A DIVISION OF GENZYME CORPORATION
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
2. REGISTRATION STATEMENT
In March 2000, we filed with the SEC a prospectus pursuant to Rule
424 of the Securities Act of 1933, as amended, covering the offering of
3,000,000 shares of Molecular Oncology Stock (plus 450,000 shares issuable
upon exercise of the underwriter's over-allotment option). The proceeds
of the offering were to be allocated to Genzyme Molecular Oncology.
In April 2000, in light of recent market volatility and current market
conditions, we terminated the offering of shares of Molecular Oncology
Stock contemplated by the prospectus.
3. NEW ACCOUNTING PRONOUNCEMENTS
We have included information regarding the impact that recently
issued accounting standards will have on our financial statements in
Note 11., "New Accounting Pronouncements," to our unaudited,
consolidated financial statements, which we incorporate by reference
into this note.
4. SUBSEQUENT EVENT
In April 2000, Genzyme Molecular Oncology drew $15.0 million of cash
under its interdivisional financing arrangement with Genzyme General in
exchange for 676,254 Genzyme Molecular Oncology designated shares. As
required by our charter, the number of Genzyme Molecular Oncology
designated shares was determined using the average closing price of the
Molecular Oncology Stock for the 20 trading days beginning on the
thirtieth trading day before the draw. These funds will be used primarily
to fund research, preclinical and clinical development programs, and for
working capital and general corporate purposes. Subsequent to the draw,
$15.0 million remained available to Genzyme Molecular Oncology under this
arrangement.
-26-
<PAGE>
GENZYME SURGICAL PRODUCTS
A Division of Genzyme Corporation
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
2000 1999
---- ----
(UNAUDITED, AMOUNTS IN THOUSANDS)
<S> <C> <C>
Total revenues ................................................ $ 29,082 $ 27,353
Operating costs and expenses:
Cost of products sold .................................... 16,039 15,844
Selling, general and administrative ...................... 16,400 15,287
Research and development ................................. 6,971 5,602
Amortization of intangibles .............................. 1,426 1,417
-------- --------
Total operating costs and expenses ................... 40,836 38,150
-------- --------
Operating loss ................................................ (11,754) (10,797)
Other income (expenses)
Loss on sale of assets ................................... (4) --
Other .................................................... 32 46
Investment income ........................................ 1,682 7
Interest expense ......................................... 1 (1)
-------- --------
Total other income (expenses) ........................ 1,711 52
-------- --------
Division net loss ............................................. $(10,043) $(10,745)
======== ========
Comprehensive loss, net of tax:
Division net loss .......................................... $(10,043) $(10,745)
Other comprehensive income (loss), net of tax:
Unrealized gains on securities arising during the
period ............................................... 1,439 --
-------- --------
Comprehensive loss ..................................... $ (8,604) $(10,745)
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited,
combined financial statements.
-27-
<PAGE>
GENZYME SURGICAL PRODUCTS
A Division of Genzyme Corporation
COMBINED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 24,999 $ 22,673
Short-term investments.......................................................... 64,615 41,606
Accounts receivable, net........................................................ 19,796 19,886
Inventories..................................................................... 36,138 30,491
Prepaid expenses and other current assets....................................... 1,368 815
------------- ---------------
Total current assets......................................................... 146,916 115,471
Property, plant and equipment, net................................................. 17,835 17,621
Long-term investments.............................................................. 26,388 61,846
Intangibles, net................................................................... 171,396 172,833
Investment in equity securities.................................................... 6,483 3,140
Other.............................................................................. 1,326 13
------------ -------------
Total assets.................................................................. $ 370,344 $ 370,924
============ =============
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable................................................................ $ 4,949 $ 3,562
Accrued expenses................................................................ 9,220 7,038
Due to Genzyme General.......................................................... 5,017 6,406
------------ -----------
Total current liabilities..................................................... 19,186 17,006
Division equity.................................................................... 351,158 353,918
------------ -------------
Total liabilities and division equity......................................... $ 370,344 $ 370,924
============ =============
</TABLE>
The accompanying notes are an integral part of these unaudited,
combined financial statements.
-28-
<PAGE>
GENZYME SURGICAL PRODUCTS
A Division of Genzyme Corporation
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
2000 1999
------------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Division net loss .................................................. $(10,043) $(10,745)
Reconciliation of division net loss to net cash used in operating
activities:
Depreciation and amortization .................................... 2,224 2,008
Equity in loss of unconsolidated affiliate ....................... -- --
Accrued interest/amortization of marketable securities ........... 610 --
Provision for bad debt ........................................... 75 --
Other ............................................................ 4 (36)
Increase (decrease) in cash from working capital changes:
Accounts receivable ............................................ 15 (681)
Inventories .................................................... (5,647) (2,893)
Prepaid expenses and other current assets ...................... (553) 585
Accounts payable and accrued expenses .......................... 3,360 1,691
Due to Genzyme General ......................................... (1,389) --
------- -------
Net cash used in operating activities ........................ (11,344) (10,071)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments ........................................... (35,450) --
Sales and maturities of investments ................................ 47,315 --
Purchase of property, plant and equipment .......................... (939) (660)
Other .............................................................. (1,378) (491)
------- -------
Net cash provided by (used in) investing activities .......... 9,548 (1,151)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net cash allocated from Genzyme General ............................ 906 12,421
Allocated proceeds from issuance of Surgical Products Stock ........ 362 --
Other .............................................................. 2,854 --
------- -------
Net cash provided by financing activities .................... 2,854 12,421
------- -------
Increase in cash and cash equivalents ................................. 2,326 1,199
Cash and cash equivalents at beginning of period ...................... 22,673 --
------- -------
Cash and cash equivalents at end of period ............................ $ 24,999 $ 1,199
======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited,
combined financial statements.
-29-
<PAGE>
GENZYME SURGICAL PRODUCTS
A Division of Genzyme Corporation
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
We established Genzyme Surgical Products as a separate division of
Genzyme in June 1999. The business of Genzyme Surgical Products previously
operated as a business unit of Genzyme General. These unaudited, combined
financial statements reflect the allocated financial position, results of
operations and cash flows of Genzyme Surgical Products as if it had been
separately accounted for as a separate division of Genzyme for all periods
presented.
The combined financial statements of Genzyme Surgical Products for each
period include the balance sheets, results of operations and cash flows of the
businesses we allocate to Genzyme Surgical Products. We also allocate a portion
of our corporate operations to Genzyme Surgical Products using methods described
in our allocation policy below. These combined financial statements are prepared
using amounts included in our consolidated financial statements included in this
Form 10-Q. 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 footnotes or other
financial information that are normally required by generally accepted
accounting principles can be condensed or ommitted. We have reclassified certain
1999 data to conform with our 2000 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
interim financial statements, you should also read the financial statements
and notes for Genzyme Surgical Products included in our 1999 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 future periods.
<PAGE>
GENZYME SURGICAL PRODUCTS
A DIVISION OF GENZYME CORPORATION
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
2. INVENTORIES (amounts in thousands)
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
(Unaudited)
<S> <C> <C>
Raw materials................................... $ 15,091 $ 15,473
Work-in-process................................. 1,797 2,029
Finished products............................... 19,250 12,989
---------- ---------
Total....................................... $ 36,138 $ 30,491
========= ========
</TABLE>
3. SEGMENT INFORMATION
We present segment information in a manner consistent with the method
we use to report this information to our management. 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-Registered Trademark- bioresorbable membrane.
-30-
<PAGE>
GENZYME SURGICAL PRODUCTS
A Division of Genzyme Corporation
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS (Continued)
3. SEGMENT INFORMATION (CONTINUED):
Information concerning the operations in these reportable segments
is as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
2000 1999
--------- ---------
(Amounts in thousands)
<S> <C> <C>
REVENUES:
Cardiovascular Surgery............................ $ 19,650 $ 19,388
General Surgery................................... 6,989 5,897
Other............................................. 2,443 2,068
--------- ---------
Total........................................... $ 29,082 $ 27,353
======== ========
GROSS PROFIT:
Cardiovascular Surgery............................ $ 8,387 $ 8,570
General Surgery................................... 3,562 1,878
Other............................................. 1,094 1,061
-------- --------
Total........................................... $ 13,043 $ 11,509
======== ========
</TABLE>
The Other category includes amounts attributable to our products for
plastic surgery.
There has been no material change in segment assets since December 31,
1999.
4. ACQUISITION OF BIOMATRIX, INC. AND FORMATION OF GENZYME BIOSURGERY
In March 2000, we entered into an agreement to acquire Biomatrix, Inc.
Upon the effectiveness of our Registration Statement on Form S-4 and
completion of the merger, we will form a new operating division called
Genzyme Biosurgery and create a new series of common stock that is
intended to reflect its value and track its performance. We refer to
this stock as "Biosurgery Stock." In connection with the merger, and
upon Genzyme shareholder approval, the assets and liabilities allocated
to Genzyme Surgical Products and Genzyme Tissue Repair will be
re-allocated to Genzyme Biosurgery and shares of Surgical Products Stock
and Tissue Repair Stock will be exchanged for Biosurgery Stock. We will
account for the acquisition of Biomatrix as a purchase.
Biomatrix stockholders will receive $37.00 in cash, one share of
Biosurgery Stock or a combination of cash and stock for each share of
Biomatrix common stock they hold. The merger agreement provides,
that we will pay cash for up to 28.38% of the outstanding shares of
Biomatrix common stock that receive merger consideration, or up to
approximately $245.0 million.
Holders of Surgical Products Stock will receive 0.6060 share of
Biosurgery Stock in exchange for each share of Surgical Products Stock
they hold and holders of Tissue Repair Stock will receive 0.3352 share
of Biosurgery Stock in exchange for each share of Tissue Repair Stock
they hold.
For more information about the merger and the merger consideration,
we encourage you to carefully read our Registration Statement on Form S-4
(File No. 333-34972) filed with SEC on April 18, 2000, as amended.
-31-
<PAGE>
GENZYME SURGICAL PRODUCTS
A Division of Genzyme Corporation
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
5. NEW ACCOUNTING PRONOUNCEMENTS
We have included information regarding the impact that recently
issued accounting standards will have on our financial statements in
Note 13., "New Accounting Pronouncements," to our unaudited, consolidated
financial statements, which we incorporate by reference into this note.
6. SUBSEQUENT EVENT
We have included information regarding Focal Inc.'s exercise of the
First Option under the stock purchase agreement between Genzyme and Focal
in April 2000 in Note 12., "Subsequent Events," to our unaudited,
consolidated financial statements. We incorporate that information into
this note by reference.
-32-
<PAGE>
GENZYME TISSUE REPAIR
A Division of Genzyme Corporation
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
2000 1999
---- ----
(UNAUDITED, AMOUNTS IN THOUSANDS)
<S> <C> <C>
Total revenues .............................................. $ 5,867 $ 4,023
Operating costs and expenses:
Cost of services sold ................................... 3,023 2,998
Selling, general and administrative ..................... 5,739 6,314
Research and development ................................ 1,871 1,968
-------- --------
Total operating costs and expenses: ................... 10,633 11,280
-------- --------
Operating loss .............................................. (4,766) (7,257)
Other income (expenses):
Equity in net loss of joint venture ..................... -- (2,007)
Other ................................................... (5) --
Interest income ......................................... 102 93
Interest expense ........................................ (302) (445)
-------- --------
Total other income (expenses) ......................... (205) (2,359)
-------- --------
Division net loss ........................................... $ (4,971) $ (9,616)
======== ========
Comprehensive loss, net of tax:
Division net loss ........................................... $ (4,971) $ (9,616)
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities arising during
the period ............................................ -- --
-------- --------
Comprehensive loss ..................................... $ (4,971) $ (9,616)
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited,
combined financial statements.
-33-
<PAGE>
GENZYME TISSUE REPAIR
A Division of Genzyme Corporation
COMBINED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 8,444 $ 9,373
Accounts receivable, net ......................... 5,356 4,968
Inventories ...................................... 2,378 2,394
Other current assets ............................. 383 253
-------- --------
Total current assets ........................... 16,561 16,988
Plant and equipment, net ............................ 2,343 2,545
Other ............................................... 104 115
-------- --------
Total assets ................................... $ 19,008 $ 19,648
======== ========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable ................................. $ 371 $ 1,062
Accrued expenses ................................. 1,621 3,131
Due to Genzyme General ........................... 1,243 683
-------- --------
Total current liabilities ...................... 3,235 4,876
Noncurrent liabilities:
Long-term debt ................................... 18,000 18,000
Other ............................................ 190 227
-------- --------
Total liabilities .............................. 21,425 23,103
Division equity ..................................... (2,417) (3,455)
-------- --------
Total liabilities and division equity .......... $ 19,008 $ 19,648
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited,
combined financial statements.
-34-
<PAGE>
GENZYME TISSUE REPAIR
A Division of Genzyme Corporation
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
2000 1999
---- ----
(UNAUDITED, AMOUNTS
IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Division net loss .................................................. $(4,971) $(9,616)
Reconciliation of division net loss to net cash used in operating
activities:
Depreciation and amortization .................................... 335 328
Provision for bad debt ........................................... 32 52
Technology license fee ........................................... 250 --
Equity in net loss of joint venture .............................. -- 2,007
Amortization of deferred rent .................................... (37) (37)
Increase (decrease) in cash from working capital changes:
Accounts receivable ............................................ (388) 700
Inventories .................................................... (16) (12)
Other current assets ........................................... (130) (81)
Accounts payable and accrued expenses .......................... (2,773) (816)
Due to Genzyme General ......................................... 560 3,446
------- -------
Net cash used in operating activities ........................ (7,138) (4,029)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in joint venture ........................................ -- (2,084)
Purchase of property, plant and equipment .......................... (133) (345)
Other .............................................................. 11 34
------- -------
Net cash used in investing activities ........................ (122) (2,395)
CASH FLOWS FROM FINANCING ACTIVITIES:
Allocated proceeds from issuance of Tissue Repair Stock, net ....... 411 116
Payments of debt and capital lease obligations ..................... -- (47)
Cash allocated from Genzyme General ................................ 4,949 5,000
Other .............................................................. 971 --
------- -------
Net cash provided by financing activities .................... 6,331 5,069
------- -------
Decrease in cash and cash equivalents ................................. (929) (1,355)
Cash and cash equivalents at beginning of period ...................... 9,373 7,732
------- -------
Cash and cash equivalents at end of period ............................ $ 8,444 $ 6,377
======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited,
combined financial statements.
-35-
<PAGE>
GENZYME TISSUE REPAIR
A Division of Genzyme Corporation
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The combined financial statements of Genzyme Tissue Repair for each
period include the balance sheets, results of operations and cash flows of
the businesses we allocate to Genzyme Tissue Repair. We also allocate a
portion of our corporate operations to Genzyme Tissue Repair using methods
described in our allocation policy below. These combined financial statements
are prepared using amounts included in our consolidated financial statements
included in this Form 10-Q. 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 footnotes or
other financial information that are normally required by generally accepted
accounting principles can be condensed or omitted. We have reclassified
certain 1999 data to conform to our 2000 presentation.
These 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
interim financial statements, you should also read the financial statements
and notes for Genzyme Tissue Repair included in our 1999 Form 10-K, as
amended. Revenues, expenses, assets and liabilities can vary from quarter to
quarter. Therefore, the results and trends in these interim statements may not
be the same as those for future periods.
<PAGE>
GENZYME TISSUE REPAIR
A DIVISION OF GENZYME CORPORATION
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
2. INVENTORIES (amounts in thousands):
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
(Unaudited)
<S> <C> <C>
Raw materials ....................... $ 432 $ 428
Work-in-process ..................... 1,916 1,938
Finished products ................... 30 28
------ ------
Total ........................... $2,378 $2,394
====== ======
</TABLE>
3. DIACRIN JOINT VENTURE
In May 1999, we re-allocated 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. In connection with the
re-allocation, it was agreed that Genzyme Tissue Repair would be required
to pay Genzyme General $20.0 million plus accrued interest at an annual
rate of 13.5% if the joint venture does not initiate a Phase III clinical
trial of NeuroCell-TM--PD by June 30, 2000. Any required refund may
be paid in cash, Genzyme Tissue Repair designated shares, or a combination
of both, at Genzyme Tissue Repair's option.
-36-
<PAGE>
GENZYME TISSUE REPAIR
A Division of Genzyme Corporation
NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS
4. INTERDIVISIONAL FINANCING ARRANGEMENT
In March 2000, Genzyme Tissue Repair made a $5.0 million draw
under its interdivisional financing arrangement with Genzyme General
in exchange for 765,169 Genzyme Tissue Repair designated shares. As
required by our charter, the number of Genzyme Tissue Repair designated
shares was determined using the average closing price of the Tissue
Repair Stock for the 20 trading days beginning on the 30th trading day
before the draw. The funds will be used for Genzyme Tissue Repair's
operating needs. As of March 31, 2000 $15.0 million remained available
to Genzyme Tissue Repair under this arrangement.
5. ACQUISITION OF BIOMATRIX, INC. AND FORMATION OF GENZYME BIOSURGERY
In March 2000, we entered into an agreement to acquire
Biomatrix, Inc. Upon the effectiveness of our Registration Statement on
Form S-4 and completion of the merger, we will form a new operating
division called Genzyme Biosurgery and create a new series of common stock
that is intended to reflect its value and track its performance. We refer
to this stock as "Biosurgery Stock." In connection with the merger, and
upon Genzyme Shareholder approval, the assets and liabilities allocated
to Genzyme Surgical Products and Genzyme Tissue Repair will be
re-allocated to Genzyme Biosurgery and shares of Surgical Products Stock
and Tissue Repair Stock will be exchanged for Biosurgery Stock. We will
account for the acquisition of Biomatrix as a purchase.
Biomatrix stockholders will receive $37.00 in cash, one share of
Biosurgery Stock or a combination of cash and stock for each share of
Biomatrix common stock they hold. The merger agreement provides
that we will pay cash for up to 28.38% of the outstanding shares of
Biomatrix common stock that receive merger consideration, or up to
approximately $245.0 million.
Holders of Surgical Products Stock will receive 0.6060 share of
Biosurgery Stock in exchange for each share of Surgical Products
Stock they hold and holders of Tissue Repair Stock will receive 0.3352
share of Biosurgery Stock in exchange for each share of Tissue Repair
Stock they hold.
For more information about the merger and the merger consideration,
we encourage you to carefully read our Registration Statement on Form S-4
(File No. 333-34972) filed with the SEC on April 18, 2000, as amended.
6. NEW ACCOUNTING PRONOUNCEMENTS
We have included information regarding the impact that recently
issued accounting standards will have on our financial statements in
Note 11, "New Accounting Pronouncements," to our unaudited, consolidated
financial statements, which we incorporate by reference into this note.
-37-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion contains forward-looking statements. These
forward-looking statements represent the expectations of our management as of
the filing date of this report. Actual results could differ materially from
those anticipated by the forward-looking statements due to the risks and
uncertainties described in Exhibit 99.2, "Factors Affecting Future Operating
Results," to our 1999 Form 10-K. You should consider carefully each of these
risks and uncertainties in evaluating our financial condition and results of
operations.
We are a biotechnology company that develops innovative products and
services for significant unmet medical needs. We have four operating divisions:
- Genzyme General, which develops and markets:
- therapeutic products, with an expanding focus on products to treat
patients suffering from lysosomal storage disorders and other specialty
therapeutics;
- diagnostic products, with a focus on IN VITRO diagnostics; and
- other products and services, such as genetic testing services and
lipids and peptides for drug delivery.
- 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; and
- Genzyme Tissue Repair, which develops and markets biological products
for orthopedic injuries, such as cartilage damage, and severe burns.
In June 1997, we formed Genzyme Molecular Oncology as a separate
division of Genzyme by acquiring PharmaGenics, Inc. and combining it with
several of our ongoing programs in the field of oncology.
In June 1999, we established 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 as if
Genzyme Surgical Products had existed as a separate division of Genzyme for
all periods presented.
The greater segregation of assets, liabilities and earnings (losses)
resulting from the creation of Genzyme Molecular Oncology and Genzyme
Surgical Products is a trend that we do not expect to continue. As discussed
below, Genzyme Surgical Products and Genzyme Tissue Repair will be combined
into Genzyme Biosurgery upon the completion of the Biomatrix acquisition,
reducing the segregation of assets among our divisions and reducing the
series of common stock outstanding. As market or competitive conditions
warrant, we may create new series of tracking stock or change our earnings
allocation methodology. However, at the present time, we have no plans to do
so.
We prepare the financial statements of Genzyme in accordance with generally
accepted accounting principles. We present financial information and accounting
policies specific to Genzyme in Exhibit 99.1 to our 1999 Form 10-K.
We have four series of common stock - Genzyme General Stock, Molecular
Oncology Stock, Surgical Products Stock and Tissue Repair Stock - which we refer
to as "tracking stock." Unlike typical common stock, each of our tracking stocks
is designed to track the financial performance of a specific subset of our
business operations and its allocated assets, rather than operations and assets
of our entire company. The chief mechanisms intended to cause each tracking
stock to "track" the financial performance of each division are provisions in
our charter governing dividends and distributions. Under these provisions, our
charter:
- factors the assets and liabilities and income or losses
attributable to a division into the determination of the
amount available to pay dividends on the associated tracking
stock; and
- requires us to exchange, redeem or distribute a dividend to
the holders of Molecular Oncology Stock, Surgical Products
Stock, or Tissue Repair Stock if all or substantially all of
the assets allocated to those corresponding divisions are sold
to a third party (a dividend or redemption payment must equal
in value the net after-tax proceeds from the sale; an exchange
must be for Genzyme General Stock at a 10% premium to the
exchanged stock's average market price following the
announcement of the sale).
To determine earnings per share, we allocate Genzyme's earnings to each
series of our common stock based on the earnings attributable to that series of
stock. The earnings attributable to each series of stock is defined in our
charter as the net income or loss of the corresponding division determined in
accordance with generally accepted accounting principles and as adjusted for tax
benefits allocated to or from the division in accordance with our management and
accounting policies. Our charter also requires that all income and expenses of
Genzyme be allocated among the divisions in a reasonable and consistent manner.
However, subject to fiduciary duties, our board of directors can, at its
discretion, change the methods of allocating earnings to each series of common
stock. We intend to allocate earnings using our current methods for the
foreseeable future. See "Earnings Allocations" below.
Because the earnings allocated to each series of stock are based on the
income or losses attributable to each corresponding division, we include
financial statements and management's discussion and analysis of Genzyme
Corporation and of each division to aid investors in evaluating Genzyme's
performance and the performance of each of its divisions.
While each tracking stock is designed to reflect a division's performance,
it is common stock of Genzyme Corporation and not of a division; each division
is not a company or legal entity, and therefore does not and cannot issue stock.
Consequently, holders of a series of tracking stock have no specific rights to
assets allocated to the corresponding division. Genzyme Corporation continues to
hold title to all of the assets allocated to each division and is responsible
for all of its liabilities, regardless of what we deem for financial statements
presentation purposes as allocated to any division. Holders of each tracking
stock, as common stockholders, are therefore subject to the risks of investing
in the businesses, assets and liabilities of Genzyme as a whole. For instance,
the assets allocated to each division are subject to company-wide claims of
creditors, product liability plaintiffs and stockholder litigation. Also, in the
event of a Genzyme liquidation, insolvency or similar event, holders of each
tracking stock would only have the rights of common stockholders in the combined
assets of Genzyme.
We provide separate financial statements for each of our divisions as well
as consolidated financial statements that include the consolidated results of
each of our divisions and our corporate operations taken as a whole. You should
read this discussion and analysis of our financial position and results of
operations in conjunction with those unaudited, consolidated financial
statements and related notes, which are included in this report.
In March 2000, we entered into an agreement to acquire Biomatrix, Inc.
Upon completion of the acquisition, we will form a new operating division,
and the assets and liabilities allocated to Genzyme Surgical Products and
Genzyme Tissue Repair will be re-allocated to that new division. For more
information you should read the section entitled "Liquidity and Capital
Resources" below.
-38-
<PAGE>
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
MARCH 31, INCREASE/
-------------------- (DECREASE)
2000 1999 % CHANGE
---- ---- --------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C>
Total revenues ................................. $ 208,130 $ 183,744 13%
Cost of products and services sold ............. 60,110 55,906 8%
Selling, general and administrative ............ 61,551 58,945 4%
Research and development (including research
and development related to contracts) ..... 55,699 32,834 70%
Amortization of intangibles .................... 6,098 6,207 (2)%
-------- --------
Total operating costs and expenses ............. 183,458 153,892 19%
-------- --------
Operating income ............................... 24,672 29,852 (17)%
Other income (expenses), net ................... 19,000 (3,962) 580%
-------- --------
Income before income taxes ..................... 43,672 25,890 69%
Provision for income taxes ..................... (11,854) (9,833) 21%
-------- --------
Net income ..................................... $ 31,818 $ 16,057 98%
======== =========
</TABLE>
REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, INCREASE/
-------------------- (DECREASE)
2000 1999 % CHANGE
---- ---- --------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C>
Product revenue............................... $184,421 $ 163,702 13%
Service revenue................................ 20,966 18,730 12%
-------- --------
Total product and service revenue......... 205,387 182,432 13%
Research and development revenue.............. 2,743 1,312 109%
-------- --------
Total revenues...................... $208,130 $ 183,744 13%
======== =========
</TABLE>
-39-
<PAGE>
PRODUCT REVENUE:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, INCREASE
------------------ (DECREASE)
2000 1999 % CHANGE
---- ---- --------------
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT
PERCENTAGE DATA)
<S> <C> <C> <C>
Genzyme General:
Therapeutics:
Cerezyme-Registered Trademark-/Ceredase
-Registered Trademark- enzyme............. $128,605 $113,754 13%
Renagel-Registered Trademark-Capsules..... 1,836 -- 100%
Thyrogen-Registered Trademark-............ 3,361 1,287 161%
Other therapeutic products................ 16 54 (70%)
--------- --------
Total Therapeutics...................... 133,818 115,095 16%
Diagnostic Products......................... 15,238 14,691 4%
Other....................................... 6,283 6,563 (4%)
--------- --------
Total product revenue - Genzyme General... 155,339 136,349 14%
Genzyme Surgical Products:
Cardiovascular Surgery...................... 19,650 19,388 1%
General Surgery............................. 6,989 5,897 19%
Other....................................... 2,443 2,068 18%
--------- --------
Total product revenue - Genzyme Surgical
Products............................. 29,082 27,353 6%
--------- --------
Total product revenue........................ $184,421 $163,702 13%
======== ========
</TABLE>
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 the three
months ended March 31, 2000 as compared to the three months ended March 31, 1999
is largely due to increased sales of Cerezyme-Registered Trademark- enzyme,
which is a therapy for the treatment of Gaucher disease. The increase in sales
of Cerezyme-Registered Trademark- enzyme is attributable to our identification
of new Gaucher disease patients throughout the world and strong international
sales. We also sell Ceredase-Registered Trademark- enzyme for the treatment of
Gaucher disease, but we have successfully converted virtually all Gaucher
disease patients to a treatment regimen using Cerezyme-Registered Trademark-
enzyme.
Our results of operations are highly dependent on sales of
Cerezyme-Registered Trademark- enzyme and a reduction in revenue from sales
of this product would adversely affect our results of operations.
The following table provides information regarding the growth in sales
of our Gaucher disease therapies as a percentage of total product revenue for
the periods presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
---- ----
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C>
% of total product revenue.................... 70% 69%
</TABLE>
SERVICE REVENUE:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, INCREASE/
------------------- (DECREASE)
2000 1999 % CHANGE
---- ---- --------
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT
PERCENTAGE DATA)
<S> <C> <C> <C>
Genzyme General:
Genetic testing............................. $15,120 $13,892 9%
------- -------
Genzyme Molecular Oncology:
Genomics and gene expression................ -- 900 (100%)
------- -------
Genzyme Tissue Repair:
Carticel-Registered Trademark-Chondrocytes.. 4,532 2,942 54%
Epicel-TM-Skin Grafts....................... 1,314 996 32%
------- -------
Total service revenue - Genzyme Tissue
Repair.................................. 5,846 3,938 48%
------- -------
Total service revenue......................... $20,966 $18,730 12%
======= =======
</TABLE>
We derive service revenue from four principal sources:
- genetic testing services performed by Genzyme General;
- genomics services using Genzyme Molecular Oncology's SAGE-TM- gene
expression technology;
- Genzyme Tissue Repair's Carticel-Registered Trademark- chondrocytes for the
treatment of cartilage damage; and
- Genzyme Tissue Repair's Epicel-TM- skin grafts for the treatment of severe
burns.
Our service revenue increased during the three months ended March 31, 2000 as
compared to the same period in 1999 as a result of increased sales of
Carticel-Registered Trademark- chondrocytes for the treatment of cartilage
damage and Epicel-TM- skin grafts for the treatment of severe burns, as well
as increased revenue from genetic testing. The increase in genetic testing
service revenue during the period is a result of growth in sales of our DNA
and cancer testing services. These increases were partially offset by a
decrease in genomics service revenue as a result of lower sales volume.
RESEARCH AND DEVELOPMENT REVENUE:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, INCREASE/
------------------ (DECREASE)
2000 1999 % CHANGE
---- ---- --------
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C>
Genzyme General......................... $ 167 $ 525 (68%)
Genzyme Molecular Oncology.............. 2,555 702 264%
Genzyme Tissue Repair................... 21 85 (75%)
-------- --------
Total research and development revenue $ 2,743 $ 1,312 109%
======== ========
</TABLE>
Our research and development revenue increased during the three months
ended March 31, 2000 as compared to the same period of 1999 due to an
increase in licensing revenue. Genzyme Molecular Oncology recognized licensing
revenue in the first three months of 2000 as a result of a $2.0 million
development milestone payment received related to the advancement by Schering-
Plough Corporation of the p53 tumor suppressor gene in ovarian cancer clinical
trials.
The increase in research and development revenue was partially offset by a
decrease in revenue related to StressGen/Genzyme LLC, our joint venture with
StressGen Biotechnologies Corporation and the Canadian Medical Discoveries Fund,
Inc. to develop stress gene therapies for the treatment of cancer. This joint
venture was dissolved at the end of 1999. The research and development revenues
for the three months ended March 31, 1999 included work performed by Genzyme
Molecular Oncology on behalf of the joint venture for which there was no
comparable amount in the same period of 2000.
-40-
<PAGE>
INTERNATIONAL PRODUCT AND SERVICE SALES:
A substantial portion of our revenue was generated outside of the
United States, as described in the following table. Most of these revenues are
attributable to sales of Cerezyme-Registered Trademark- enzyme.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, INCREASE/
-------------------- (DECREASE)
2000 1999 % CHANGE
---- ---- --------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C>
Total international product and
service revenue.......................... $86,777 $72,336 20%
% of total product and service revenue........ 42% 40%
</TABLE>
MARGINS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, INCREASE/
-------------------- (DECREASE)
2000 1999 % CHANGE
---- ---- --------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C>
Product margin................................ $136,162 $ 119,884 14%
% of product revenue.......................... 74% 73%
Service margin................................ 9,115 6,642 39%
% of service revenue.......................... 43% 35%
Total gross margin............................ $145,277 $ 126,526 15%
% of total product and service revenue........ 71% 69%
</TABLE>
We provide a broad range of healthcare products and services. As a result,
our gross margin varies significantly based on the category of product or
service. Sales of therapeutic products, including Cerezyme-Registered Trademark-
enzyme, result in higher margins than sales of surgical or diagnostic products.
Our service margin increased during the period. This increase is
attributable to:
- an increase in sales of DNA and cancer testing services;
- increased sales of Carticel-Registered Trademark- chondrocytes and
Epicel-TM- skin grafts; and
- a reduction in labor, materials and production costs for
Carticel-Registered Trademark- chondrocytes and Epicel-TM- skin
grafts.
These increases were partially 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 for the three
months ended March 31, 2000 is related to:
- increased staffing to support the growth in several of Genzyme
General's product lines;
-41-
<PAGE>
- increased expenditures to support the increased sales of
Cerezyme-Registered Trademark- enzyme and Thyrogen-Registered
Trademark- hormone; and
- increased expenditures for marketing Genzyme Surgical Products'
cardiovascular products, primarily the minimally invasive cardiac
surgery instrument line.
The increases in selling, general and administrative expenses were
partially offset by a reduction of legal costs by Genzyme Molecular Oncology
associated with the prosecution and maintenance of its intellectual property
portfolio and a decrease in its license issue fees.
The increase in research and development expense for the three months
ended March 31, 2000 as compared to the same period of 1999 is primarily a
result of:
- a charge of $19.5 million for the initial amounts payable to Synpac
(North Carolina), Inc. under a license granted by Synpac to Genzyme to
develop and commercialize an enzyme replacement therapy for Pompe
disease produced using a Chinese hamster ovary cell line;
- increased spending on our program to develop Fabrazyme-TM- enzyme for
the treatment of Fabry disease;
- increased costs in connection with the operations of ATIII LLC, a
joint venture whose results we consolidate;
- increased spending in our cell and gene therapy programs; and
- increased spending on the development programs for our surgical
instruments and devices.
OTHER INCOME AND EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, INCREASE/
-------------------- (DECREASE)
2000 1999 % CHANGE
---- ---- --------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C>
Equity in net loss of unconsolidated
affiliates .................... $ (8,133) $(10,092) (19)%
Gain on affiliate sale of stock .... 20,270 606 3,245%
Gain on sale of investments in
equity securities ............. -- 1,963 N/A
Minority interest .................. 856 866 (1)%
Gain on sale of assets ............. 31 -- N/A
Other .............................. (29) -- N/A
Investment income .................. 9,944 8,193 21%
Interest expense ................... (3,939) (5,498) (28)%
--------- ---------
Total other income (expenses), net . $ 19,000 $ (3,962) 580%
========= =========
</TABLE>
EQUITY IN NET LOSS OF UNCONSOLIDATED AFFILIATES
We currently own approximately 30% of the common stock of Genzyme
Transgenics and record our portion of its results in net loss of unconsolidated
affiliates. We also record the results of the following joint ventures in net
loss of unconsolidated affiliates:
-42-
<PAGE>
<TABLE>
<CAPTION>
JOINT VENTURE PARTNER EFFECTIVE DATE PRODUCT/INDICATION GENZYME DIVISION
------------- ------- -------------- ------------------ ----------------
<S> <C> <C> <C> <C>
RenaGel LLC GelTex Pharmaceuticals, Inc. June 1997 Renagel-Registered Trademark- Genzyme General
capsules for the reduction
of serum phosphorus in
patients with end-stage
renal disease
BioMarin/ BioMarin Pharmaceutical Inc. September 1998 Aldurazyme-TM-enzyme for Genzyme General
Genzyme LLC the treatment of
mucopolysaccharidosis-I
Pharming/
Genzyme LLC Pharming Group, N.V. October 1998 Transgenic human
alpha-glucosidase Genzyme General
for the treatment of
Pompe disease
Diacrin/Genzyme LLC Diacrin, Inc. October 1996 Products using porcine Genzyme Tissue Repair
fetal cells for the (until May 1999);
treatment of Parkinson's Genzyme General (after
and Huntington's diseases May 1999)
</TABLE>
Our equity in net loss of unconsolidated affiliates decreased for the three
months ended March 31, 2000 as compared to the three months ended March 31, 1999
as a result of;
- decreased losses from Genzyme Transgenics and RenaGel LLC; and
- the dissolution of StressGen/Genzyme LLC.
These decreases were partially offset by increased losses from our joint
ventures with BioMarin and Pharming.
GAIN ON AFFILIATE SALE OF STOCK
In February 2000, Genzyme Transgenics Corporation, an unconsolidated
affiliate, completed an offering of 3.5 million shares of Genzyme
Transgenics common stock, resulting in net proceeds to Genzyme Transgenics
of $75.2 million (after the exercise of the underwriter's overallotment
option). In accordance with our policy pertaining to affiliate sales of
stock, we recognized a gain of $20.3 million and recorded a net deferred tax
expense of $3.9 million for the three months ended March 31, 2000. The
deferred tax expense is net of a $3.4 million credit for the elimination of a
valuation allowance on deferred tax assets. As a result of the issuance of
the additional shares by Genzyme Transgenics, our ownership interest in
Genzyme Transgenics decreased from 33% to 28%.
MINORITY INTEREST
Due to our combined direct and indirect ownership interest in ATIII LLC,
we consolidate the results of ATIII LLC and record Genzyme Transgenic's
portion of the losses of that joint venture as minority interest. Minority
interest for the three months ended March 31, 2000 declined slightly in
comparison to the same period of 1999 due to a marginal decrease in the net
losses incurred by ATIII LLC during the three months ended March 31, 2000.
GAIN ON SALE OF INVESTMENTS IN EQUITY SECURITIES
We recorded a gain of $2.0 million in January 1999 upon the sale of the
shares of Techne Corporation common stock that we received when we sold our
research products business to Techne. There were no such sales of stock during
the three months ended March 31, 2000.
INVESTMENT INCOME
Our investment income increased for the three months ended March 31, 2000
due primarily to higher average cash balances as compared to the three months
ended March 31, 1999.
-43-
<PAGE>
INTEREST EXPENSE
Our interest expense decreased for the period as a result of our repayment
in November 1999 of $82.0 million outstanding under our revolving credit
facility from a syndicate of banks.
TAX PROVISION:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, INCREASE/
-------------------- (DECREASE)
2000 1999 % CHANGE
---- ---- --------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C>
Provision for income taxes............... $ 11,854 $ 9,833 21%
Tax rate................................. 27% 38%
</TABLE>
Our tax rates 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.
In the three months ended March 31, 2000, we reversed a $3.4 million
valuation allowance which reduced our tax rate by 7.8%.
EARNINGS ALLOCATIONS
Genzyme allocates its earnings to each of our series of common stock based on
the earnings attributable to that series of stock. The earnings attributable to
each series of stock is defined in our charter as the net income or loss of the
corresponding division determined in accordance with generally accepted
accounting principles and as adjusted for tax benefits allocated to or from the
division in accordance with our management and accounting policies. The earnings
allocated to each series of common stock are indicated in the table below (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
<S> <C> <C>
2000 1999
---- ----
Earnings allocated to:
Genzyme General Stock................ $51,637 $32,481
Molecular Oncology Stock............. (5,057) (7,060)
Surgical Products Stock.............. (10,043) -
Tissue Repair Stock.................. (4,971) (9,616)
</TABLE>
In connection with the creation of Genzyme Surgical Products as a separate
division and the distribution of Surgical Products Stock on June 28, 1999, we
modified the way that we allocate net income and net losses to our series of
common stock.
Through June 27, 1999, the operations of Genzyme Surgical Products were
included in Genzyme General, and the net losses of Genzyme Surgical Products
were allocated to Genzyme General Stock. Since June 28, 1999, the net losses
of Genzyme Surgical Products were no longer included in the determination of
net income allocated to Genzyme General Stock. This change in the methodology
of allocating net income or net losses has resulted in an increase in the net
income allocated to Genzyme General Stock that is not due to operational
changes or new business. Subsequent to the creation of Genzyme Surgical
Products, pursuant to the Company's management and accounting policies, tax
benefits generated by Genzyme Surgical Products continued to be allocated to
Genzyme General Stock.
From January 1, 1999 through March 31, 1999, the net loss of Genzyme Surgical
Products of $10.7 million was allocated to Genzyme General Stock.
If the shares of Surgical Products Stock initially issued on June 28, 1999
were assumed to be outstanding since January 1, 1999, net income allocated to
Genzyme General Stock, net loss allocated to Surgical Products Stock and
weighted average shares outstanding would have been as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1999
------------------
<S> <C>
Genzyme General:
Net income allocated to Genzyme General Stock......... $43,226
=======
Weighted average shares outstanding:
Basic............................................... 81,958
Diluted............................................. 92,591
Genzyme Surgical Products:
Net loss allocated to Surgical Products Stock......... $(10,745)
=========
Weighted average shares outstanding-basic and diluted. 14,800
</TABLE>
Our management and accounting policies provide that, if as of the end of any
fiscal quarter, a division can not use any projected annual tax benefit
attributable to it to offset or reduce its current or deferred income tax
expense, we may allocate the tax benefit to other divisions in proportion to
their taxable income without any compensating payments or allocation to the
division
<PAGE>
generating the benefit. Tax benefits allocated to Genzyme General, which are
included in earnings attributable to Genzyme General Stock, are as follows
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
2000 1999
---- ----
<S> <C> <C>
Tax benefits allocated from:
Genzyme Molecular Oncology.......... $1,096 $1,934
Genzyme Surgical Products........... 3,420 3,825
Genzyme Tissue Repair............... 1,812 3,962
------ ------
Total................................... $6,328 $9,721
====== ======
Total tax benefits allocated from other Genzyme divisions
as a % of earnings allocated to Genzyme General Stock 12% 30%
</TABLE>
The amount of tax benefits allocated to Genzyme General fluctuate based on
the results of Genzyme Molecular Oncology, Genzyme Surgical Products and
Genzyme Tissue Repair. If the net losses of those divisions decline, as they
are expected to, then the tax benefits allocated to Genzyme General will also
decline.
-44-
<PAGE>
GENZYME GENERAL
The components of Genzyme General's combined statements of operations
are described in the following table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, INCREASE/
-------------------- (DECREASE)
2000 1999 % CHANGE
---- ---- --------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C>
Total revenues ................................. $ 170,626 $ 150,766 13%
Cost of products and services sold ............. 41,048 36,722 12%
Selling, general and administrative ............ 38,222 35,725 7%
Research and development (including research and
development related to contracts) ........... 42,743 21,065 103%
Amortization of intangibles .................... 1,968 2,086 (6)%
--------- ---------
Total operating costs and expenses ............. 123,981 95,598 30%
--------- ---------
Operating income ............................... 46,645 55,168 (15)%
Other income (expenses), net ................... 17,508 (1,447) 1,310%
--------- ---------
Income before income taxes ..................... 64,153 53,721 19%
Provision for income taxes ..................... (18,844) (20,216) (7)%
--------- ---------
Division net income ............................ $ 45,309 $ 33,505 35%
========= =========
</TABLE>
REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, INCREASE/
-------------------- (DECREASE)
2000 1999 % CHANGE
---- ---- --------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C>
Product revenue ................................ $155,339 $136,349 14%
Service revenue ................................ 15,120 13,892 9%
-------- --------
Total product and service revenue.......... 170,459 150,241 13%
Research and development revenue ............... 167 525 (68)%
-------- --------
Total revenues ....................... $170,626 $150,766 13%
======== ========
</TABLE>
-45-
<PAGE>
The following table sets forth Genzyme General's product and service
revenue on a segment basis:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, INCREASE
--------------- (DECREASE)
2000 1999 % CHANGE
---- ---- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS EXCEPT
PERCENTAGE DATA)
<S> <C> <C> <C>
Product revenue:
Therapeutics:
Cerezyme-Registered Trademark-/
Ceredase-Registered Trademark enzyme..... $128,605 $113,754 13%
Renagel-Registered Trademark- Capsules..... 1,836 -- 100%
Thyrogen-Registered Trademark-............. 3,361 1,287 161%
Other therapeutic products................. 16 54 (70%)
-------- --------
Total Therapeutics....................... 133,818 115,095 16%
Diagnostic Products.......................... 15,238 14,691 4%
Other........................................ 6,283 6,563 (4%)
-------- --------
Total product revenue...................... 155,339 136,349 14%
Service revenue:
Other...................................... 15,120 13,892 9%
-------- --------
Total product and service revenue......... $170,459 $150,241 13%
======== ========
</TABLE>
THERAPEUTICS
Genzyme General's increase in product revenue is largely due to
increased sales of Cerezyme-Registered Trademark- enzyme, which is
attributable to the identification of new Gaucher disease patients throughout
the world and strong international sales. We have provided information
regarding the growth in sales of Genzyme General's Gaucher disease therapies
during the period in the following table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
--------- ---------
(UNAUDITED, AMOUNTS
IN THOUSANDS, EXCEPT
PERCENTAGE DATA)
<S> <C> <C>
% of total product revenue .................. 83% 83%
</TABLE>
Genzyme General's results of operations are highly dependent on sales
of Cerezyme-Registered Trademark- enzyme. A reduction in revenue from sales
of this product would adversely affect its results of operations. Revenue from
Cerezyme-Registered Trademark- 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 each period also includes sales of
Thyrogen-Registered Trademark- hormone, which is an adjunctive diagnostic tool
for well differentiated thyroid cancer.
DIAGNOSTICS
Diagnostics revenues increased for the three months ended March 31,
2000 as compared to the same period of 1999, due primarily to increased sales of
HDL and LDL cholesterol testing products, despite the sale of our bioreagent
and ELISA product lines, in July 1999. Diagnostics' product revenue includes
royalties on product sales by Techne Corporation's biotechnology group.
Diagnostics' service revenue increased during the period as a result of
growth in sales of our DNA and cancer testing services.
-46-
<PAGE>
OTHER
Other revenue for each period include sales of:
- lipids and peptides for drug delivery; and
- genetic testing services.
INTERNATIONAL PRODUCT AND SERVICE SALES
A substantial portion of Genzyme General's revenue was generated
outside of the United States, as described in the following table. Most of
these revenues were attributable to sales of Cerezyme-Registered Trademark-
enzyme.
<TABLE>
<CAPTION>
THREE MONTHS ENDED INCREASE/
MARCH 31, (DECREASE)
2000 1999 % CHANGE
------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C>
International product and
service revenue ................. $77,772 $63,456 23%
% of total product and service revenue 46% 42%
</TABLE>
MARGINS
<TABLE>
<CAPTION>
THREE MONTHS ENDED INCREASE/
MARCH 31, (DECREASE)
2000 1999 % CHANGE
-------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C>
Product margin ....................... $123,119 $108,382 14%
% of product revenue ................. 79% 79%
Service margin ....................... 6,292 5,137 22%
% of service revenue ................. 42% 37%
Total gross margin ................... $129,411 $113,519 14%
% of total product and service revenue 76% 76%
</TABLE>
Genzyme General provides a broad range of healthcare products and
services. As a result, Genzyme General's gross margin varies significantly based
on the category of product or service. Sales of therapeutic products, including
Cerezyme-Registered Trademark- enzyme, result in higher margins than diagnostic
products.
Our service margin increased during each period as a result of
increases in sales of DNA and cancer testing services.
-47-
<PAGE>
OPERATING EXPENSES
The increase in selling, general and administrative expenses for the
three months ended March 31, 2000 as compared to the three months ended March
31, 1999 is primarily related to:
- increased staffing to support the growth in several of Genzyme
General's product lines; and
- increased expenditures to support the increased sales of
Cerezyme-Registered Trademark- enzyme and Thyrogen-Registered
Trademark- hormone.
The increase in research and development expense for the three months
ended March 31, 2000 as compared to the same period of 1999 is primarily a
result of:
- a charge of $19.5 million for the initial amounts payable to
Synpac (North Carolina), Inc. under a license granted by
Synpac to Genzyme to develop and commercialize an enzyme
replacement therapy for Pompe disease produced using a Chinese
hamster ovary cell line;
- increased spending on our program to develop Fabrazyme-TM- enzyme
for the treatment of Fabry disease;
- increased costs in connection with the operations of ATIII
LLC, a joint venture whose results we consolidate; and
- increased spending in our cell and gene therapy programs.
OTHER INCOME AND EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, INCREASE/
------------------- (DECREASE)
2000 1999 % CHANGE
-------- -------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C>
Equity in net loss of unconsolidated
affiliates .................... $ (8,133) $ (7,756) 5%
Gain on affiliate sale of stock .... 20,270 606 3,245%
Gain on sale of investments in
equity securities ............. -- 1,963 N/A
Minority interest .................. 856 866 (1)%
Gain on sale of assets ............. 35 -- N/A
Other .............................. (56) -- N/A
Investment income .................. 8,087 7,923 2%
Interest expense ................... (3,551) (5,049) (30)%
-------- -------- ----------
Total other income (expenses), net . $ 17,508 $ (1,447) 1,310%
======== ======== ==========
</TABLE>
EQUITY IN NET LOSS OF UNCONSOLIDATED AFFILIATES
Genzyme General records in equity in net loss of unconsolidated
affiliates its portion of the results of our joint ventures with GelTex
Pharmaceuticals, Inc., BioMarin Pharmaceutical Inc., Pharming Group, N.V. and
Diacrin, Inc. Genzyme General also records a portion of the results of Genzyme
Transgenics in equity in net loss of unconsolidated affiliates.
Genzyme General's equity in net loss of unconsolidated affiliates
increased for the three months ended March 31, 2000 as compared to the three
months ended March 31, 1999 as a result of:
-48-
<PAGE>
- the reallocation of our interest in our joint venture with Diacrin from
Genzyme Tissue Repair to Genzyme General in May 1999;
- increased losses from our joint venture with BioMarin to develop and
commercialize Aldurazyme-TM- enzyme for the treatment of
mucopolysaccharidosis-I; and
- increased losses from our joint venture with Pharming to develop a therapy
for Pompe disease.
These increases were partially offset by decreased losses from Genzyme
Transgenics and RenaGel LLC.
GAIN ON AFFILIATE SALE OF STOCK
In February 2000, Genzyme Transgenics Corporation, an unconsolidated
affiliate, completed an offering of 3.5 million shares of Genzyme Transgenics
common stock, resulting in net proceeds to Genzyme Transgenics of $75.2
million (after the exercise of the underwriter's overallotment option). In
accordance with our policy pertaining to affiliate sales of stock, we
recognized a gain of $20.3 million and recorded a net deferred tax expense of
$3.9 million for the three months ended March 31, 2000. The deferred tax
expense is net of a $3.4 million credit for the reversal of a valuation
allowance on deferred tax assets. As a result of the issuance of the
additional shares by Genzyme Transgenics, our ownership interest in Genzyme
Transgenics decreased from 33% to 28%.
MINORITY INTEREST
Due to our combined direct and indirect ownership interest in ATIII
LLC, Genzyme General consolidates the results of ATIII LLC and records
Genzyme Transgenics' portion of the losses of that joint venture as minority
interest. Minority interest for the three months ended March 31, 2000
declined slightly in comparison to the same period of 1999 due to a marginal
decrease in the net losses incurred by ATIII LLC during the three months
ended March 31, 2000.
GAIN ON SALE OF INVESTMENTS IN EQUITY SECURITIES
Genzyme General recorded gains of $2.0 million in January 1999 upon the
sale of the shares of Techne common stock that it received when it sold
its research products business to Techne. There were no such sales of stock
during the three months ended March 31, 2000.
INVESTMENT INCOME
Genzyme General's investment income increased for the three months
ended March 31, 2000 due primarily to higher average cash balances as compared
to the three months ended March 31, 1999.
INTEREST EXPENSE
Genzyme General's interest expense decreased for the three months
ended March 31, 2000 as a result of our repayment in November 1999 of $82.0
million outstanding under our revolving credit facility, which had been
allocated to Genzyme General.
-49-
<PAGE>
TAX PROVISION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, INCREASE/
---------------------- (DECREASE)
2000 1999 % CHANGE
--------- --------- -----------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C>
Provision for income taxes..... $ 18,844 $ 20,216 (7)%
Effective tax rate ............ 29% 38%
</TABLE>
Genzyme General's tax rates 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.
In the three months ended March 31, 2000, we reversed a $3.4 million
valuation allowance which reduced our tax rate by 5.3%.
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
MARCH 31, INCREASE/
----------------- (DECREASE)
2000 1999 % CHANGE
------ ------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C>
Total revenues ........................ $ 2,555 $ 1,613 58%
Cost of revenues ...................... 56 640 (91%)
Selling, general and administrative ... 1,190 1,619 (26%)
Research and development .............. 4,058 3,905 4%
Amortization of intangibles ........... 2,956 2,956 0%
------- -------
Total operating costs and expenses 8,260 9,120 (9%)
------- -------
Operating loss ........................ (5,705) (7,507) (24%)
Other expenses, net ................... (14) (215) (93%)
------- -------
Loss before income taxes............. . (5,719) (7,722) (26%)
Tax benefit ........................... 662 662 0%
------- -------
Division net loss ..................... $(5,057) $(7,060) (28%)
======= =======
</TABLE>
-50-
<PAGE>
REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, INCREASE/
----------------- (DECREASE)
2000 1999 % CHANGE
------- ------- ----------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C>
Royalty and licensing revenue .. $2,555 $ 404 532%
Research and development revenue -- 298 (100%)
Service revenue ................ -- 911 (100%)
------- -------
Total revenues ............ $2,555 $1,613 58%
======= =======
</TABLE>
Licensing revenue increased as a result of a $2.0 million development
milestone payment received in the first quarter of 2000 under a license
agreement with Schering-Plough Corporation. This milestone payment was related
to the advancement by Schering-Plough of the p53 tumor suppressor gene in
ovarian cancer clinical trials.
Our research and development revenue increased during the three months
ended March 31, 2000 as compared to the same period of 1999 due to an
increase in licensing revenue. Genzyme Molecular Oncology recognized
licensing revenue in the first three months of 2000 as a result of a $2.0
million development milestone payment received related to the advancement by
Schering-Plough Corporation of the p53 tumor suppressor gene in ovarian
cancer clinical trials.
Service revenues decreased as a result of lower sales volumes for
genomics services using Genzyme Molecular Oncology's SAGE-TM- gene expression
technology.
COST OF REVENUES
Genzyme Molecular Oncology's cost of revenues includes:
- services performed using the SAGE-TM- gene expression technology on
behalf of third parties;
- royalties paid to third parties; and
- work performed on behalf of StressGen/Genzyme LLC in the three
months ended March 31, 1999. There are no similar costs for work
performed on behalf of the joint venture in the same period of 2000
because the joint venture was dissolved in the fourth quarter of 1999.
Cost of revenues decreased as a result of the dissolution of
StressGen/Genzyme LLC and a planned reduction of genomics services provided by
Genzyme Molecular Oncology.
OPERATING EXPENSES
Genzyme Molecular Oncology's selling, general and administrative
expenses decreased primarily as a result of reduced legal costs associated
with the prosecution and maintenance of its intellectual property portfolio
and a decrease in license issue fees.
Genzyme Molecular Oncology's research and development expenses increased
as a result of:
- clinical trial costs for its melanoma and breast tumor vaccine
product; and
- an increase in the number of research personnel and related
expenses required to support its immunotherapy and antiangiogenesis
programs.
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.
-51-
<PAGE>
Genzyme Molecular Oncology's other expenses decreased as a result of the
dissolution of StressGen/Genzyme LLC in December 1999. Genzyme Molecular
Oncology no longer incurs expenses related to this joint venture because it was
dissolved in 1999.
GENZYME SURGICAL PRODUCTS
In June 1999, we established Genzyme Surgical Products as a separate
division of Genzyme. The business of Genzyme Surgical Products had previously
been accounted for as a business unit of Genzyme General. The products and
assets allocated to Genzyme Surgical Products consist primarily of:
- the products and assets we acquired upon the purchase of Deknatel Snowden
Pencer, Inc. in 1996;
- the Sepra products (our line of products and product candidates designed to
limit post-operative adhesions); 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,
investments and certain other assets, to Genzyme Surgical Products in connection
with the creation of Genzyme Surgical Products as a separate division of
Genzyme. The following discussion reflects the results of operations of Genzyme
Surgical Products as if it had been accounted for 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
MARCH 31,
------------------- INCREASE/(DECREASE)
2000 1999 % CHANGE
------------------- -------------------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C>
Total revenues ........................ $ 29,082 $ 27,353 6%
Cost of products sold ................. 16,039 15,844 1%
Selling, general and administrative ... 16,400 15,287 7%
Research and development .............. 6,971 5,602 24%
Amortization of intangibles ........... 1,426 1,417 1%
-------- --------
Total operating costs and expenses 40,836 38,150 7%
-------- --------
Operating loss ........................ (11,754) (10,797) 9%
Other income, net ..................... 1,711 52 3,190%
-------- --------
Division net loss ..................... $(10,043) $(10,745) (7%)
======== ========
</TABLE>
REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------- INCREASE/(DECREASE)
2000 1999 % CHANGE
------- ------ -------------------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C>
Cardiovascular surgery products... $19,650 $19,388 1%
General surgery products ......... 6,989 5,897 19%
</TABLE>
-52-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Other products ................ 2,443 2,068 18%
------- --------
Total revenues ........... $29,082 $27,353 6%
======= ========
</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 is due to increased sales of instruments for minimally invasive
cardiac surgery. This increase was partially offset by a decrease in sales of
fluid management systems and surgical closures as a result of seasonal
fluctuations for these products.
The increase in general surgery product revenues is primarily due to the
increase in sales of Sepra Film-Registered Trademark- bioresorbable membrane.
Sales of Sepra Products for the three months ended March 31, 2000 were $3.9
million compared to $2.9 million during the same period in 1999. An increase
in general surgery instrument sales also contributed to the overall increase
in general surgery product revenue.
Other surgery product revenues consist of sales of Genzyme Surgical
Products' Snowden-Pencer-Registered Trademark- line of instruments for
plastic surgery and products sold to original equipment manufacturers,
including sutures. The increase in other surgery product revenues for the
first three months of 2000 as compared to the same period of 1999 is
primarily due to increased sales of plastic surgery instruments.
International revenue as a percentage of total sales for the three
months ended March 31, 2000 was 29% as compared to 30% in the same period of
1999.
MARGINS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------- INCREASE/(DECREASE)
2000 1999 % CHANGE
------- ------ -------------------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C>
Gross margins ......................... $13,043 $11,509 13%
% of total revenues .............. 45% 42%
</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.
Gross margins increased in the first quarter of 2000 when compared to the
same period of 1999 due to increased sales of higher margin products, such as
devices for minimally invasive cardiac surgery.
OPERATING EXPENSES
Genzyme Surgical Products' selling, general and administrative expenses
increased in the first three months of 2000 as a result of increased spending in
marketing of the cardiovascular products, primarily the minimally invasive
cardiac surgery instrument line.
Genzyme Surgical Products' research and development expenses for the three
months ended March 31, 2000 increased when compared to the same period in 1999
as a result of increased spending in Genzyme Surgical Products' cell and gene
therapy programs as well as increased research and development spending for
surgical instruments and devices.
-53-
<PAGE>
OTHER INCOME AND EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------- INCREASE/(DECREASE)
2000 1999 % CHANGE
------- ------ -------------------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C>
Loss on sale of assets..... $ (4) $ -- N/A
Other ..................... 32 46 (30%)
Investment income ......... 1,682 7
Interest expense .......... 1 (1) 200%
------- -----
Total other income $ 1,711 $ 52 3,190%
======= =====
</TABLE>
The increase in other income and expenses is primarily due to an
increase in investment income. Investment income increased because Genzyme
Surgical Products had a higher average cash balance during the three months
ended March 31, 2000 as a result of the allocation in June 1999 of $150.0
million in cash from Genzyme General to Genzyme Surgical Products.
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
MARCH 31,
----------------- INCREASE/(DECREASE)
2000 1999 % CHANGE
------- ------ -------------------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C>
Total revenues ...................... $ 5,867 $ 4,023 46%
Cost of services sold ............... 3,023 2,998 1%
Selling, general and administrative.. 5,739 6,314 (9)%
Research and development ............ 1,871 1,968 (5)%
-------- --------
Total operating costs and expenses 10,633 11,280 (6)%
Operating loss ...................... (4,766) (7,257) (34)%
Other expenses, net ................. (205) (2,359) (91)%
-------- --------
Division net loss.................... $ (4,971) $ (9,616) (48)%
======== ========
REVENUES
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------- INCREASE/(DECREASE)
2000 1999 % CHANGE
------- ------ -------------------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C>
Carticel-Registered Trademark-chondrocytes $4,532 $2,942 54%
Epicel-TM-skin grafts .................... 1,314 996 32%
Other .................................... 21 85 (75)%
------ ------
Total revenues .............. $5,867 $4,023 46%
====== ======
</TABLE>
Genzyme Tissue Repair's service revenue increased during the three months
ended March 31, 2000 as compared to the same period of 1999 as a result of
increases in sales of Carticel-Registered Trademark- chondrocytes and Epicel-TM-
skin grafts.
The increase in sales of Carticel-Registered Trademark- chondrocytes
during the period 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
-54-
<PAGE>
approvals. Revenue from Epicel-TM- skin grafts varies widely from quarter to
quarter depending on the number of patients requiring severe burn care.
MARGINS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------- INCREASE/(DECREASE)
2000 1999 % CHANGE
------- ------ -------------------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C>
Total gross margin................................... $2,844 $1,025 177%
% of total revenue................................... 48% 25%
</TABLE>
Genzyme Tissue Repair's gross margins improved in both periods as a result of:
- increased sales of Carticel-Registered Trademark- chondrocytes and
Epicel-TM- skin grafts;
- a reduction in fixed costs, materials and production costs for
Carticel-Registered Trademark- chondrocytes and Epicel-TM- skin
grafts; and
- continued expense controls.
OPERATING EXPENSES
Genzyme Tissue Repair's selling, general and administrative expenses
decreased in the three months ended March 31, 2000 as compared to the same
period of 1999 as a result of its efforts to streamline its operations. Its
research and development expenses decreased in the period due to the
termination of its TGF-beta and other research and development programs.
OTHER INCOME AND EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------- INCREASE/(DECREASE)
2000 1999 % CHANGE
------- ------ -------------------
(UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C>
Equity in net loss of joint venture.. $ -- $(2,007) (100)%
Interest income ..................... 102 93 10%
Interest expense .................... (302) (445) (32)%
Other ............................... (5) -- N/A
------ -------
Total other income (expenses) .... $ (205) $(2,359) (91)%
====== =======
</TABLE>
Equity in net loss of joint venture decreased during the period 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.
Interest income increased in the three months ended March 31, 2000 as
a result of higher average cash balances during the period.
Interest expense decreased in the three months ended March 31, 2000 as a
result of the completion of the conversion of Genzyme Tissue Repair's 5%
convertible subordinated note in the fourth quarter of 1999.
-55-
<PAGE>
B. LIQUIDITY AND CAPITAL RESOURCES
GENZYME CORPORATION
At March 31, 2000, we had cash, cash-equivalents, and short- and long-term
investments of $686.6 million, an increase of $33.6 million from December 31,
1999.
We generated $46.4 million in cash from our operations for the three months
ended March 31, 2000.
Our investing activities utilized $67.4 million in cash for the three
months ended March 31, 2000. Investing activities used:
- $51.4 million for our net purchases of investments;
- $13.6 million to fund capital expenditures; and
- $6.0 million to fund our investments in joint ventures;
During the three months ended March 31, 2000, we received $16.6 million
in cash from exercises of stock options and the issuance of stock under our
employee stock purchase plan.
In November 1999, we refinanced our $225.0 million revolving credit
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. At March 31, 2000, $23.0 million was outstanding in the credit
facility that matures in November 2002. We have allocated the $23.0 million
of borrowings to Genzyme Tissue Repair. We expect to expand our existing
credit facilities and borrow approximately $200 million of cash to finance
the cash portion of the Biomatrix merger consideration. We will allocate the
$200 million of borrowings to Genzyme Biosurgery in connection with its
formation as a separate division of Genzyme as discussed below.
At December 31, 1999, $20.0 million of Genzyme General's cash was
available to Genzyme Tissue Repair under its interdivisional financing
arrangement with Genzyme General. In March 2000, Genzyme Tissue Repair made a
$5.0 million draw under this arrangement in exchange for 765,169 Genzyme
Tissue Repair designated shares. As required by our charter, the number of
Genzyme Tissue Repair designated shares was determined using the average
closing price of Tissue Repair Stock for the 20 trading days beginning on the
30th trading day before the draw. As of March 31, 2000 $15.0 million was
available to Genzyme Tissue Repair under this arrangement.
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;
- working capital; and
- strategic business initiatives.
Our cash reserves will be further reduced to pay principal and interest on
the following debt:
- $21.2 million in principal under the 5% convertible subordinated
debentures due August 2003, which are convertible into Genzyme
General Stock; and
- $250.0 million in principal under the 5 1/4% convertible subordinated
notes due June 2005, which are convertible into Genzyme General Stock,
Molecular Oncology Stock and Surgical Products Stock.
Our cash reserves will also be reduced if we exercise our option to
purchase the limited partnership interests in Genzyme Development Partners,
L.P. and use cash to pay all or a portion of the approximately $26.0 million
advance payment to the limited partners. This option will be exercisable
during the ninety day period beginning August 31, 2000.
Genzyme Development Partners is a Delaware limited partnership that was
formed in 1989 to develop, produce and derive income from the sale of Sepra
products. Its general partner is a wholly-owned subsidiary of Genzyme.
If we use cash to pay or redeem this debt, including the interest due on
it, our cash reserves will be diminished.
In March 2000, we entered into an agreement to acquire Biomatrix,
Inc. Upon the effectiveness of our Registration Statement on Form S-4 and
completion of the merger, we will form a new operating division called
Genzyme Biosurgery and create a new series of common stock that is intended to
reflect its value and track its performance. We refer to this stock as
"Biosurgery Stock." In connection with the merger, and upon Genzyme
shareholder approval, the assets and liabilities allocated to Genzyme
Surgical Products and Genzyme Tissue Repair will be re-allocated to
Genzyme Biosurgery and
-56-
<PAGE>
shares of Surgical Products Stock and Tissue Repair Stock will be exchanged
for Biosurgery Stock. We will account for the acquisition of Biomatrix as a
purchase.
Biomatrix stockholders will receive $37.00 in cash, one share of
Biosurgery Stock or a combination of cash and stock for each share of
Biomatrix common stock they hold. The merger agreement provides, that we will
pay cash for up to 28.38% of the outstanding shares of Biomatrix common stock
that receive merger consideration, or up to approximately $245.0 million.
Holders of Surgical Products Stock will receive 0.6060 share of
Biosurgery Stock in exchange for each share of Surgical Products Stock they
hold and holders of Tissue Repair Stock will receive 0.3352 share of
Biosurgery Stock in exchange for each share of Tissue Repair Stock they hold.
For more information about the merger and the merger consideration, we
encourage you to carefully read the Registration Statement on Form S-4
(File No. 333-34972) filed with the SEC on April 18, 2000, as amended.
The acquisition, which we expect to complete in the third quarter of
2000, is subject to:
- approval by Biomatrix's shareholders;
- approval by our shareholders, including separate approval of the
holders of Surgical Products Stock and Tissue Repair Stock;
- clearance under federal antitrust laws; and
- other customary closing conditions.
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 March 31, 2000, Genzyme General had cash, cash-equivalents, and short-
and long-term investments of $560.6 million, an increase of $46.7 million from
December 31, 1999.
Genzyme General generated $64.2 million in cash from its operations for the
three months ended March 31, 2000.
Genzyme General's investing activities utilized $81.6 million in cash for
the three months ended March 31, 2000. Investing activities used:
- $63.2 million for Genzyme General's net purchases of investments;
- $14.5 million to fund capital expenditures; and
- $6.0 million to fund Genzyme General's investments in joint ventures.
During the three months ended March 31, 2000, Genzyme General
received $12.7 million in cash proceeds were allocated to Genzyme General from
exercise of options to purchase shares of Genzyme General Stock and shares of
Genzyme General Stock issued under our employee stock plans.
At December 31, 1999 and March 31, 2000 $30.0 million of Genzyme
General's cash was available to Genzyme Molecular Oncology. In April 2000,
Genzyme Molecular Oncology drew $15.0 million of cash under this arrangement
to meets its financing needs. We have included more information about this
draw below under the heading "Subsequent Events - Genzyme Molecular Oncology
Interdivisional Financing Arrangement" which we incorporate into this
discussion by reference. Subsequent to the draw, $15.0 million remained
available to Genzyme Molecular Oncology under this arrangement.
-57-
<PAGE>
At December 31, 1999, $20.0 million of Genzyme General's cash was
available to Genzyme Tissue Repair under its interdivisional financing
arrangement with Genzyme General. In March 2000, Genzyme Tissue Repair made
a $5.0 million draw under this arrangement in exchange for 765,169 Genzyme
Tissue Repair designated shares. For information regarding the determination
of the amount of Genzyme Tissue Repair designated shares authorized in
connection with each draw under this arrangement you should read the section
entitled "Liquidity and Capital Resources -- Genzyme Corporation" above. As
of March 31, 2000 $15.0 million was available to Genzyme Tissue Repair under
this arrangement.
Genzyme General, together with our other operating divisions, has access
to Genzyme's revolving credit facilities. At March 31, 2000, $50.0 million
was available under a facility that matures in November 2000 and $77.0
million was available under a facility that matures in November 2002. We
expect to expand our existing credit facilities and borrow approximately $200
million of cash to finance the cash portion of the Biomatrix merger
consideration. We will allocate the $200 million of borrowings to Genzyme
Biosurgery in connection with its formation as a separate division of
Genzyme. We have included information about the proposed acquisition of
Biomatrix, Inc. and proposed acquisition of BioMatrix and proposed formation
of Genzyme Biosurgery as a new division of Genzyme under the heading
"Liquidity and Capital Resources - Genzyme Corporation", which we incorporate
into this discussion by reference.
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;
- working capital; and
- strategic business initiatives.
Genzyme General's cash reserves will be further reduced to pay principal
and interest on the following debt:
- $21.2 million in principal under the 5% convertible subordinated
debentures due August 2003, which are convertible into Genzyme
General Stock; and
- $250.0 million in principal under the 5 1/4% convertible subordinated
notes due June 2005, which are convertible into shares of Genzyme
General 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, we may have to obtain additional
financing for Genzyme General. 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 March 31, 2000, Genzyme Molecular Oncology had cash and cash equivalents
of $1.5 million, a decrease of $2.0 million from December 31, 1999.
During the first quarter of 2000, Genzyme Molecular Oncology used $3.3
million of cash for operations. Financing activities provided $1.2 million of
cash proceeds allocated to Genzyme Molecular Oncology from exercises of
options and the issuance of Molecular Oncology Stock under our employee stock
purchase plan.
At December 31, 1999 and March 31, 2000 $30.0 million of Genzyme
General's cash was available to Genzyme Molecular Oncology under its
interdivisional financing arrangement with Genzyme General. In April 2000,
Genzyme Molecular
-58-
<PAGE>
Oncology drew $15.0 million of cash under this arrangement to meets its
financing needs. We have included more information about this draw below
under the heading "Subsequent Events - Genzyme Molecular Oncology
Interdivisional Financing Arrangement," which we incorporate into this
discussion by reference. Subsequent to the draw, $15.0 million remained
available to Genzyme Molecular Oncology under this arrangement.
In March 2000, we filed with the SEC a prospectus pursuant to Rule 424
of the Securities Act of 1933, as amended, covering the offering of 3,000,000
shares of Molecular Oncology Stock (plus 450,000 shares issuable upon exercise
of the underwriter's over-allotment option). The proceeds of the offering were
to be used by Genzyme Molecular Oncology to fund research, pre-clinical and
clinical development programs, to repay existing indebtedness, and for working
capital and general corporate purposes. In April 2000, in light of recent market
volatility and current market conditions, we withdrew the offering of shares of
Molecular Oncology Stock contemplated by the prospectus.
Genzyme Molecular Oncology, together with our other operating divisions,
has access to Genzyme's revolving credit facilities. At March 31, 2000, $50.0
million was available under a facility that matures in November 2000 and
$77.0 million was available under a facility that matures in November 2002.
We expect to expand our existing credit facilities and borrow approximately
$200 million of cash to finance the cash portion of the Biomatrix merger
consideration. We will allocate the $200 million of borrowings to Genzyme
Biosurgery in connection with its formation as a separate division of
Genzyme. We have included information about the proposed acquisition of
Biomatrix, Inc. and proposed acquisition of BioMatrix and proposed formation
of Genzyme Biosurgery as a new division of Genzyme under the heading
"Liquidity and Capital Resources - Genzyme Corporation", which we incorporate
into this discussion by reference.
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 $15.0 million remaining on the interdivisional financing
arrangement from Genzyme General;
- our revolving credit facilities;
- revenues generated from the SAGE-TM- gene expression technology; and
- revenues from license agreements.
We expect Genzyme Molecular Oncology to have significant operating losses
for the next several years. Genzyme Molecular Oncology plans to spend
substantial amounts of funds on, among other things:
- research and development;
- preclinical and clinical testing; and
- pursuing regulatory approvals.
Genzyme Molecular Oncology's cash needs may differ from those planned as a
result of many factors, including the:
- ability to become profitable
- results of research and development and clinical testing;
- achievement of milestones under existing licensing arrangements;
- 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 we 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, reduce or eliminate certain of its programs. Genzyme Molecular Oncology
may also have to give rights to third parties to attempt to commercialize
technologies or products that it would otherwise commercialize itself.
GENZYME SURGICAL PRODUCTS
At March 31, 2000, Genzyme Surgical Products had cash, cash equivalents,
and short- and long-term investments of $116.0 million, a decrease of $10.1
million from December 31, 1999.
Genzyme Surgical Products used $11.3 million in cash for operations in the
first three months of 2000. This is primarily due to Genzyme Surgical Products'
net loss of $10.0 million for the three months ended March 31, 2000.
-59-
<PAGE>
Genzyme Surgical Products' investing activities in the first three months
of 2000 generated $11.9 million in cash from its investments, and used $0.9
million to fund capital expenditures.
During the three months ended March 31, 2000, financing activities
provided $0.9 million of cash proceeds allocated to Genzyme Surgical Products
from exercises of options and the issuance of Surgical Products Stock under
our employee stock purchase plan.
In June 1999, we allocated $150.0 million in cash, cash equivalents,
investments and certain other assets from Genzyme General to Genzyme Surgical
Products in connection with the creation of Genzyme Surgical Products as a
separate division of Genzyme.
In March 2000, we entered into an agreement to acquire Biomatrix, Inc.
Upon the effectiveness of our Registration Statement on Form S-4 and
completion of the merger, we will form a new operating division called
Genzyme Biosurgery and create a new series of common stock that is intended to
reflect its value and track its performance. We refer to this stock as
"Biosurgery Stock." In connection with the merger, and upon Genzyme
Shareholder approval, the assets and liabilities allocated to Genzyme
Surgical Products and Genzyme Tissue Repair will be re-allocated to Genzyme
Biosurgery and shares of Surgical Products Stock and Tissue Repair Stock will
be exchanged for Biosurgery Stock. We will account for the acquisition of
BioMatrix as a purchase.
Biomatrix stockholders will receive $37.00 in cash, one share of
Biosurgery Stock or a combination of cash and stock for each share of
Biomatrix common stock they hold. The merger agreement provides, that we will
pay cash for up to 28.38% of the outstanding shares of Biomatrix common stock
that receive merger consideration, or up to approximately $245.0 million.
Holders of Surgical Products Stock will receive 0.6060 share of Biosurgery
Stock in exchange for each share of Surgical Products Stock they hold and
holders of Tissue Repair Stock will receive 0.3352 share of Biosurgery Stock
in exchange for each share of Tissue Repair Stock they hold. To the extent
Genzyme Surgical Products uses cash to complete the acquisition, its cash
reserves will be diminished.
For more information about the merger and the merger consideration, we
encourage you to carefully read the Registration Statement on Form S-4
(File No. 333-34972) filed with the SEC on April 18, 2000, as amended.
Genzyme Surgical Products, together with our other operating divisions,
has access to our revolving credit facilities. At March 31, 2000 $50.0
million was available under a facility that matures in November 2000 and
$77.0 million was available under a facility that matures in November 2002.
We expect to expand our existing credit facilities and borrow approximately
$200 million of cash to finance the cash portion of the Biomatrix merger
consideration. We will allocate the $200 million of borrowings to Genzyme
Biosurgery in connection with its formation as a separate division of
Genzyme. We have included information about the proposed acquisition of
Biomatrix, Inc. and proposed acquisition of BioMatrix and proposed formation
of Genzyme Biosurgery as a new division of Genzyme under the heading
"Liquidity and Capital Resources - Genzyme Corporation", which we incorporate
into this discussion by reference.
In April 2000, Focal Inc. exercised its First Option under the stock
purchase agreement between Genzyme and Focal. As required by the terms of this
agreement, Genzyme Surgical Products was required to purchase $5.0 million of
Focal common stock, at a price of $8.14 per share. We will allocate these
shares to Genzyme Surgical Products. We are committed, at Focal's option, to
make additional future equity investments of up to $10.0 million subject to
certain conditions.
We anticipate that Genzyme Surgical Products' current cash resources,
together with revenues generated from its products and distribution agreements,
will be sufficient to fund its operations through 2001. However, its cash needs
may differ from those planned because of many factors, including:
- the ability to become profitable;
- results of research and development programs;
- the ability to establish strategic collaborations and licensing
arrangements for research and development programs;
- the achievement of milestones under strategic collaborations;
- the ability to establish and maintain additional distribution
arrangements;
- the enforcement of patent and other intellectual property rights;
- market acceptance of novel approaches and therapies;
- the development of competitive products; and
- the ability to satisfy regulatory requirements of the FDA and other
government authorities.
In addition, if we exercise our option to purchase the limited
partnership interests in Genzyme Development Partners, L.P. and use cash to
pay all or a portion of the approximately $26.0 million advance payment to
the limited partners, our cash resources will be diminished. The option will be
exercisable during the 90-day period beginning August 31, 2000. Genzyme
Development Partners is a Delaware limited partnership that was formed in
1989 to develop, produce and derive income from the sale of Sepra products.
Its general partner is a wholly-owned subsidiary of Genzyme.
-60-
<PAGE>
Genzyme Surgical Products may require significant additional financing to
continue operations at anticipated levels. We cannot guarantee that we will be
able to obtain any additional financing for Genzyme Surgical Products or find it
on favorable terms. If Genzyme Surgical Products has insufficient funds or is
unable to raise additional funds, it may have to delay, reduce or eliminate some
of its programs. Genzyme Surgical Products may also have to give third parties
rights to commercialize technologies or products that it would otherwise
commercialize itself.
GENZYME TISSUE REPAIR
At March 31, 2000, Genzyme Tissue Repair had cash and cash equivalents of
$8.4 million, a decrease of $0.9 million from December 31, 1999.
During the first quarter of 2000, Genzyme Tissue Repair used $7.1 million
of cash for operations. This is primarily due to Genzyme Tissue Repair's net
loss of $5.0 million during the period.
Genzyme Tissue Repair used $0.1 million for investing activities in the
three months ended March 31, 2000 primarily for the purchase of property,
plant and equipment.
Financing activities provided Genzyme Tissue Repair with $6.3 million of
cash. This includes $5.0 million drawn by Genzyme Tissue Repair under its
interdivisional financing arrangement with Genzyme General and $0.4 million
of cash proceeds allocated to Genzyme Tissue Repair from the issuance of
Tissue Repair Stock under employee stock plans.
In March 2000, we entered into an agreement to acquire Biomatrix, Inc.
Upon the effectiveness of our Registration Statement on Form S-4 and
completion of the merger, we will form a new operating division called
Genzyme Biosurgery and create a new series of common stock that is intended to
reflect its value and track its performance. We refer to this stock as
"Biosurgery Stock." In connection with the merger, and upon Genzyme
shareholder approval, the assets and liabilities allocated to Genzyme
Surgical Products and Genzyme Tissue Repair will be re-allocated to Genzyme
Biosurgery and shares of Surgical Products Stock and Tissue Repair Stock will
be exchanged for Biosurgery Stock. We will account for the acquisition of
BioMatrix as a purchase. We have included more information about the proposed
acquisition of Biomatrix, Inc. and proposed formation of Genzyme Biosurgery
as a new division of Genzyme above under the heading "Liquidity and Capital
Resources - Genzyme Surgical Products," which we incorporate into this
discussion by reference.
Genzyme Tissue Repair, together with our other operating divisions, has
access to our revolving credit facilities. At March 31, 2000, $50.0 million
was available under a facility that matures in November 2000 and $77.0
million was available under a facility that matures in November 2002. At
March 31, 2000, $18.0 million of funds outstanding under our revolving credit
facility were allocated to Genzyme Tissue Repair. We expect to expand our
existing credit facilities and borrow approximately $200 million of cash to
finance the cash portion of the Biomatrix merger consideration. We will
allocate the $200 million of borrowings to Genzyme Biosurgery in connection
with its formation as a separate division of Genzyme. We have included
information about the proposed acquisition of Biomatrix, Inc. and proposed
acquisition of BioMatrix and proposed formation of Genzyme Biosurgery as a
new division of Genzyme under the heading "Liquidity and Capital Resources -
Genzyme Corporation", which we incorporate into this discussion by reference.
At December 31, 1999, $20.0 million of Genzyme General's cash was
available to Genzyme Tissue Repair under its interdivisional financing
arrangement with Genzyme General. In March 2000, Genzyme Tissue Repair made
a $5.0 million draw on this arrangement in exchange for 765,169 Genzyme
Tissue Repair designated shares. For information regarding the determination
of the amount of Genzyme Tissue Repair designated shares authorized in
connection with each draw under this arrangement you should read the section
entitled "Liquidity and Capital Resources -- Genzyme Corporation" above. As
of March 31, 2000, $15.0 million was available to Genzyme Tissue Repair under
this arrangement.
We anticipate that Genzyme Tissue Repair's current cash resources,
together with the $15.0 million that remains available under the interdivisional
financing arrangement from Genzyme General, will be sufficient to fund its
operations through the end of 2000.
Genzyme Tissue Repair's cash needs may differ from those planned as a
result of various factors, including the:
- ability to become profitable;
- ability to satisfy regulatory requirements of the FDA and other
government agencies;
- results of research and development and clinical testing;
-61-
<PAGE>
- enforcement of patent and other intellectual property rights; and
- development of competitive products and services.
In addition, in 1999, Genzyme Tissue Repair received $25.0 million in cash
from Genzyme General in connection with the re-allocation of our interest in
our joint venture with Diacrin, Inc. from Genzyme Tissue Repair to Genzyme
General. In connection with the re-allocation, it was agreed that Genzyme
Tissue Repair would be required to pay to Genzyme General $20.0 million plus
accrued interest at an annual interest rate of 13.5%. In June 2000, our board
of directors extended the milestone timeline to initiate a Phase 3 clinical
trial of NeuroCell-TM- -PD from June 30, 2000 to December 31, 2000. The
milestone date and the related financial obligation were extended to allow
additional time to review data from the current blinded phase 2 clinical
trial. If a phase 3 clinical trial is initiated by December 31, 2000 but
NeuroCell-TM- -PD does not receive marketing approval by June 30, 2004,
Genzyme Tissue Repair will be required to pay Genzyme General $15.0 million
plus accrued interest at an annual rate of 13.5%. Genzyme Tissue Repair may
repay these amounts in cash. Genzyme Tissue Repair designated shares, or a
combination of both, at its option. If these milestones are not achieved, and
Genzyme Tissue Repair elects to pay Genzyme General in Genzyme Tissue Repair
designated shares, this would substantially dilute the rights of the holders
of Tissue Repair Stock and could significantly affect the market price of
Tissue Repair Stock.
Genzyme Tissue Repair will require substantial additional funds in order to
continue operations at current levels beyond 2000. We cannot guarantee that
we will be able to obtain any additional financing for Genzyme Tissue Repair
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, reduce 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 EUROPEAN CURRENCY
Since December 31, 1999, there have been no material changes related to
our outstanding derivatives and forward contracts, or any other material
contracts as a result of the euro conversion, nor have there been any
material changes in our competitive position as a result of the conversion.
We incorporate our disclosure related to the euro conversion 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 1999 Form 10-K by reference into
this discussion.
YEAR 2000
There have been no material changes in our Year 2000 compliance program
or our potential Year 2000 exposures since December 31, 1999. We incorporate
our disclosure related to our Year 2000 compliance program and potential Year
2000 exposures set forth under the heading "Management's Discussion and
Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and
Results of Operations - Year 2000" in Exhibit 13.1 to our 1999 Form 10-K by
reference into this discussion.
MARKET RISK
There have been no material changes in our market risk since December
31, 1999. We incorporate our disclosure related to our market risk 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 l999 Form 10-K by reference into this
discussion.
NEW ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44, "Accounting for Certain Transactions Involving
Stock Compensation--an interpretation of Accounting Principles Board Opinion
No. 25" ("FIN-44"). FIN-44 will be effective on July 1, 2000, but certain
conclusions in FIN-44 cover specific events that occurred after either
December 15, 1998 or January 12, 2000.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101") which summarizes
the staff's view in applying generally accepted accounting principles to
selected revenue recognition issues. SAB 101 will be effective on October 1,
2000.
We are currently evaluating the guidance provided in FIN-44 and SAB 101
and do not expect their application to have a material effect on our
financial statements.
-62-
<PAGE>
We do not expect the application of either FIN-44 or SAB 101 to have a material
effect on our financial statements.
SUBSEQUENT EVENTS
SETTLEMENT OF LAWSUIT
In April, 2000, Genzyme General received net proceeds of approximately
$5.1 million in connection with a settlement of a lawsuit. The lawsuit,
initiated in 1993, pertained to an accidental spill of Ceredase-R- at a fill
facility operated by a contractor to Genzyme General.
GENZYME MOLECULAR ONCOLOGY INTERDIVISIONAL FINANCING ARRANGEMENT
In April 2000, Genzyme Molecular Oncology drew $15.0 million of Genzyme
General's cash under a $30.0 million interdivisional financing arrangement
with Genzyme General in exchange for 676,254 designated shares of Molecular
Oncology Stock. As required by our charter, the draw is priced at the average
closing price of the Molecular Oncology Stock for the 20 trading days
beginning on the thirtieth trading day before the draw. These funds will be
used for Genzyme Molecular Oncology's operating needs.
ADDITIONAL INVESTMENT IN FOCAL, INC.
In April 2000, Focal Inc. exercised its First Option under the stock
purchase agreement between Genzyme and Focal. As required by the terms of
this agreement, Genzyme purchased $5.0 million worth of Focal common stock,
or 614,250 shares at a price of $8.14 per share. We have allocated these
shares to Genzyme Surgical Products. We are committed, at Focal's option, to
make future equity investments of up to $10.0 million subject to certain
conditions.
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,
1999.
We incorporate our disclosure related to market risk 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 1999 Form 10-K by reference into this
discussion.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule for the three month period ended
March 31, 2000 (for EDGAR filing purposes only). Filed herewith.
(b) Reports on Form 8-K
On March 23, 2000, we filed a Current Report on Form 8-K
relating to board authorization of an amendment to our charter
for the purpose of updating the terms of our tracking stock to
include the types of rights and other terms contained in more
recently introduced tracking stocks of other companies.
On March 15, 2000, we filed a Current Report on Form 8-K
relating to the execution of an Agreement and Plan of Merger
pursuant to which we will effect a business combination
through the merger of Biomatrix, Inc. with and into a wholly-
owned subsidiary of Genzyme.
On January 10, 2000, we filed a Current Report on Form 8-K
relating to the conversion of Genzyme Tissue Repair's $13.0
million 5% convertible subordinated note.
-63-
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, MARCH 31, 2000
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENZYME CORPORATION
DATE: May 15, 2000 By: /S/ MICHAEL S. WYZGA
---------------------------
Michael S. Wyzga
Senior Vice President Finance,
Chief Financial Officer,
Corporate Controller and
Chief Accounting Officer
-64-
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
FORM 10-Q, MARCH 31, 2000
EXHIBIT INDEX
27 Financial Data Schedule for the three month period ended
March 31, 2000 (for EDGAR filing purposes only). Filed herewith.
-65-
