-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TBMGp056sFLp5T2+wlvi0Q/MVWB/CUzhv0AykjtyMBGukTXjs5CoQ98J6+Gv1ZfK bNhDMeXxO+W1o91FII69Vw== 0000950135-99-004107.txt : 19990817 0000950135-99-004107.hdr.sgml : 19990817 ACCESSION NUMBER: 0000950135-99-004107 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENZYME CORP CENTRAL INDEX KEY: 0000732485 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 061047163 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-14680 FILM NUMBER: 99692478 BUSINESS ADDRESS: STREET 1: ONE KENDALL SQ CITY: CAMBRIDGE STATE: MA ZIP: 02139 BUSINESS PHONE: 6172527500 MAIL ADDRESS: STREET 1: ONE KENDALL SQUARE CITY: CAMBRIDGE STATE: MA ZIP: 02139 10-Q 1 GENZYME CORPORATION 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 ------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------------- ----------------------- Commission file number 0-14680 ------------------------------------------------------ GENZYME CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) 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 July 31, 1999: Genzyme General Division Common Stock 83,362,170 Genzyme Surgical Products Division Common Stock 14,835,161 Genzyme Tissue Repair Division Common Stock 23,541,737 Genzyme Molecular Oncology Division Common Stock 12,677,390 2 NOTE REGARDING FORWARD-LOOKING STATEMENTS: This report on Form 10-Q for Genzyme Corporation ("Genzyme" or the "Company") contains forward-looking statements concerning, among other things, the Company's expected future revenues, operations and expenditures. All such forward-looking statements are necessarily only estimates of future results and the actual results achieved by the Company may differ materially from these projections due to a number of factors, including: - the Company's ability to successfully complete preclinical and clinical development and obtain timely regulatory approval and adequate patent and other proprietary rights protection of its products and services; - the content and timing of decisions made by the FDA and other agencies regarding the Company's products and services; - the accuracy of the Company's estimates of the size and characteristics of markets to be addressed by the Company's products and services; - market acceptance of the Company's products and services; - the Company's ability to obtain reimbursement for its products and services from third-party payers, where appropriate; - the accuracy of the Company's information concerning the products and resources of competitors and potential competitors; and - the ability of the Company, its subsidiaries, and its significant suppliers, customers and partners to be Year 2000 compliant in a timely manner. For a further description of these risks and uncertainties, see "Factors Affecting Future Operating Results" under the headings: - "Management's Discussion and Analysis of Genzyme General Division's Financial Condition and Results of Operations" and "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operations" in the Genzyme General Annual Report for the fiscal year ended December 31, 1998, set forth in Exhibit 13.1 to Genzyme's Annual Report on Form 10-K, as amended on Form 10-K/A, for the fiscal year ended December 31, 1998 (the "1998 Genzyme 10-K/A"); - "Management's Discussion and Analysis of Genzyme Tissue Repair Division's Financial Condition and Results of Operations" in the Genzyme Tissue Repair Annual Report for the fiscal year ended December 31, 1998, set forth in Exhibit 13.2 to the 1998 Genzyme 10-K/A; and - "Management's Discussion and Analysis of Genzyme Molecular Oncology Division's Financial Condition and Results of Operations" in the Genzyme Molecular Oncology Annual Report for the fiscal year ended December 31, 1998, set forth in Exhibit 13.3 to the 1998 Genzyme 10-K/A. See also "Risks Related to Genzyme Surgical Products" under the heading "Risk Factors Relating to Genzyme Surgical Products Division Common Stock" set forth in Exhibit 99.3 to Genzyme's Current Report on Form 8-K filed with the SEC on June 11, 1999. NOTE REGARDING REFERENCES TO GENZYME DIVISIONS: In this report on Form 10-Q, Genzyme's four operating divisions are referred to as follows: - Genzyme General Division = "Genzyme General" or "GENZ" - Genzyme Tissue Repair Division = "Genzyme Tissue Repair" or "GZTR" - Genzyme Molecular Oncology Division = "Genzyme Molecular Oncology" or "GZMO" - Genzyme Surgical Products Division = "Genzyme Surgical Products" or "GZSP" The series of Genzyme common stock that reflect the value and track the performance of these divisions are referred to by their ticker symbols: - Genzyme General Division Common Stock = "GENZ Stock" - Genzyme Tissue Repair Division Common Stock = "GZTR Stock" - Genzyme Molecular Oncology Division Common Stock = "GZMO Stock" - Genzyme Surgical Products Division Common Stock = "GZSP Stock" -2- 3 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, JUNE 30, 1999 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION PAGE NO. ITEM 1. Financial Statements GENZYME GENERAL Unaudited, Combined Statements of Operations for the Three and Six Months Ended June 30, 1999 and 1998......................... 4 Unaudited, Combined Balance Sheets as of June 30, 1999 and December 31, 1998........................................... 5 Unaudited, Combined Statements of Cash Flows for the Six Months Ended June 30, 1999 and 1998......................... 6 Notes to Unaudited, Combined Financial Statements................. 7 GENZYME SURGICAL PRODUCTS Unaudited, Combined Statements of Operations for the Three and Six Months Ended June 30, 1999 and 1998......................... 10 Unaudited, Combined Balance Sheets as of June 30, 1999 and December 31, 1998........................................... 11 Unaudited, Combined Statements of Cash Flows for the Six Months Ended June 30, 1999 and 1998......................... 12 Notes to Unaudited, Combined Financial Statements................. 13 GENZYME TISSUE REPAIR Unaudited, Combined Statements of Operations for the Three and Six Months Ended June 30, 1999 and 1998......................... 14 Unaudited, Combined Balance Sheets as of June 30, 1999 and December 31, 1998........................................... 15 Unaudited, Combined Statements of Cash Flows for the Six Months Ended June 30, 1999 and 1998......................... 16 Notes to Unaudited, Combined Financial Statements................. 17 GENZYME MOLECULAR ONCOLOGY Unaudited, Combined Statements of Operations for the Three and Six Months Ended June 30, 1999 and 1998......................... 18 Unaudited, Combined Balance Sheets as of June 30, 1999 and December 31, 1998........................................... 19 Unaudited, Combined Statements of Cash Flows for the Six Months Ended June 30, 1999 and 1998......................... 20 Notes to Unaudited, Combined Financial Statements................. 21 GENZYME CORPORATION AND SUBSIDIARIES Unaudited, Consolidated Statements of Operations for the Three and Six Months Ended June 30, 1999 and 1998......................... 22 Unaudited, Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998........................................... 24 Unaudited, Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1999 and 1998......................... 25 Notes to Unaudited, Consolidated Financial Statements............. 26 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 31 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.... 43 PART II. OTHER INFORMATION ITEM 2. Changes in Securities and Use of Proceeds..................... 43 ITEM 4. Submission of Matters to a Vote of Security Holders........... 43 ITEM 6. Exhibits and Reports on Form 8-K ............................. 45 Signatures............................................................. 47 -3- 4
GENZYME GENERAL COMBINED STATEMENTS OF OPERATIONS THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------- ------------------------- (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 1999 1998 - ----------------------------------------------------------- --------- --------- --------- --------- Total revenues....................................................... $154,205 $141,779 $304,971 $271,675 Operating costs and expenses: Cost of products and services sold .............................. 36,169 41,853 72,891 81,607 Selling, general and administrative ............................. 42,333 31,296 78,058 62,459 Research and development ........................................ 24,947 17,316 46,012 32,509 Amortization of intangibles ..................................... 2,017 1,869 4,103 3,637 -------- -------- -------- -------- Total operating costs and expenses ........................ 105,466 92,334 201,064 180,212 -------- -------- -------- -------- Operating income .................................................... 48,739 49,445 103,907 91,463 Other income (expenses): Equity in net loss of unconsolidated affiliates ................. (6,969) (4,059) (14,725) (6,913) Gain on affiliate sale of stock ................................. -- 2,369 606 2,369 Minority interest ............................................... 864 860 1,730 1,724 Gain on sale of investment in equity securities ................. -- -- 1,963 -- Charge for impaired investment .................................. (5,487) -- (5,487) -- Gain on sale of product line.................................... 7,500 -- 7,500 -- Investment income ............................................... 8,820 4,818 16,743 7,686 Interest expense ................................................ (5,137) (3,333) (10,186) (5,304) --------- -------- --------- --------- Total other income (expenses) ............................. (409) 655 (1,856) (438) --------- -------- --------- --------- Income before income taxes .......................................... 48,330 50,100 102,051 91,025 Provision for income taxes .......................................... (20,417) (18,811) (40,633) (34,601) --------- -------- --------- --------- Net income .......................................................... 27,913 31,289 61,418 56,424 Tax benefit allocated from Genzyme Surgical Products ................ 6,525 3,557 10,350 6,837 Tax benefit allocated from Genzyme Tissue Repair .................... 3,412 3,390 7,374 7,796 Tax benefit allocated from Genzyme Molecular Oncology ............... 2,376 2,850 4,310 4,085 --------- -------- --------- --------- Net income attributable to GENZ Stock ............................... $ 40,226 $ 41,086 $ 83,452 $ 75,142 ========= ======== ========= ========= Per GENZ common share: Net income per GENZ common share - basic .......................... $ 0.49 $ 0.52 $ 1.01 $ 0.96 ========= ======== ========= ========= Weighted average shares outstanding ................................. 82,644 78,524 82,301 78,223 ========= ======== ========= ========= Net income per GENZ common share - diluted ........................ $ 0.46 $ 0.50 $ 0.95 $ 0.93 ========= ======== ========= ========= Adjusted weighted average shares outstanding ........................ 92,683 83,454 92,629 81,908 ========= ======== ========= ========= Net income .......................................................... $ 27,913 $ 31,289 $ 61,418 $ 56,424 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments ....................... (4,986) 542 (13,812) (156) Unrealized gains (losses) on securities: Unrealized gains (losses) arising during the period .......... 1,420 (4,970) (889) (3,643) Reclassification adjustment for gains included in net income ............................................. 3,169 -- 1,945 -- --------- -------- --------- --------- Unrealized gains (losses) on securities, net .................... 4,589 (4,970) 1,056 (3,643) --------- -------- --------- --------- Other comprehensive loss ......................................... (397) (4,428) (12,756) (3,799) --------- -------- --------- --------- Comprehensive income.............................................. $ 27,516 $ 26,861 $ 48,662 $ 52,625 ========= ======== ========= =========
The accompanying notes are an integral part of these unaudited, combined financial statements. -4- 5
GENZYME GENERAL COMBINED BALANCE SHEETS JUNE 30, DECEMBER 31, (UNAUDITED, AMOUNTS IN THOUSANDS) 1999 1998 - ------------------------------------------------------------------------ ---------- ------------ ASSETS Current assets: Cash and cash equivalents ........................................... $ 87,427 $ 100,012 Short-term investments .............................................. 250,929 174,421 Accounts receivable, net ............................................ 140,285 137,615 Inventories ......................................................... 80,261 85,162 Prepaid expenses and other current assets ........................... 25,741 27,727 Due from Genzyme Surgical Products .................................. 1,043 -- Due from Genzyme Tissue Repair ...................................... 6,195 548 Due from Genzyme Molecular Oncology ................................. 4,663 4,773 Deferred tax assets - current ....................................... 39,675 39,725 ---------- ---------- Total current assets .............................................. 636,219 569,983 Property, plant and equipment, net ..................................... 359,081 362,743 Long-term investments .................................................. 128,106 281,664 Intangibles, net ....................................................... 81,130 85,851 Deferred tax assets - noncurrent ....................................... 24,168 28,138 Investment in equity securities ........................................ 44,190 51,977 Other noncurrent assets ................................................ 27,327 30,035 ---------- ---------- Total assets ...................................................... $1,300,221 $1,410,391 ========== ========== LIABILITIES AND DIVISION EQUITY Current liabilities: Accounts payable .................................................... $ 15,753 $ 22,324 Accrued expenses .................................................... 73,368 65,643 Income taxes payable ................................................ 18,878 16,532 Deferred revenue .................................................... 1,556 1,231 Current portion of long-term debt and capital lease obligations ..... 83,334 82,568 ---------- ---------- Total current liabilities ......................................... 192,889 188,298 Long-term debt and capital lease obligations ........................... 2,089 3,087 Convertible subordinated notes and debentures .......................... 272,090 271,559 Other .................................................................. 1,649 7,480 ---------- ---------- Total liabilities ................................................. 468,717 470,424 Division equity ........................................................ 831,504 939,967 ---------- ---------- Total liabilities and division equity .............................. $1,300,221 $1,410,391 ========== ==========
The accompanying notes are an integral part of these unaudited, combined financial statements. -5- 6
GENZYME GENERAL COMBINED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED (UNAUDITED, AMOUNTS IN THOUSANDS) JUNE 30, - -------------------------------------------------------------------------------------------------------------------- 1999 1998 ---- ---- OPERATING ACTIVITIES: Net income ........................................................................... $ 61,418 $ 56,424 Reconciliation of net income to net cash provided by (used in) operating activities: Depreciation and amortization ..................................................... 26,829 19,299 Non-cash compensation expense ..................................................... -- 31 Accrued interest/amortization on investments ...................................... (1,357) (2,041) Provision for bad debts ........................................................... 8,125 3,017 Loss on sale of plant and equipment ............................................... 488 -- Equity in net loss of unconsolidated affiliates ................................... 14,725 6,913 Minority interest in net loss of subsidiaries ..................................... (1,730) (1,724) Gain on affiliate sale of stock ................................................... (606) (2,369) Gain on sale of investment in equity securities ................................... (1,963) -- Charge for impaired investment .................................................... 5,487 -- Gain on sale of product line ...................................................... (7,500) -- Other ............................................................................. 376 162 Increase (decrease) in cash from working capital changes: Accounts receivable ............................................................ (13,671) (18,839) Inventories .................................................................... 3,795 4,433 Prepaid expenses and other current assets ...................................... 1,585 (938) Due from Genzyme Surgical Products ............................................. (1,043) -- Due from Genzyme Tissue Repair ................................................. (5,647) (20) Due from Genzyme Molecular Oncology ............................................ 110 (182) Accounts payable, accrued expenses, income taxes payable and deferred revenue ............................................................ 27,620 25,835 --------- -------- Net cash provided by operating activities ...................................... 117,041 90,001 INVESTING ACTIVITIES: Purchases of investments ............................................................. (320,388) (106,047) Sales and maturities of investments................................................... 268,007 40,598 Proceeds from sale of equity investment .............................................. 11,090 -- Acquisitions of property, plant and equipment ........................................ (28,157) (33,168) Sales of property, plant and equipment ............................................... (17) 588 Acquisitions, net of acquired cash and assumed liabilities ........................... -- (8,324) Investment in unconsolidated affiliates .............................................. (100) -- Investments in joint ventures ........................................................ (18,575) (3,707) Repayment of loans by affiliates ..................................................... -- 2,019 Other ................................................................................ 8,983 (433) --------- -------- Net cash used in investing activities .......................................... (79,157) (108,474) FINANCING ACTIVITIES: Proceeds from issuance of common stock ............................................... 31,251 16,656 Proceeds from issuance of debt ....................................................... -- 243,676 Payments of debt and capital lease obligations ....................................... (643) (13,978) Net cash allocated to Genzyme Surgical Products ...................................... (53,163) (16,879) Net cash allocated (to) from Genzyme Tissue Repair ................................... (29,984) 84 Other ................................................................................ 3,934 1,721 --------- -------- Net cash provided by (used in) financing activities ............................ (48,605) 231,280 Effect of exchange rate changes on cash .................................................. (1,864) (1,855) --------- -------- Increase (decrease) in cash and cash equivalents ......................................... (12,585) 210,952 Cash and cash equivalents at beginning of period ......................................... 100,012 65,301 --------- -------- Cash and cash equivalents at end of period................................................ $ 87,427 $276,253 ========= ======== Supplemental disclosure of non-cash transactions: Transfer of cash and investments to GZSP - Note 1
The accompanying notes are an integral part of these unaudited, combined financial statements. -6- 7 GENZYME GENERAL NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION In June 1999, Genzyme created Genzyme Surgical Products from Genzyme's existing surgical products business, which previously operated as a business unit of Genzyme General. On June 28, 1999, Genzyme distributed 0.17901 share of GZSP Stock for each share of GENZ Stock owned on June 14, 1999 and Genzyme General transferred $150.0 million in cash, cash equivalents and investments to GZSP in connection with the creation of GZSP as a separate division of Genzyme. These unaudited, combined financial statements reflect the financial position and results of operations and cash flows of Genzyme General as if GZSP had existed as a separate division and the GZSP Stock had been outstanding for all periods. These unaudited, combined financial statements should be read in conjunction with the financial statements and footnotes for Genzyme included in the 1998 Genzyme 10-K/A and the financial statements and footnotes for Genzyme General included in Genzyme's Current Report on Form 8-K filed with the SEC on June 30, 1999. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted according to the rules and regulations of the SEC. Certain items in the 1998 financial statements have been reclassified to conform with the 1999 presentation. The financial statements for the three and six months ended June 30, 1999 and 1998 are unaudited but include, in management's opinion, all adjustments (consisting only of normally recurring accruals) necessary for a fair presentation of the results for the periods presented. 2. FINANCIAL INFORMATION Financial information specific to Genzyme General is presented in these unaudited, combined financial statements. Financial information relevant to Genzyme, Genzyme General, GZSP, GZTR and GZMO, collectively, are presented in the unaudited, consolidated financial statements of Genzyme (the "Unaudited, Consolidated Financial Statements of Genzyme"). 3. INVENTORIES (IN THOUSANDS)
June 30, 1999 December 31, 1998 ------------- ----------------- Raw materials.............................. $ 27,506 $ 29,497 Work-in-process............................ 34,170 23,359 Finished products.......................... 18,585 32,306 ---------- ---------- Total......................... $ 80,261 $ 85,162 ========= =========
4. REALLOCATION OF JOINT VENTURE INTEREST Diacrin/Genzyme LLC was established as a joint venture between GZTR and Diacrin, Inc. to develop and commercialize products and processes using porcine fetal cells for the treatment of Parkinson's disease and Huntington's disease in humans. On May 26, 1999, the holders of GZTR Stock approved the reallocation of Genzyme's interest in Diacrin/Genzyme LLC from GZTR to Genzyme General in exchange for $25.0 million of cash and a 3% worldwide royalty on any products sold by Diacrin/Genzyme LLC. In connection with this transfer, Genzyme General paid GZTR $25.0 million in cash and the funds available under GZTR's equity line of credit from Genzyme General (the "GZTR Equity Line") were reduced to $20.0 million from $45.0 million. Of the $25.0 million in cash paid to GZTR, $5.0 million is non-refundable and $20.0 million is subject to the successful achievement of certain future milestones by Diacrin/Genzyme LLC. If the milestones are not met, GZTR is required to repay Genzyme General for the advanced milestone funds plus interest in cash, GZTR Designated Shares, or a combination of both, at GZTR's option. GZTR Designated Shares are shares of GZTR Stock that are not issued and outstanding, but which Genzyme's board of directors may from time to time issue, sell or otherwise distribute without allocating the proceeds to GZTR. 5. CHARGE FOR IMPAIRED INVESTMENT In June 1999, Genzyme General recorded a charge for an impaired investment of $5.5 million related to a strategic investment in a company whose common stock price decline was considered "other than temporary." -7- 8 GENZYME GENERAL NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS 7. GAIN ON SALE OF PRODUCT LINE In April 1999, Genzyme General received approximately $8.3 million ($8.0 million in principal and $0.3 million in interest) and recorded a gain of approximately $7.5 million in connection with a note receivable that was previously fully reserved due to uncertainty surrounding collection. Genzyme received this note in partial consideration for the sale of Genetic Design, Inc. in 1996. 8. NET INCOME PER SHARE The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
Three Months Ended Six Months Ended June 30, June 30, ----------------------- ----------------------- 1999 1998 1999 1998 ------- ------- ------- ------- Net income - basic ........................................ $40,226 $41,086 $83,452 $75,142 Effect of dilutive securities (net of tax): Genzyme's 5 1/4% convertible subordinated notes due June 2005 (the "GENZ Notes"): Interest expense ...................................... 1,903 885 3,949 904 Amortization of purchaser's discount and offering costs (1) ................................ 136 61 282 62 Genzyme's 5% convertible subordinated debentures due August 2003 (the "GENZ Debentures"): Interest expense ...................................... 154 -- 319 -- Amortization of debt offering costs (2) ............... 25 -- 53 -- ------- ------- ------- ------- Net income - diluted ...................................... $42,444 $42,032 $88,055 $76,108 ======= ======= ======= ======= Shares used in net income per common share-basic .......... 82,644 78,524 82,301 78,223 Effect of dilutive securities: Employee and director stock options ................... 3,071 2,152 3,356 2,291 Warrants .............................................. 25 3 29 6 GENZ Notes (3) ........................................ 6,313 2,775 6,313 1,388 GENZ Debentures (3) ................................... 630 -- 630 -- ------- ------- ------- ------- Dilutive potential common shares (4) .................... 10,039 4,930 10,328 3,685 ------- ------- ------- ------- Shares used in net income per common share-diluted (4) .... 92,683 83,454 92,629 81,908 ======= ======= ======= ======= Net income per common share - basic ....................... $ 0.49 $ 0.52 $ 1.01 $ 0.96 ======= ======= ======= ======= Net income per common share - diluted (4) ................. $ 0.46 $ 0.50 $ 0.95 $ 0.93 ======= ======= ======= =======
(1) The purchaser's discount and offering costs of approximately $7.0 million are being amortized over the term of the GENZ Notes, which mature in June 2005. (2) The offering costs of approximately $0.9 million are being amortized over the term of the GENZ Debentures, which mature in August 2003. (3) The GENZ Notes were issued in May 1998 and the GENZ Debentures were issued in August 1998. (4) Certain securities were not included in the computation of Genzyme General's diluted earnings per share for the three and six months ended June 30, 1999 and 1998 because each such securities had an exercise price greater than the average market price of GENZ Stock during each respective period. Such securities include:
Three Months Ended Six Months Ended (Amounts in Thousands) June 30, June 30, - ---------------------------------------------------------------------------------------------------------------------- 1999 1998 1999 1998 ----- ------ ----- ------ Shares of GENZ Stock issuable for options ................. 1,801 3,830 1,591 3,845 Shares of GENZ Stock issuable for warrants ................ -- 80 -- 80 ----- ------ ----- ------ Total shares with exercise prices greater than the average market price of GENZ Stock during the period .. 1,801 3,910 1,591 3,925 ===== ====== ===== ======
-8- 9 GENZYME GENERAL NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS 8. SEGMENT INFORMATION Genzyme General's reportable segments are strategic business units that offer different products and services. Genzyme General has two reportable segments: -- the Therapeutics business unit, which develops, manufactures and distributes human therapeutic products for significant unmet medical needs. The business derives substantially all of its revenue from Cerezyme[R] enzyme and Ceredase[R] enzyme sales. -- the Diagnostic Products business unit, which provides diagnostic products to niche markets focusing on in vitro diagnostics. Information concerning the operations in these reportable segments is as follows (amounts in thousands): Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 1999 1998 1999 1998 -------- -------- -------- -------- Revenues: Therapeutics $119,233 $ 98,601 $234,264 $192,123 Diagnostic Products 14,955 17,235 29,647 33,952 Other 19,455 24,876 39,910 43,480 Eliminations/Adjustments 562 1,067 1,150 2,120 -------- -------- -------- -------- Total $154,205 $141,779 $304,971 $271,675 ======== ======== ======== ======== Net Income: Therapeutics $ 29,553 $ 31,327 $ 63,423 $ 60,249 Diagnostic Products 1,071 503 2,200 587 Other 454 (737) (1,328) (2,257) Eliminations/Adjustments (3,165) 196 (2,877) (2,155) -------- -------- -------- -------- Total $ 27,913 $ 31,289 $ 61,418 $ 56,424 ======== ======== ======== ======== There has been no material change in segment assets since December 31, 1998. 9. SUBSEQUENT EVENTS The disclosures related to the sale of Genzyme General's immunochemistry product lines to Alexon-Trend, Inc., the acquisition of Peptimmune Inc. and the additional equity investment in BioMarin Pharmaceutical, Inc. are included in Note 9., "Subsequent Events" to the Unaudited, Consolidated Financial Statements of Genzyme, which is incorporated herein by reference. -9- 10
GENZYME SURGICAL PRODUCTS COMBINED STATEMENTS OF OPERATIONS Three Months Ended Six Months Ended June 30, June 30, ------------------------ ------------------------ (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 1999 1998 - -------------------------------------------------------------------- -------- -------- -------- -------- Total revenues ..................................................... $ 26,681 $ 27,201 $ 54,034 $ 51,428 Operating costs and expenses: Cost of products sold .......................................... 17,439 15,259 33,283 29,982 Selling, general and administrative ............................ 16,492 16,601 31,779 30,549 Research and development ....................................... 8,983 3,788 14,585 7,013 Amortization of intangibles .................................... 1,444 1,431 2,861 2,862 -------- -------- -------- -------- Total operating costs and expenses ....................... 44,358 37,079 82,508 70,406 -------- -------- -------- -------- Operating loss ..................................................... (17,677) (9,878) (28,474) (18,978) Other income (expenses): Equity in net loss of unconsolidated affiliates ................ -- (18) -- (29) Other .......................................................... (3) (10) 43 (50) Interest income ................................................ 56 38 63 90 Interest expense ............................................... (34) (18) (35) (37) -------- -------- -------- -------- Total other income (expenses) ............................ 19 (8) 71 (26) -------- -------- -------- -------- Net loss attributable to GZSP Stock ................................ $(17,658) $ (9,886) $(28,403) $(19,004) ======== ======== ======== ======== Pro forma net loss per GZSP common share (basic and diluted) ....... $ (1.19) $ (0.67) $ (1.92) $ (1.28) ======== ======== ======== ======== Pro forma shares outstanding ....................................... 14,800 14,800 14,800 14,800 ======== ======== ======== ======== Net loss ........................................................... $(17,658) $ (9,886) $(28,403) $(19,004) Other comprehensive income (loss), net of tax: Unrealized gains (losses) on securities: Unrealized gains (losses) arising during the period ......... (628) -- (628) -- -------- -------- -------- -------- Other comprehensive loss ........................................ (628) -- (628) -- -------- -------- -------- -------- Comprehensive loss .............................................. $(18,286) $ (9,886) $(29,031) $(19,004) ======== ======== ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. -10- 11
GENZYME SURGICAL PRODUCTS COMBINED BALANCE SHEETS June 30, December 31, (UNAUDITED, AMOUNTS IN THOUSANDS) 1999 1998 - --------------------------------------------------------------- -------- -------- ASSETS Current assets: Cash and cash equivalents .................................. $ 26,005 $ -- Short-term investments ..................................... 48,322 -- Accounts receivable, net ................................... 16,561 15,663 Inventories ................................................ 29,903 22,026 Prepaid expenses and other current assets .................. 462 1,932 -------- -------- Total current assets ..................................... 121,253 39,621 Property, plant and equipment, net ............................ 16,790 16,249 Long-term investments ......................................... 78,342 -- Intangibles, net .............................................. 175,036 177,897 Other noncurrent assets ....................................... 307 449 -------- -------- Total assets ............................................. $391,728 $234,216 ======== ======== LIABILITIES AND DIVISION EQUITY Current liabilities: Accounts payable ........................................... $ 5,603 $ 3,925 Accrued expenses ........................................... 6,349 2,982 Due to Genzyme General ..................................... 1,043 -- -------- -------- Total current liabilities ................................ 12,995 6,907 Other noncurrent liabilities .................................. 221 221 -------- -------- Total liabilities ........................................ 13,216 7,128 Division equity ............................................... 378,512 227,088 -------- -------- Total liabilities and division equity .................... $391,728 $234,216 ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. -11- 12
GENZYME SURGICAL PRODUCTS COMBINED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED (UNAUDITED, AMOUNTS IN THOUSANDS) JUNE 30, - ------------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: 1999 1998 ---------- --------- Net loss ......................................................................... $ (28,403) $(19,004) Reconciliation of net loss to net cash provided by (used in) operating activities: Depreciation and amortization ................................................. 3,967 4,052 Provision for bad debts and inventory ......................................... 1,611 119 Equity in net loss of unconsolidated affiliate ................................ -- 79 Increase (decrease) in cash from working capital changes: Accounts receivable ........................................................ (1,073) (3,441) Inventories ................................................................ (9,313) 183 Prepaid expenses and other assets .......................................... 1,470 (949) Due to Genzyme General ..................................................... 1,043 -- Accounts payable and accrued expenses ...................................... 5,045 2,994 --------- -------- Net cash used in operating activities ................................... (25,653) (15,967) INVESTING ACTIVITIES: Acquisitions of property, plant and equipment .................................... (1,646) (870) Other ............................................................................ 141 (69) --------- -------- Net cash used in investing activities ...................................... (1,505) (939) FINANCING ACTIVITIES: Net cash allocated from Genzyme General .......................................... 53,163 16,879 Payments of debt and capital lease obligations ................................... -- (90) Other ............................................................................ -- (351) --------- -------- Net cash provided by financing activities .................................. 53,163 16,438 Increase (decrease) in cash and cash equivalents ..................................... 26,005 (468) Cash and cash equivalents at beginning of period ..................................... -- 975 --------- -------- Cash and cash equivalents at end of period ........................................... $ 26,005 $ 507 ========= ======== Supplemental disclosure of non-cash transactions: Transfer of cash and investments from Genzyme General - Note 1
The accompanying notes are an integral part of these unaudited, combined financial statements. -12- 13 GENZYME SURGICAL PRODUCTS NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION In June 1999, Genzyme created Genzyme Surgical Products from Genzyme's existing surgical products business, which previously operated as a business unit of Genzyme General. GZSP primarily consists of the products and assets of Genzyme acquired upon the purchase of Deknatel Snowden Pencer, Inc. ("DSP") in 1996, Genzyme's portfolio of hyaluronic acid-based products and product candidates (the "Sepra Products"), and Genzyme's research and development programs in gene and cell therapy for cardiovascular disease. On June 28, 1999, Genzyme distributed 0.17901 share of GZSP Stock for each share of GENZ Stock owned on June 14, 1999. Approximately 14.8 million shares of GZSP Stock were distributed. On June 28, 1999, Genzyme General transferred $150.0 million in cash, cash equivalents and investments to GZSP in connection with the creation of GZSP as a separate division of Genzyme. These unaudited, combined financial statements should be read in conjunction with the financial statements and footnotes for Genzyme included in the 1998 Genzyme 10-K/A and the financial statements and footnotes for Genzyme Surgical Products included in Genzyme's Current Report on Form 8-K filed with the SEC on June 11, 1999. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted according to the rules and regulations of the SEC. Certain items in the 1998 financial statements have been reclassified to conform with the 1999 presentation. The financial statements for the three and six months ended June 30, 1999 and 1998 are unaudited but include, in management's opinion, all adjustments (consisting only of normally recurring accruals) necessary for a fair presentation of the results for the periods presented. 2. FINANCIAL INFORMATION Financial information specific to GZSP is presented in these unaudited, combined financial statements. Accounting policies and financial information relevant to Genzyme, Genzyme General, GZSP, GZTR and GZMO, collectively, are presented in the Unaudited Consolidated Financial Statements of Genzyme. 3. INVENTORIES (IN THOUSANDS)
JUNE 30, 1999 DECEMBER 31, 1998 ------------- ----------------- Raw materials................................... $ 9,710 $ 11,567 Work-in-process................................. 1,572 1,734 Finished products............................... 18,621 8,725 ---------- ---------- Total.............................. $ 29,903 $ 22,026 ========= ========
4. NET INCOME (LOSS) PER SHARE Note 7., "Net Income (Loss) Per Share" to the Unaudited, Consolidated Financial Statements of Genzyme is incorporated herein by reference. 5. SEGMENT INFORMATION GZSP has two reportable segments: the Cardiovascular Surgery product line, which includes chest drainage systems, instruments and closures which are used primarily in coronary artery bypass, valve replacement and other cardiothoracic procedures; and the General Surgery product line, which includes surgical instruments and Seprafilm[R] Bioresorbable Membrane, which is used to reduce the incidence and extent of post- surgical adhesions in abdominal or pelvic surgery. Information concerning the operations in these reportable segments is as follows (in thousands):
FOR THE THREE FOR THE SIX MONTHS ENDING MONTHS ENDING JUNE 30, JUNE 30, ----------------------- ----------------------- 1999 1998 1999 1998 --------- ---------- --------- --------- REVENUE: Cardiovascular Surgery ........... $18,047 $18,553 $37,433 $36,928 General Surgery ..... 6,238 5,954 12,135 9,771 Other................ 2,396 2,694 4,466 4,729 ------- ------- ------- ------- Total ........... $26,681 $27,201 $54,034 $51,428 ======= ======= ======= ======= GROSS PROFIT: Cardiovascular Surgery ........... $ 6,556 $ 8,447 $15,025 $17,027 General Surgery ..... 2,046 2,492 4,449 2,518 Other ............... 640 1,003 1,277 1,901 ------- ------- ------- ------- Total ........... $ 9,242 $11,942 $20,751 $21,446 ======= ======= ======= =======
There has been no material change in segment assets since December 31, 1998. -13- 14
GENZYME TISSUE REPAIR COMBINED STATEMENTS OF OPERATIONS THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------ (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 1999 1998 - -------------------------------------------------------------------- -------- -------- -------- -------- Total revenues ..................................................... $ 4,665 $ 4,345 $ 8,688 $ 7,956 Operating costs and expenses: Cost of services sold .......................................... 3,221 3,776 6,219 7,010 Selling, general and administrative ............................ 6,115 6,007 12,429 12,320 Research and development ....................................... 2,003 2,832 3,971 5,918 -------- -------- -------- -------- Total operating costs and expenses: .......................... 11,339 12,615 22,619 25,248 -------- -------- -------- -------- Operating loss ..................................................... (6,674) (8,270) (13,931) (17,292) Other income (expenses): Equity in net loss of joint venture ............................ (1,361) (1,697) (3,368) (3,628) Interest income ................................................ 72 227 165 674 Interest expense ............................................... (419) (715) (864) (1,529) -------- -------- -------- -------- Total other income (expenses) ................................ (1,708) (2,185) (4,067) (4,483) -------- -------- -------- -------- Net loss attributable to GZTR Stock ................................ $ (8,382) $(10,455) $(17,998) $(21,775) ======== ======== ======== ======== Per GZTR common share (basic and diluted) .......................... $ (0.37) $ (0.52) $ (0.81) $ (1.08) ======== ======== ======== ======== Weighted average shares outstanding ................................ 22,764 20,159 22,355 20,080 ======== ======== ======== ======== Net loss ........................................................... $ (8,382) $(10,455) $(17,998) $(21,775) Other comprehensive income (loss), net of tax: Unrealized gains (losses) on securities arising during the period ................................................. -- 7 -- 7 -------- -------- -------- -------- Comprehensive loss .............................................. $ (8,382) $(10,448) $(17,998) $(21,768) ======== ======== ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. -14- 15
GENZYME TISSUE REPAIR COMBINED BALANCE SHEETS JUNE 30, DECEMBER 31, (UNAUDITED, AMOUNTS IN THOUSANDS) 1999 1998 - ------------------------------------------------------------------- -------- ------------ ASSETS Current assets: Cash and cash equivalents ...................................... $25,323 $ 7,732 Accounts receivable, net ....................................... 4,041 3,833 Inventories .................................................... 2,658 2,645 Other current assets ........................................... 911 1,723 ------- -------- Total current assets ......................................... 32,933 15,933 Property, plant and equipment, net ................................ 2,822 2,836 Other noncurrent assets ........................................... 120 185 ------- -------- Total assets ................................................. $35,875 $ 18,954 ======= ======== LIABILITIES AND DIVISION EQUITY Current liabilities: Accounts payable ............................................... $ 608 $ 1,355 Accrued expenses ............................................... 2,528 2,491 Due to Genzyme General ......................................... 6,195 548 Current portion of long-term debt .............................. 25,391 18,000 ------- -------- Total current liabilities .................................... 34,722 22,394 Convertible note, net ............................................. -- 12,579 Other noncurrent liabilities ...................................... 302 377 ------- -------- Total liabilities ............................................ 35,024 35,350 Division equity ................................................... 851 (16,396) ------- -------- Total liabilities and division equity ........................ $35,875 $ 18,954 ======= ========
The accompanying notes are an integral part of these unaudited, combined financial statements. -15- 16
GENZYME TISSUE REPAIR COMBINED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED (UNAUDITED, AMOUNTS IN THOUSANDS) JUNE 30, - ------------------------------------------------------------------------------------------------------------------- 1999 1998 -------- --------- OPERATING ACTIVITIES: Net loss........................................................................ $ (17,998) $ (21,775) Reconciliation of net loss to net cash provided by (used in) operating activities: Depreciation and amortization................................................. 682 1,147 Non-cash compensation expense................................................. -- 77 Provision for bad debts....................................................... -- 257 Accretion of debt discount.................................................... -- 536 Accrued interest/amortization on bonds........................................ -- 136 Equity in net loss of joint venture........................................... 3,368 3,628 Increase (decrease) in cash from working capital: Accounts receivable......................................................... (208) (965) Inventories................................................................. (13) (326) Prepaid expenses and other.................................................. 739 (453) Accounts payable and accrued expenses....................................... (484) 253 Due to Genzyme General...................................................... 5,647 20 --------- --------- Net cash used in operating activities..................................... (8,267) (17,465) INVESTING ACTIVITIES: Investment in joint venture..................................................... (3,594) (3,417) Sales and maturities of investments............................................. -- 7,539 Purchase of property, plant and equipment....................................... (564) (108) Sale of property, plant and equipment........................................... -- 16,535 Other........................................................................... 34 12 --------- --------- Net cash provided by (used in) investing activities....................... (4,124) 20,561 FINANCING ACTIVITIES: Proceeds from issuance of common stock, net..................................... 221 1,347 Payments of debt and capital lease obligations.................................. (148) -- Cash allocated (to) from Genzyme General........................................ 29,984 (84) Other........................................................................... (75) (75) --------- --------- Net cash provided by financing activities................................. 29,982 1,188 --------- --------- Increase in cash and cash equivalents.............................................. 17,591 4,284 Cash and cash equivalents at beginning of period................................... 7,732 21,120 --------- --------- Cash and cash equivalents at end of period......................................... $ 25,323 $ 25,404 ========= ========= Supplemental disclosure of non-cash activity: Debt conversions -- Note 4
The accompanying notes are an integral part of these unaudited, combined financial statements. -16- 17 GENZYME TISSUE REPAIR NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION These unaudited, combined financial statements should be read in conjunction with the 1998 Genzyme 10-K/A and the financial statements and footnotes for both GZTR and Genzyme included therein. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the SEC. Certain items in the 1998 financial statements have been reclassified to conform with the 1999 presentation. The financial statements for the three and six months ended June 30, 1999 and 1998 are unaudited but include, in management's opinion, all adjustments (consisting only of normally recurring accruals) necessary for a fair presentation of the results for the periods presented. 2. FINANCIAL INFORMATION Financial information specific to GZTR is presented in these unaudited, combined financial statements. Financial information relevant to Genzyme, Genzyme General, GZSP, GZTR and GZMO, collectively, are presented in the Unaudited, Consolidated Financial Statements of Genzyme. 3. INVENTORIES (IN THOUSANDS)
June 30, 1999 December 31, 1998 ------------- ----------------- Raw materials................................... $ 263 $ 264 Work-in-process................................. 2,395 2,381 --------- --------- Total.............................. $ 2,658 $ 2,645 ======== ========
4. DEBT CONVERSIONS In the first two quarters of 1999, the holder of Genzyme's 5% convertible subordinated note due February 2000 (the "GZTR Note") converted an aggregate of $5,040,000 in principal amount in exchange for a total of 2,445,014 shares of GZTR Stock. GZTR paid approximately $306,000 of accrued interest to the holder in connection with these conversions. 5. REALLOCATION OF JOINT VENTURE INTEREST Diacrin/Genzyme LLC was established as a joint venture between GZTR and Diacrin, Inc. to develop and commercialize products and processes using porcine fetal cells for the treatment of Parkinson's disease and Huntington's disease in humans. On May 26, 1999, the holders of GZTR Stock approved the reallocation of Genzyme's interest in Diacrin/Genzyme LLC from GZTR to Genzyme General in exchange for $25.0 million of cash and a 3% worldwide royalty on any products sold by Diacrin/Genzyme LLC. In connection with this transfer, GZTR received $25.0 million in cash from Genzyme General and the funds available under the GZTR Equity Line were reduced to $20.0 million from $45.0 million. Of the $25.0 million in cash paid to GZTR, $5.0 million is non-refundable and $20.0 million is subject to the successful achievement of certain future milestones by Diacrin/Genzyme LLC. If the milestones are not met, GZTR is required to repay Genzyme General for the advanced milestone funds plus interest in cash, GZTR Designated Shares, or a combination of both, at GZTR's option. GZTR recorded its portion of the net losses of Diacrin/Genzyme LLC through May 26, 1999. 6. NET INCOME (LOSS) PER SHARE Note 7., "Net Income (Loss) Per Share" to the Unaudited, Consolidated Financial Statements of Genzyme is incorporated herein by reference. 7. SUBSEQUENT EVENT In July and August 1999, the holder of the GZTR Note converted a total of $810,000 in principal amount in exchange for 466,357 shares of GZTR Stock. GZTR paid approximately $67,000 of accrued interest to the holder in connection with these conversions. -17- 18
GENZYME MOLECULAR ONCOLOGY COMBINED STATEMENTS OF OPERATIONS THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------ (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 1999 1998 - -------------------------------------------------------------------- -------- -------- -------- -------- Total revenues ...................................................... $ 1,133 $ 1,689 $ 2,746 $ 4,506 Operating costs and expenses: Cost of revenues ................................................ 372 1,102 1,012 2,323 Selling, general and administrative ............................. 1,418 2,003 3,037 3,155 Research and development ........................................ 4,728 2,228 8,633 5,523 Amortization of intangibles ..................................... 2,957 3,045 5,913 6,070 -------- ------- -------- -------- Total operating costs and expenses ............................ 9,475 8,378 18,595 17,071 -------- ------- -------- -------- Operating loss ...................................................... (8,342) (6,689) (15,849) (12,565) Other income (expenses): Equity in net loss of joint venture ............................. (632) (534) (1,007) (978) Interest income ................................................. 154 204 317 484 Interest expense ................................................ -- (1,090) (3) (2,252) -------- ------- -------- -------- Total other income (expenses) ................................. (478) (1,420) (693) (2,746) -------- ------- -------- -------- Loss before income taxes ............................................ (8,820) (8,109) (16,542) (15,311) Tax benefit ......................................................... 662 662 1,324 1,324 -------- ------- -------- -------- Net loss attributable to GZMO Stock ................................. $ (8,158) $(7,447) $(15,218) $(13,987) ======== ======= ======== ======== Per GZMO common share (basic and diluted) ........................... $ (0.64) $ (1.90) $ (1.20) $ (3.56) ======== ======= ======== ======== Weighted average shares outstanding ................................. 12,676 3,929 12,667 3,929 ======== ======= ======== ======== Net loss ............................................................ $ (8,158) $(7,447) $(15,218) $(13,987) Other comprehensive income (loss), net of tax: Unrealized gains (losses) on securities arising during the period ................................................. -- 2 -- 7 -------- ------- -------- -------- Comprehensive loss ............................................... $ (8,158) $(7,445) $(15,218) $(13,980) ======== ======= ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. -18- 19
GENZYME MOLECULAR ONCOLOGY COMBINED BALANCE SHEETS JUNE 30, DECEMBER 31, (UNAUDITED, AMOUNTS IN THOUSANDS) 1999 1998 - ------------------------------------------------------------------- ------- -------- ASSETS Current assets: Cash and cash equivalents ....................................... $ 7,314 $10,868 Short term investments .......................................... -- 1,032 Accounts receivable, net ........................................ 256 5,931 Other current assets ............................................ 172 85 ------- ------- Total current assets .......................................... 7,742 17,916 Equipment, net ..................................................... 688 791 Intangibles, net ................................................... 11,332 17,245 ------- ------- Total assets .................................................. $19,762 $35,952 ======= ======= LIABILITIES AND DIVISION EQUITY Current liabilities: Accrued expenses ................................................ $ 1,185 $ 1,273 Due to Genzyme General .......................................... 4,663 4,773 Payable to joint venture ........................................ 2,188 1,181 Deferred revenue ................................................ 1,035 1,500 ------- ------- Total current liabilities ..................................... 9,071 8,727 Deferred tax liability ............................................. 2,537 3,861 ------- ------- Total liabilities ............................................. 11,608 12,588 Division equity .................................................... 8,154 23,364 ------- ------- Total liabilities and division equity ......................... $19,762 $35,952 ======= =======
The accompanying notes are an integral part of these unaudited, combined financial statements. -19- 20
GENZYME MOLECULAR ONCOLOGY COMBINED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED (UNAUDITED, AMOUNTS IN THOUSANDS) JUNE 30, - -------------------------------------------------------------------------------------------------------------- 1999 1998 -------- -------- OPERATING ACTIVITIES: Net loss .................................................................. $(15,218) $(13,987) Reconciliation of net loss to net cash provided by (used in) operating activities: Depreciation and amortization ........................................... 6,059 6,280 Deferred tax benefit .................................................... (1,324) (1,324) Accretion of debt conversion feature .................................... -- 1,412 Equity in loss of joint venture ......................................... 1,007 978 Accrued interest/amortization of marketable securities .................. 10 87 Non-cash compensation expense ........................................... 10 57 Non-cash purchase price adjustments ..................................... -- 747 Increase (decrease) in cash from working capital: Accounts receivable ................................................... 5,675 (58) Other current assets .................................................. (172) (3) Accrued expenses, deferred revenue and payable to joint venture........ (468) (309) Due to Genzyme General ................................................ (110) 182 -------- -------- Net cash used in operating activities ............................... (4,531) (5,938) INVESTING ACTIVITIES: Purchases of investments .................................................. -- (2,057) Maturities of investments ................................................. 1,022 2,539 Acquisitions of equipment ................................................. (43) (502) -------- -------- Net cash provided by (used in) investing activities ................. 979 (20) FINANCING ACTIVITIES: Repayments of debt ........................................................ -- (5,018) Other ..................................................................... (2) 98 -------- -------- Net cash used in financing activities ............................... (2) (4,920) -------- -------- Decrease in cash and cash equivalents ........................................ (3,554) (10,878) Cash and cash equivalents at beginning of period ............................. 10,868 15,010 -------- -------- Cash and cash equivalents at end of period ................................... $ 7,314 $ 4,132 ======== ========
The accompanying notes are an integral part of these unaudited, combined financial statements. -20- 21 GENZYME MOLECULAR ONCOLOGY NOTES TO UNAUDITED, COMBINED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION These unaudited, combined financial statements should be read in conjunction with the 1998 Genzyme 10-K/A and the financial statements and footnotes for both GZMO and Genzyme included therein. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the SEC. Certain items in the 1998 financial statements have been reclassified to conform with the 1999 presentation. The financial statements for the three and six months ended June 30, 1999 and 1998 are unaudited but include, in management's opinion, all adjustments (consisting only of normally recurring accruals) necessary for a fair presentation of the results for the periods presented. 2. FINANCIAL INFORMATION Financial information specific to GZMO is presented in these unaudited, combined financial statements. Financial information relevant to Genzyme, Genzyme General, GZSP, GZTR and GZMO, collectively, are presented in the Unaudited, Consolidated Financial Statements of Genzyme. 3. PAYABLE TO JOINT VENTURE Pursuant to the funding commitment provided in the Collaboration Agreement related to StressGen/Genzyme LLC, the joint venture between Genzyme, StressGen Biotechnologies Corporation ("StressGen") and the Canadian Medical Discoveries Fund, Inc. ("CMDF"), Genzyme and StressGen are obligated to fund the operations of StressGen/Genzyme LLC in equal portions after the initial $10.0 million (Canadian) of funding of StressGen/Genzyme LLC has been expended. Because CMDF has the right to require Genzyme and StressGen to repurchase CMDF's membership interest, GZMO records 50% of the losses incurred by StressGen/Genzyme LLC. As of June 30, 1999 and December 31, 1998, GZMO's portion of the cumulative losses of StressGen/Genzyme LLC exceeded its initial capital contribution of $0.7 million and, as a result, GZMO has recorded $2.3 million and $1.2 million, respectively, as current liabilities due to the joint venture. 4. NET INCOME (LOSS) PER SHARE Note 7., "Net Income (Loss) Per Share" to the Unaudited, Consolidated Financial Statements of Genzyme is incorporated herein by reference. -21- 22
GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------------- --------------------------- (UNAUDITED, AMOUNTS IN THOUSANDS,) 1999 1998 1999 1998 - ------------------------------------------------------------ --------- --------- --------- --------- Revenues: Net product sales ....................................... $ 165,873 $ 153,807 $ 329,575 $ 293,177 Net service sales ....................................... 19,799 18,627 38,529 36,871 Revenues from research and development contracts ........ 1,012 2,440 2,324 5,377 --------- --------- --------- --------- Total revenues ........................................ 186,684 174,874 370,428 335,425 Operating costs and expenses: Cost of products sold .................................. 44,575 48,573 88,386 94,923 Cost of services sold .................................. 12,414 12,425 24,502 24,255 Selling, general and administrative .................... 66,358 55,907 125,303 108,483 Research and development ............................... 40,873 27,016 73,707 52,567 Amortization of intangibles ............................ 6,166 6,093 12,373 12,065 --------- --------- --------- --------- Total operating costs and expenses ............... 170,386 150,014 324,271 292,293 --------- --------- --------- --------- Operating income ........................................... 16,298 24,860 46,157 43,132 Other income (expenses): Equity in net loss of unconsolidated affiliates ........ (8,962) (6,318) (19,100) (11,598) Gain on affiliate sale of stock ........................ -- 2,369 606 2,369 Minority interest ...................................... 864 860 1,730 1,724 Gain on sale of investment ............................. -- -- 1,963 -- Charge for impaired investment ......................... (5,487) -- (5,487) -- Gain on sale of product line and other ................. 7,497 -- 7,543 -- Investment income ...................................... 9,102 5,287 17,288 8,934 Interest expense ....................................... (5,590) (5,156) (11,088) (9,122) --------- --------- --------- --------- Total other income (expenses) .................... (2,576) (2,958) (6,545) (7,693) --------- --------- --------- --------- Income before income taxes ................................. 13,722 21,902 39,612 35,439 Provision for income taxes ................................. (7,431) (8,806) (17,264) (14,559) --------- --------- --------- --------- Net income ................................................. $ 6,291 $ 13,096 $ 22,348 $ 20,880 ========= ========= ========= =========
The accompanying notes are an integral part of these unaudited, combined financial statements. -22- 23
GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------ (UNAUDITED, AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 1999 1998 - -------------------------------------------------------------------- -------- -------- -------- -------- Attributable to Genzyme General: Net income ...................................................... $ 27,913 $ 31,289 $ 61,418 $ 56,424 Tax benefit allocated from Genzyme Surgical Products ............ 6,525 3,557 10,350 6,837 Tax benefit allocated from Genzyme Tissue Repair ................ 3,412 3,390 7,374 7,796 Tax benefit allocated from Genzyme Molecular Oncology ........... 2,376 2,850 4,310 4,085 -------- -------- -------- -------- Net income attributable to GENZ Stock ........................... $ 40,226 $ 41,086 $ 83,452 $ 75,142 ======== ======== ======== ======== Per GENZ common share: Net income per GENZ common share - basic ..................... $ 0.49 $ 0.52 $ 1.01 $ 0.96 ======== ======== ======== ======== Weighted average shares outstanding .............................. 82,644 78,524 82,301 78,223 ======== ======== ======== ======== Net income per GENZ common and common equivalent share - diluted ................................... $ 0.46 $ 0.50 $ 0.95 $ 0.93 ======== ======== ======== ======== Adjusted weighted average shares outstanding .................... 92,683 83,454 92,629 81,908 ======== ======== ======== ======== Attributable to Genzyme Surgical Products: Net loss attributable to GZSP Stock ............................. $(17,658) $ (9,886) $(28,403) $(19,004) ======== ======== ======== ======== Per GZSP basic and diluted common share: Pro forma net loss ............................................ $ (1.19) $ (0.67) $ (1.92) $ (1.28) ======== ======== ======== ======== Pro forma weighted average shares outstanding ................... 14,800 14,800 14,800 14,800 ======== ======== ======== ======== Attributable to Genzyme Tissue Repair: Net loss attributable to GZTR Stock ............................. $ (8,382) $(10,455) $(17,998) $(21,775) ======== ======== ======== ======== Per GZTR basic and diluted common share: Net loss ...................................................... $ (0.37) $ (0.52) $ (0.81) $ (1.08) ======== ======== ======== ======== Weighted average shares outstanding ............................. 22,764 20,159 22,355 20,080 ======== ======== ======== ======== Attributable to Genzyme Molecular Oncology: Net loss attributable to GZMO Stock ............................. $ (8,158) $ (7,447) $(15,218) $(13,987) ======== ======== ======== ======== Per GZMO basic and diluted common share: Net loss ...................................................... $ (0.64) $ (1.90) $ (1.20) $ (3.56) ======== ======== ======== ======== Weighted average shares outstanding ............................. 12,676 3,929 12,667 3,929 ======== ======== ======== ======== Comprehensive income: Net income ......................................................... $ 6,291 $ 13,096 $ 22,348 $ 20,880 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments ...................... (4,986) 542 (13,812) (156) Unrealized gains (losses) on securities: Unrealized gains (losses) arising during the period ......... 792 (4,961) (1,517) (3,629) Reclassification adjustment for gains (losses) included in net income (loss) ...................................... 3,169 -- 1,945 -- -------- -------- -------- -------- Unrealized gains (losses) on securities, net ............ 3,961 (4,961) 428 (3,629) -------- -------- -------- -------- Other comprehensive loss ........................................ (1,025) (4,419) (13,384) (3,785) -------- -------- -------- -------- Comprehensive income ............................................ $5,266 $ 8,677 $ 8,964 $ 17,095 ======== ======== ======== ========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. -23- 24
GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED, AMOUNTS IN THOUSANDS) JUNE 30, DECEMBER 31, - ----------------------------------------------------------------------------------------------------------------------------------- 1999 1998 ----------- ----------- ASSETS Current assets: Cash and cash equivalents ....................................................... $ 146,069 $ 118,612 Short-term investments .......................................................... 299,251 175,453 Accounts receivable, net ........................................................ 161,143 163,042 Inventories ..................................................................... 112,822 109,833 Prepaid expenses and other current assets ....................................... 27,286 31,467 Deferred tax assets - current ................................................... 39,675 39,725 ----------- ----------- Total current assets .......................................................... 786,246 638,132 Property, plant and equipment, net ................................................. 379,381 382,619 Long-term investments .............................................................. 206,448 281,664 Intangibles, net ................................................................... 266,525 279,516 Deferred tax assets - noncurrent ................................................... 21,631 24,277 Investment in equity securities .................................................... 44,190 51,977 Other .............................................................................. 27,754 30,669 ----------- ----------- Total assets ................................................................... $ 1,732,175 $ 1,688,654 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ................................................................ $ 21,964 $ 27,604 Accrued expenses ................................................................ 83,430 72,389 Income taxes payable ............................................................ 18,878 16,543 Deferred revenue ................................................................ 2,591 2,731 Current portion of long-term debt and capital lease obligations ................. 108,725 100,568 Payable to joint venture ........................................................ 2,188 1,181 ----------- ----------- Total current liabilities ..................................................... 237,776 221,016 Long-term debt and capital lease obligations ....................................... 2,089 3,087 Convertible subordinated notes and debentures, net ................................. 272,090 284,138 Other .............................................................................. 2,172 8,078 ----------- ----------- Total liabilities .............................................................. 514,127 516,319 Stockholders' equity: Preferred Stock ................................................................. -- -- GENZ Stock, $.01 par value ...................................................... 830 814 GZTR Stock, $.01 par value ...................................................... 235 209 GZMO Stock, $.01 par value ...................................................... 127 126 GZSP Stock, $.01 par value ..................................................... 149 -- Treasury Stock - at cost ........................................................ (901) (901) Additional paid-in capital - Genzyme General .................................... 1,087,389 593,042 Additional paid-in capital - Genzyme Surgical Products .......................... (149) 365,785 Additional paid-in capital - Genzyme Tissue Repair .............................. 114,342 174,198 Additional paid-in capital - Genzyme Molecular Oncology ......................... 31,227 63,427 Retained earnings (accumulated deficit) ......................................... 8,550 (13,798) Accumulated other comprehensive income .......................................... (23,751) (10,367) ----------- ----------- Total stockholders' equity ..................................................... 1,218,048 1,172,535 ----------- ----------- Total liabilities and stockholders' equity ..................................... $ 1,732,175 $ 1,688,854 =========== ===========
The accompanying notes are an integral part of these unaudited, consolidated financial statements. -24- 25
GENZYME CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, AMOUNTS IN THOUSANDS) FOR THE SIX MONTHS ENDED JUNE 30, - ------------------------------------------------------------------------------------------------------------------------------- 1999 1998 --------- --------- OPERATING ACTIVITIES: Net income .......................................................................... $ 22,348 $ 20,880 Reconciliation of net income to net cash provided by (used in) operating activities: Depreciation and amortization .................................................... 37,033 30,274 Non-cash compensation expense .................................................... 10 165 Accrued interest/amortization on bonds ........................................... (1,347) (1,818) Non-cash purchase price adjustments .............................................. -- 747 Provision for bad debts and inventory ............................................ 9,736 3,393 Loss on sale of plant & equipment ................................................ 488 -- Deferred income tax benefit ...................................................... (1,324) (1,324) Equity in net loss of unconsolidated affiliates .................................. 19,100 11,598 Gain on affiliate sale of stock .................................................. (606) (2,369) Minority interest in net loss of affiliates ...................................... (1,730) (1,724) Gain on sale of investment ....................................................... (1,963) -- Accretion of debt conversion feature ............................................. -- 1,948 Charge for impaired investment ................................................... 5,487 -- Gain on sale of business ......................................................... (7,500) -- Other ............................................................................ 376 162 Increase (decrease) in cash from working capital changes: Accounts receivable ........................................................... (9,277) (23,245) Inventories ................................................................... (5,531) 4,290 Prepaid expenses and other current assets ..................................... 3,622 (2,401) Accounts payable, accrued expenses, income taxes payable and deferred revenue ........................................................ 9,668 10,055 --------- --------- Net cash provided by operating activities ..................................... 78,590 50,631 INVESTING ACTIVITIES: Purchases of investments ............................................................ (320,388) (108,104) Sales and maturities of investments ................................................. 269,029 50,676 Acquisitions of property, plant and equipment ....................................... (30,410) (18,148) Sale of property, plant and equipment ............................................... (17) 623 Acquisitions, net of acquired cash and assumed liabilities .......................... -- (8,324) Proceeds from sale of equity investment ............................................. 11,090 -- Investment in unconsolidated affiliates ............................................. (100) -- Investment in joint ventures ........................................................ (22,169) (7,124) Repayment of loans by affiliates .................................................... -- 2,019 Other ............................................................................... 9,158 (490) --------- --------- Net cash used in investing activities ......................................... (83,807) (88,872) FINANCING ACTIVITIES: Proceeds from issuance of common stock .............................................. 31,472 18,003 Proceeds from issuance of debt, net ................................................. (791) 243,676 Payments of debt and capital lease obligations ...................................... -- (19,086) Other ............................................................................... 3,857 1,393 --------- --------- Net cash provided by financing activities ..................................... 34,538 243,986 Effect of exchange rate changes on cash ................................................. (1,864) (1,855) --------- --------- Increase in cash and cash equivalents ................................................... 27,457 203,890 Cash and cash equivalents at beginning of period ........................................ 118,612 102,406 --------- --------- Cash and cash equivalents at end of period .............................................. $ 146,069 $ 306,296 ========= ========= Supplemental disclosure of non-cash activity: Debt Conversions - Note 3.
The accompanying notes are an integral part of these unaudited, consolidated financial statements. -25- 26 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION These unaudited, consolidated financial statements should be read in conjunction with the financial statements and footnotes for Genzyme included in the 1998 Genzyme 10-K/A. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the SEC. Certain items in the 1998 financial statements have been reclassified to conform to the 1999 presentation. The financial statements for the three and six months ended June 30, 1999 and 1998 are unaudited but include, in management's opinion, all adjustments (consisting only of normally recurring accruals) necessary for a fair presentation of the results for the periods presented. 2. INVENTORIES (IN THOUSANDS)
June 30, 1999 December 31, 1998 ------------- ----------------- Raw materials................................... $ 37,479 $ 41,328 Work-in-process................................. 38,137 27,474 Finished products............................... 37,206 41,031 -------- -------- Total.............................. $112,822 $109,833 ======== ========
3. DEBT CONVERSIONS In the first two quarters of 1999, the holder of the GZTR Note converted an aggregate of $5,040,000 in principal amount in exchange for a total of 2,445,014 shares of GZTR Stock. GZTR paid approximately $306,000 of accrued interest to the holder in connection with these conversions. 4. CREATION OF NEW DIVISION In June 1999, Genzyme created Genzyme Surgical Products from Genzyme's existing surgical products business, which previously operated as a business unit of Genzyme General. GZSP primarily consists of the products and assets of Genzyme acquired upon the purchase of DSP in 1996, the Sepra Products, and Genzyme's research and development programs in gene and cell therapy for cardiovascular disease. On June 28, 1999, Genzyme distributed 0.17901 share of GZSP Stock for each share of GENZ Stock owned on June 14, 1999. Approximately 14.8 million shares of GZSP Stock were distributed. On June 28, 1999, Genzyme General transferred $150.0 million in cash, cash equivalents and investments to GZSP in connection with the creation of GZSP as a separate division of Genzyme. 5. CHARGE FOR IMPAIRED INVESTMENT In June 1999, Genzyme recorded a charge for an impaired investment of $5.5 million related to a strategic investment in a company whose common stock price decline was considered "other than temporary." 6. GAIN ON SALE OF PRODUCT LINE In April 1999, Genzyme received approximately $8.3 million ($8.0 million in principal and $0.3 million in interest) and recorded a gain of approximately $7.5 million in connection with a note receivable that was previously fully reserved due to uncertainty surrounding collection. Genzyme received this note in partial consideration for the sale of Genetic Design, Inc. in 1996. -26- 27 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS 7. NET INCOME PER SHARE The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts): GENZYME GENERAL:
Three Months Ended Six Months Ended June 30, June 30, ----------------------- ----------------------- 1999 1998 1999 1998 ------- ------- ------- ------- Net income - basic ................................................. $40,226 $41,086 $83,452 $75,142 Effect of dilutive securities (net of tax): GENZ Notes: Interest expense ............................................... 1,903 885 3,949 904 Amortization of purchaser's discount and offering costs (1) ......................................... 136 61 282 62 GENZ Debentures: Interest expense ............................................... 154 -- 319 -- Amortization of debt offering costs (2) ........................ 25 -- 53 -- ------- ------- ------- ------- Net income - diluted ............................................... $42,444 $42,032 $88,055 $76,108 ======= ======= ======= ======= Shares used in net income per common share-basic ................... 82,644 78,524 82,301 78,223 Effect of dilutive securities: Employee and director stock options ............................ 3,071 2,152 3,356 2,291 Warrants ....................................................... 25 3 29 6 GENZ Notes (3) ................................................. 6,313 2,775 6,313 1,388 GENZ Debentures (3) ............................................ 630 -- 630 -- ------- ------- ------- ------- Dilutive potential common shares (4) ............................. 10,039 4,930 10,328 3,685 ------- ------- ------- ------- Shares used in net income per common share-diluted (4) ............. 92,683 83,454 92,629 81,908 ======= ======= ======= ======= Net income per common share - basic ................................ $ 0.49 $ 0.52 $ 1.01 $ 0.96 ======= ======= ======= ======= Net income per common share - diluted (4) .......................... $ 0.46 $ 0.50 $ 0.95 $ 0.93 ======= ======= ======= =======
(1) The purchaser's discount and offering costs of approximately $7.0 million are being amortized over the term of the GENZ Notes, which mature in June 2005. (2) The offering costs of approximately $0.9 million are being amortized over the term of the GENZ Debentures, which mature in August 2003. (3) The GENZ Notes were issued in May 1998 and the GENZ Debentures were issued in August 1998. (4) Certain securities were not included in the computation of Genzyme General's diluted earnings per share for the three and six months ended June 30, 1999 and 1998 because each such securities had an exercise price greater than the average market price of GENZ Stock during each respective period. Such securities include:
Three Months Ended Six Months Ended June 30, June 30, ----------------------- ----------------------- 1999 1998 1999 1998 ------- ------- ------- ------- Shares of GENZ Stock issuable for options ............................ 1,801 3,830 1,591 3,845 Shares of GENZ Stock issuable for warrants ........................... -- 80 -- 80 ----- ------ ----- ------ Total shares with exercise prices greater than the average market price of GENZ Stock during the period ............ 1,801 3,910 1,591 3,925 ===== ====== ===== ======
-27- 28 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS 7. NET INCOME PER SHARE (CONTINUED) GZSP: Pro forma basic net loss per GZSP common share is the same as pro forma diluted net loss per GZSP common share for the three and six months ended June 30, 1999 and 1998. Certain securities were not included in the computation of GZSP's pro forma diluted loss per share for the three and six months ended June 30, 1999 and 1998 because they would have an anti-dilutive effect due to GZSP's net loss for the relevant period. For the three and six months ended June 30, 1999 and 1998, these securities include:
THREE MONTHS ENDED SIX MONTHS ENDED (AMOUNTS IN THOUSANDS) JUNE 30, JUNE 30, ---------------------------------------------------------------------------------------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Shares of GZSP Stock issuable for options................ 60 -- 30 -- Shares of GZSP Stock issuable upon conversion of the GENZ Notes ............................................ 1,130 -- 1,130 -- ------- ------- ------- ------- Total shares excluded from the GZSP proforma diluted loss per share calculation................................ 1,190 -- 1,160 -- ======= ======= ======= =======
GZTR: Basic net loss per GZTR common share is the same as diluted net loss per GZTR common share for the three and six months ended June 30, 1999 and 1998. Certain securities were not included in the computation of GZTR's diluted loss per share for the three and six months ended June 30, 1999 and 1998 because they would have an anti-dilutive effect due to GZTR's net loss for the relevant period. For the three and six months ended June 30, 1999 and 1998, these securities include:
THREE MONTHS ENDED SIX MONTHS ENDED (AMOUNTS IN THOUSANDS) JUNE 30, JUNE 30, ---------------------------------------------------------------------------------------------------------- 1999 1998 1999 1998 ------ ----- ------ ----- Shares of GZTR Stock issuable for options................. 4,264 3,244 3,270 2,978 GZTR Designated Shares.................................... 2,289 823 2,289 828 Shares of GZTR Stock issuable upon conversion of the GZTR Note....................................... 4,418 2,577 4,418 2,577 ------ ----- ------ ----- Total shares excluded from the GZTR diluted loss per share calculation................................. 10,971 6,644 9,977 6,383 ====== ===== ====== =====
GZMO: Basic net loss per GZMO common share is the same as diluted net loss per GZMO common share for the three and six months ended June 30, 1999 and 1998. Certain securities were not included in the computation of GZMO's diluted loss per share for the three and six months ended June 30, 1999 and 1998 because they would have an anti-dilutive effect due to GZMO's net loss for the relevant period. For the three and six months ended June 30, 1999 and 1998, these securities include:
THREE MONTHS ENDED SIX MONTHS ENDED (AMOUNTS IN THOUSANDS) JUNE 30, JUNE 30, ---------------------------------------------------------------------------------------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Shares of GZMO Stock issuable for options................. 1,730 1,177 1,625 1,024 Warrants to purchase GZMO Stock........................... 10 10 10 10 GZMO Designated Shares(1)................................. 1,410 6,000 1,410 6,000 Shares of GZMO Stock issuable upon conversion of Genzyme's 6% convertible subordinated debentures due August 2002 ...................................... -- 3,476 -- 3,476 ------ ------ ------ ------ Total shares excluded from the GZMO diluted loss per share calculation................................. 3,150 10,663 3,045 10,510 ====== ====== ====== ======
(1) GZMO Designated Shares are shares of GZMO Stock that are not issued and outstanding, but which Genzyme's board of directors may from time to time issue, sell or otherwise distribute without allocating the proceeds to GZMO. -28- 29 GENZYME CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED, CONSOLIDATED FINANCIAL STATEMENTS 8. SEGMENT INFORMATION Genzyme's reportable segments are strategic business units or divisions that offer different products and services. Genzyme has five reportable segments: -- the Therapeutics business unit, which develops, manufactures and distributes human therapeutic products for significant unmet medical needs. The business derives substantially all of its revenue from Cerezyme[R] enzyme and Ceredase[R] enzyme sales. -- the Diagnostic Products business unit, which provides diagnostic products to niche markets focusing on in vitro diagnostics. -- GZSP develops, manufactures and markets surgical products for two principal business lines: cardiovascular surgery and general surgery. -- GZTR develops and markets biological products for orthopedic injuries, such as cartilage repair, and severe burns. -- GZMO is developing cancer products, with a focus on therapeutic vaccines and angiogenesis inhibitors. Information concerning the operations in these reportable segments is as follows (amounts in thousands): Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 1999 1998 1999 1998 -------- -------- -------- -------- Revenues: GENZ: Therapeutics $119,233 $ 98,601 $234,264 $192,123 Diagnostic Products 14,955 17,235 29,647 33,952 GZSP 26,681 27,201 54,034 51,428 GZTR 4,665 4,345 8,688 7,956 GZMO 1,133 1,689 2,746 4,506 Other 19,455 24,876 39,910 43,480 Eliminations/Adjustments 562 927 1,139 1,980 -------- -------- -------- -------- Total $186,684 $174,874 $370,428 $335,425 ======== ======== ======== ======== Net Income: GENZ: Therapeutics $ 29,553 $ 31,327 $ 63,423 $ 60,249 Diagnostic Products 1,071 503 2,200 587 GZSP (17,658) (9,886) (28,403) (19,004) GZTR (8,382) (10,455) (17,998) (21,775) GZMO (8,158) (7,447) (15,218) (13,987) Other 454 (737) (1,328) (2,257) Eliminations/Adjustments 9,411 9,791 19,672 17,067 -------- -------- -------- -------- Total $ 6,291 $ 13,096 $ 22,348 $ 20,880 ======== ======== ======== ======== There has been no material change in segment assets since December 31, 1998. 9. SUBSEQUENT EVENTS On July 1, 1999, the Diagnostics business unit of Genzyme General sold its bioreagent and ELISA immunochemistry product lines to Alexon-Trend Inc., an operating unit of Sybron Laboratory Products Corp., which is a wholly-owned subsidiary of Sybron International Corporation, for $5.0 million in cash. -29- 30 On July 27, 1999, Genzyme General acquired Peptimmune, a privately-held biotechnology company that develops therapies for inherited autoimmune disorders, for $6.5 million in cash. The acquisition will be accounted for as a purchase. Peptimmune's lead development program focuses on a treatment for pemphigus vulgaris, a rare genetic disease characterized by severe and potentially fatal blistering of the skin and mucous membranes. In July 1999, Genzyme purchased 769,230 shares of the common stock of BioMarin Pharmaceutical, Inc. at a price of $13.00 per share in a private placement contemporaneous with the closing of BioMarin's initial public offering. Following this purchase, Genzyme owns approximately 6.2% of the outstanding shares of BioMarin common stock. -30- 31 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 The following discussion is a summary of the key factors management considers necessary in reviewing the Company's results of operations, liquidity and capital resources. RESULTS OF OPERATIONS GENZYME CORPORATION AND SUBSIDIARIES Since the operating results of Genzyme and its subsidiaries reflect the combined operations of Genzyme General, GZSP, GZTR and GZMO, this discussion summarizes the key factors management considers necessary in reviewing Genzyme's consolidated results of operations. Detailed discussion and analysis of each division's results of operations are provided below under separate headings. REVENUES Total revenues for the three and six months ended June 30, 1999 increased 7% and 10% to $186.7 million and $370.4 million, respectively, from $174.9 million and $335.4 million, respectively, in the corresponding periods of 1998. Product revenues consist of sales by Genzyme General and Genzyme Surgical Products. Product revenues for the three months ended June 30, 1999 increased 8% to $165.9 million from $153.8 million in the comparable period of 1998. For the six months ended June 30, 1999, product revenues increased 12% to $329.6 million from $293.2 million in the same period of 1998. The increase in both periods was primarily due to increased sales of Cerezyme[R] enzyme. Combined sales of Cerezyme[R] enzyme and Ceredase[R] enzyme increased 19% in the three months ended June 30, 1999 to $116.9 million from $98.6 million in the corresponding period of 1998. For the six months ended June 30, 1999, combined sales of Cerezyme[R] enzyme and Ceredase[R] enzyme increased 20% to $230.7 million from $192.1 million in the same period of 1998. The increase in both periods is primarily due to continued strong growth in the number of patients worldwide receiving enzyme replacement therapy for the treatment of Gaucher disease. Genzyme's results of operations are highly dependent on these products, which together represented 70% of total product sales for both periods compared to 64% and 66% for the corresponding periods in last year. Service revenues consist primarily of genetic testing services performed by Genzyme General, sales of GZTR's Carticel[R] autologous cultured chondrocytes ("Carticel[R] AuCC") and Epicel[TM] skin grafts as well as the provision of services relating to GZMO's SAGE[TM] differential gene expression technology. For the three months and six months ended June 30, 1999, service revenues increased 6% and 5% to $19.8 million and $38.5 million, respectively, from $18.6 million and $36.9 million for the corresponding periods of 1998. The increase in service sales for both the three and six months ended June 30, 1999 is due primarily to increased sales of both Carticel[R] AuCC and services relating to the SAGE[TM] technology and a slight increase in genetic testing service revenue, offset in part by slight reductions in sales of Epicel[TM] skin grafts. International sales as a percentage of total product and service sales for the three months ended June 30, 1999 and 1998 were 40% and 41%, respectively, as compared to 41% in each of the six months ended June 30, 1999 and 1998. MARGINS AND OPERATING EXPENSES Gross margins for the three months ended June 30, 1999 and 1998 were 69% and 65%, respectively, and for the six months ended June 30, 1999 and 1998 were 69% and 64%, respectively. Genzyme provides a broad range of health care products and services, resulting in a range of gross margins depending on the particular market conditions of each product or service. Product margins for both the three and six months ended June 30, 1999 were 73% as compared to product margins of 68% in each of the corresponding periods of 1998. The increase in product margins in each period is primarily due to increased sales volume of Cerezyme[R] enzyme. Service margins were 37% and 36% for the three and six months ended June 30, 1999 as compared to 33% and 34% for the corresponding periods of 1998. In both the three and six months ended June 30, 1999, increased service margins were attributable to higher sales for GZTR and GZMO, offset in part by decreased genetic testing services margins. -31- 32 Selling, general and administrative ("SG&A") expenses and amortization of intangibles for the three and six months ended June 30, 1999 increased 17% and 14% to $72.5 million and $137.7 million, respectively, from $62.0 million and $120.5 million for the same periods in 1998. The increase for both periods was due primarily to (i) increased staffing in support of the growth in several of Genzyme General's product lines; (ii) costs associated with the market introduction of Thyrogen[R] hormone in January 1999; (iii) an increase in the allowance for doubtful accounts in Genzyme General's genetic testing business unit; and (iv) an increase in GZSP professional service fees in connection with the creation of GZSP as a separate division of Genzyme. Research and development expenses for the three and six months ended June 30, 1999 increased 51% and 40% to $40.9 million and $73.7 million, respectively, in comparison to $27.0 million and $52.6 million for the corresponding periods of 1998. The increase in both periods is due primarily to; (i) increased costs in connection with the results of ATIII LLC, Genzyme's joint venture with Genzyme Transgenics Corporation ("GTC") for the development and commercialization of transgenic recombinant human antithrombin III; (ii) increased spending on GZMO's small molecule immunotherapy and anti-angiogenesis programs; (iii) increased spending on alpha-galactosidase for the treatment of Fabry disease; and (iv) increased spending on GZSP's cardiovascular gene and cell therapy development programs. OTHER INCOME AND EXPENSES Other income and expenses for the three months ended June 30, 1999 was a net other expense of $2.6 million compared to a net other expense of $3.0 million for the three months ended June 30, 1998. Equity in net loss of Genzyme's unconsolidated affiliates increased to $9.0 million for the three months ended June 30, 1999 from $6.3 million for the three months ended June 30, 1998. The change is primarily due to (i) increased losses from GTC; (ii) increased losses from RenaGel LLC, Genzyme's joint venture with GelTex Pharmaceuticals, Inc. ("GelTex") for the development and commercialization of Renagel[R] Capsules; (iii) increased losses resulting from Diacrin/Genzyme LLC, Genzyme's joint venture with Diacrin, Inc. ("Diacrin") for the development and commercialization of products and processes using porcine fetal cells for the treatment of Parkinson's and Huntington's diseases in humans; (iv) Genzyme's portion of the losses of Pharming/Genzyme LLC, Genzyme's joint venture with Pharming Group N.V. ("Pharming") for the development and commercialization of human alpha-glucosidase as a treatment for Pompe disease, which became effective on October 9, 1998; (v) Genzyme's portion of the losses of BioMarin/Genzyme LLC, Genzyme's joint venture with BioMarin Pharmaceutical Inc. ("BioMarin") for the development and commercialization of alpha-L-iduronidase for the treatment of mucopolysaccharidosis-I, which was established on September 4, 1998; and (vi) Genzyme's portion of the losses of StressGen/Genzyme LLC, Genzyme's joint venture with StressGen Biotechnologies Corporation ("StressGen") and the Canadian Medical Discoveries Fund, Inc. ("CMDF"), for the development of stress gene therapies for the treatment of cancer. Other income and expense, net, for the three months ended June 30, 1998 includes a gain of $2.4 million on Genzyme's investment in GTC due to the issuance by GTC of shares of its common stock, which was recorded in 1998 and for which there is no comparable amount in the three months ended June 30, 1999. For each of the three months ended June 30, 1999 and 1998, Genzyme recorded minority interest of $0.9 million, representing the portion of the results of ATIII LLC allocated to GTC. -32- 33 For the three months ended June 30, 1999, other income and expense, net, also includes a charge for an impaired investment of $5.5 million related to a strategic investment whose common stock price decline was considered "other than temporary" and a gain of $7.5 million which represents payment of a previously fully reserved note receivable which Genzyme had received in partial consideration for the sale of Genetic Design, Inc. in 1996. Investment income increased to $9.1 million for the three months ended June 30, 1999 from $5.3 million for the same period of 1998. The increase was due to higher average cash balances resulting primarily from the net proceeds from the issuance in May 1998 of $250.0 million in principal amount of Genzyme's 5.25% convertible subordinated notes due June 1, 2005 (the "GENZ Notes") and cash generated from operations. Interest expense was $5.6 million for the three months ended June 30, 1999, compared to $5.2 million in corresponding period of 1998. The increase was due primarily to additional interest expense related to the GENZ Notes. Other income and expenses for the six months ended June 30, 1999 was a net other expense of $6.5 million compared to a net other expense of $7.7 million for the six months ended June 30, 1998. Equity in net loss of Genzyme's unconsolidated affiliates increased to $19.1 million for the six months ended June 30, 1999 from $11.6 million for the six months ended June 30, 1998. The change is primarily due to (i) increased losses from GTC; (ii) increased losses resulting from RenaGel LLC; and (iii) Genzyme's portion of the losses of Pharming/Genzyme LLC and BioMarin/Genzyme LLC. Other income and expense, net, for the six months ended June 30, 1999 and 1998, also includes gains of $0.6 million and $2.4 million, respectively, on Genzyme's investment in GTC due to issuance by GTC of its common stock and minority interest of $1.7 million in each period representing the portion of the results of ATIII LLC allocated to GTC. For the six months ended June 30, 1999, other income and expense, net, also includes (i) a $2.0 million gain on the sale of Genzyme's remaining shares of TECHNE Corporation common stock; (ii) a charge for an impaired investment of $5.5 million related to a strategic investment whose common stock price decline was considered "other than temporary"; and (iii) a gain of $7.5 million which represents payment of a previously fully reserved note receivable which Genzyme had received in partial consideration for the sale of Genetic Design, Inc. in 1996. Investment income increased to $17.3 million for the six months ended June 30, 1999 from $8.9 million for the same period of 1998. The increase was due to higher average cash balances resulting primarily from the net proceeds from the issuance in May 1998 of the GENZ Notes and cash generated from operations. Interest expense was $11.1 million for the six months ended June 30, 1999, compared to $9.1 million in corresponding period of 1998. The increase was due primarily to additional interest expense related to the GENZ Notes. The tax provisions for the three and six months ended June 30, 1999 and 1998 vary from the U.S. statutory tax rate because of the provision for state income taxes, the foreign sales corporation, nondeductible amortization of intangibles, tax credits and Genzyme's share of the losses of unconsolidated affiliates. The effective tax rate for the three months ended June 30, 1999 increased to 54% from 40% for the corresponding period of 1998. The effective tax rate for the six months ended June 30, 1999 increased to 44% from 41% for the same period of 1998. The increase in each period is due primarily to an increase in the losses of unconsolidated affiliates and the $5.5 million charge for an impaired investment for which no tax benefit was recognized in the second quarter of 1999. GENZYME GENERAL In June 1999, Genzyme created Genzyme Surgical Products from Genzyme's existing surgical products business, which previously operated as a business unit of Genzyme General. On June 28, 1999, Genzyme distributed 0.17901 share of GZSP Stock for each share of GENZ Stock owned on June 14, 1999 and Genzyme General transferred $150.0 million in cash, cash equivalents and investments to GZSP in connection with the creation of GZSP as a separate division of Genzyme. Genzyme General's unaudited, combined financial statements reflect the financial position and results of operations and cash flows of Genzyme General as if GZSP had existed as a separate division and the GZSP Stock had been outstanding for all periods. REVENUES Total revenues for the three and six months ended June 30, 1999 increased 9% and 12% to $154.2 million and $305.0 million, respectively, from $141.8 million and $271.7 million, respectively, in the corresponding periods of 1998. Product revenues for the three months ended June 30, 1999 increased 10% to $139.2 million from $126.6 million in the comparable period of 1998. For the six months ended June 30, 1999, product revenues increased 14% to $275.5 million from $241.7 million in the same period of 1998. Revenues for the Therapeutics business unit consisted primarily of sales of Cerezyme[R] enzyme and Ceredase[R] enzyme, which increased 19% to $116.9 million for the three months ended June 30, 1999 from $98.6 million in the corresponding period in 1998 due to increased sales of Cerezyme[R] enzyme. Combined revenues for Cerezyme[R] enzyme and Ceredase[R] enzyme for the six months ended June 30, 1999 increased 20% to $230.7 million as compared to $192.1 million for the same period of 1998 due to sales of Cerezyme[R] enzyme. The increase in sales of Cerezyme[R] enzyme for both periods is primarily due to continued strong growth in the number of patients worldwide receiving enzyme replacement therapy for the treatment of Gaucher disease. Genzyme General's results of operations are highly dependent on these products, which together represented 84% of product sales for -33- 34 both the three and six months ended June 30, 1999, compared to 78% and 79% in the three and six months ended June 30, 1998, respectively. Therapeutics revenues for the three and six months ended June 30, 1999 also include sales of Thyrogen[R] hormone and lipids and peptides for drug delivery. Revenues for the Diagnostics business unit decreased 13% for both the three and six months ended June 30, 1999 to $15.0 million and $29.6 million, respectively, from $17.2 million and $34.0 million, respectively for the same periods of 1998. The decrease in diagnostics revenues for the quarter reflects the sale of Genzyme's research products business to TECHNE Corporation in July 1998. The research products business had revenues of approximately $4.0 million per quarter at the time it was sold. Diagnostic product revenues now include royalties on sales by TECHNE's biotechnology group. Excluding revenues from the research products business, diagnostic product sales increased 11% and 13% for the three and six months ended June 30, 1999, respectively, over the corresponding periods in 1998. Revenues from genetic testing services were $14.5 million and $28.4 million for the three and six months ended June 30, 1999, respectively, up slightly in comparison to the corresponding periods of 1998. International sales as a percentage of total product and service sales for both the three months ended June 30, 1999 and 1998 were 44% and for the six months ended June 30, 1999 and 1998 were 43% and 44%, respectively. MARGINS AND OPERATING EXPENSES Gross margins for the both the three and six months ended June 30, 1999 and 1998 were 76% as compared to 70% for both the three and six months ended June 30, 1998. The increase in gross margins for each period is due primarily to increased Cerezyme[R] enzyme sales. Genzyme General provides a broad range of health care products and services, resulting in a range of gross margins depending on the particular market conditions of each product or service. Product margins for both the three and six months ended June 30, 1999 were 81% and 80%, respectively, as compared to product margins of 74% and 73%, respectively, in the corresponding periods of 1998. The increase in product margins in each period is primarily due to increased sales volume of Cerezyme[R] enzyme. Genetic testing service margins for the three and six months ended June 30, 1999 decreased to 38% and 37%, respectively, in comparison to 39% and 40%, respectively, for the corresponding periods of 1998, due primarily to a decrease in capacity utilization in both the three and six months ended June 30, 1999. SG&A expenses and amortization of intangibles for the three and six months ended June 30, 1999 increased 34% and 24% to $44.4 million and $82.2 million, respectively, from $33.2 million and $66.1 million for the same periods in 1998. The increase for both periods was due primarily to (i) increased staffing in support of the growth in several of Genzyme General's product lines; (ii) costs associated with the market introduction of Thyrogen[R] hormone in January 1999; and (iii) an increase in the allowance for doubtful accounts in Genzyme General's genetic testing business unit. Research and development expenses for the three and six months ended June 30, 1999 increased 44% and 42% to $24.9 million and $46.0 million, respectively, in comparison to $17.3 million and $32.5 million for the corresponding periods of 1998. The increase in both periods is due primarily to (i) increased costs in connection with the results of ATIII LLC; and (ii) increased spending on the development of alpha-galactosidase for the treatment of Fabry disease. OTHER INCOME AND EXPENSES Other income and expenses for the three months ended June 30, 1999 was a net other expense of $0.4 million compared to a net other income of $0.7 million for the three months ended June 30, 1998. Equity in net loss of Genzyme's unconsolidated affiliates increased to $7.0 million for the three months ended June 30, 1999 from $4.1 million for the three months ended June 30, 1998. The change is primarily due to (i) increased losses from GTC; (ii) increased losses from RenaGel LLC; (iii) Genzyme General's portion of the losses Diacrin/Genzyme LLC resulting from the transfer of Genzyme's 50% ownership interest in the joint venture from GZTR to Genzyme General in May 1999; and (iv) Genzyme General's portion of the losses of Pharming/Genzyme LLC and BioMarin/Genzyme LLC. Other income and expense, net, for the three months ended June 30, 1998 includes a gain of $2.4 million on Genzyme's investment in GTC due to the issuance by GTC of shares of its common stock, which was recorded in 1998 and for which there is no comparable amount in the three months ended June 30, 1999. For each of the three months ended June 30, 1999 and 1998, Genzyme General recorded minority interest of $0.9 million, representing the portion of the results of ATIII LLC allocated to GTC. For the three months ended June 30, 1999, other income and expense, net, also includes a charge for an impaired investment of $5.5 million related to a strategic investment whose common stock price decline was considered "other than temporary" and a gain of $7.5 million which represents payment for previously fully reserved notes receivable which Genzyme General had received in partial consideration for the sale of Genetic Design, Inc. in 1996. Investment income increased to $8.8 million for the three months ended June 30, 1999 from $4.8 million for the same period of 1998. The increase was due to higher average cash balances resulting primarily from the net proceeds from the issuance in May 1998 of the GENZ Notes and cash generated from operations. Interest expense was $5.1 million for the three months ended June -34- 35 30, 1999, compared to $3.3 million in corresponding period of 1998. The increase was due primarily to additional interest expense related to the GENZ Notes and the issuance in August 1998 of $21.2 million in principal amount of 5% convertible debentures due 2003 (the "GENZ Debentures"). Other income and expenses for the six months ended June 30, 1999 was a net other expense of $1.9 million compared to a net other expense of $0.4 million for the six months ended June 30, 1998. Equity in net loss of Genzyme's unconsolidated affiliates increased to $14.7 million for the six months ended June 30, 1999 from $6.9 million for the six months ended June 30, 1998. The change is primarily due to (i) increased losses from GTC; (ii) increased losses resulting from RenaGel LLC; and (iii) Genzyme General's portion of the losses of Diacrin/Genzyme LLC, Pharming/Genzyme LLC and BioMarin/Genzyme LLC. Other income and expense, net, for the six months ended June 30, 1999 and 1998, includes gains of $0.6 million and $2.4 million, respectively, on Genzyme's investment in GTC due to issuance by GTC of its common stock and minority interest of $1.7 million in each period representing the portion of the results of ATIII LLC allocated to GTC. For the six months ended June 30, 1999, other income and expense, net, also includes (i) a $2.0 million gain on the sale of Genzyme's remaining shares of TECHNE common stock; (ii) a charge for an impaired investment of $5.5 million related to a strategic investment whose common stock price decline was considered "other than temporary"; and (iii) a gain of $7.5 million which represents payment for previously fully reserved notes receivable which Genzyme had received in partial consideration for the sale of GDI in 1996. Investment income increased to $16.7 million for the six months ended June 30, 1999 from $7.7 million for the same period of 1998. The increase was due to higher average cash balances resulting primarily from the net proceeds from the issuance in May 1998 of the GENZ Notes and cash generated from operations. Interest expense was $10.2 million for the six months ended June 30, 1999, compared to $5.3 million in corresponding period of 1998. The increase was due primarily to additional interest expense related to the GENZ Notes and the GENZ Debentures. The tax provisions for the three and six months ended June 30, 1999 and 1998 vary from the U.S. statutory tax rate because of the provision for state income taxes, the foreign sales corporation, nondeductible amortization of intangibles, tax credits and Genzyme General's share of the losses of unconsolidated affiliates. The effective tax rate for the three months ended June 30, 1999 increased to 42% from 38% for the same period of 1998. For the three months ended June 30, 1999, tax benefits allocated from GZSP, GZTR and GZMO of $6.5 million, $3.4 million and $2.4 million, respectively, reduced Genzyme General's net tax rate to 17%. In the corresponding period of 1998, tax benefits allocated from GZSP, GZTR and GZMO of $3.6 million, $3.4 million and $2.9 million, respectively, reduced Genzyme General's net tax rate to 18%. The effective tax rate for the six months ended June 30, 1999 increased to 40% from 38% for the same period of 1998. For the six months ended June 30, 1999, tax benefits allocated from GZSP, GZTR and GZMO of $10.4 million, $7.4 million and $4.3 million, respectively, reduced Genzyme General's tax rate to 18%. In the corresponding period of 1998, tax benefits allocated from GZSP, GZTR and GZMO of $6.8 million, $7.8 million and $4.1 million, respectively, reduced Genzyme General's tax rate to 17%. GENZYME SURGICAL PRODUCTS In June 1999, Genzyme created Genzyme Surgical Products from Genzyme's existing surgical products business, which previously operated as a business unit of Genzyme General. GZSP consists primarily of the products and assets of Genzyme acquired upon the purchase of Deknatel Snowden Pencer, Inc. in 1996, Genzyme's portfolio of hyaluronic acid-based products and product candidates (the "Sepra Products"), and Genzyme's research and development programs in gene and cell therapy for cardiovascular disease. On June 28, 1999, Genzyme distributed 0.17901 share of GZSP Stock for each share of GENZ Stock owned on June 14, 1999. Approximately 14.8 million shares of GZSP Stock were distributed. On June 28, 1999, Genzyme General transferred $150.0 million in cash, cash equivalents and investments to GZSP in connection with the creation of GZSP as a separate division of Genzyme. REVENUES For the three and six months ended June 30, 1999 and 1998, Genzyme Surgical Products' total revenue consisted solely of product sales. Product sales in each period consisted primarily of sales of cardiovascular fluid management products, surgical closures, surgical instruments and Seprafilm[R] Bioresorbable Membrane. Total revenues for Genzyme Surgical Products for the three and six months ended June 30, 1999 were $26.7 million and $54.0 million, respectively, as compared to $27.2 million and $51.4 million for the same periods a year ago. Revenues from cardiovascular surgery products, including chest drainage and fluid management systems, surgical closures, biomaterials, and instruments for conventional and minimally invasive cardiac surgery, were $18.0 million and $37.4 million, respectively, for the three and six months ended June 30, 1999, as compared to $18.6 million and $36.9 million for the corresponding periods of 1998. The decreases are primarily attributable to the fluctuating nature of medical device product sales. Revenues from general surgery products, including Seprafilm[R] Bioresorbable Membrane, other biomaterials and endoscopic instruments, increased 5% to $6.2 million for the three months ended June 30, 1999 as compared to $6.0 million for -35- 36 same period of 1998. For the six months ended June 30, 1999, revenues from general surgery products increased 24% to $12.1 million from $9.8 million in the same period of 1998. Sales of Seprafilm[R] Bioresorbable Membrane for the three months ended June 30, 1999 were $3.5 million compared to $3.4 million in the same period of last year. Sales of Seprafilm[R] Bioresorbable Membrane in the three months ended June 30, 1998 included $1.0 million in distributor rights and milestone revenue for which there were no comparable amounts in the corresponding period of 1999. Sales of Seprafilm[R] Bioresorbable Membrane for the six months ended June 30, 1999 were $6.9 million as compared to $5.3 million in the corresponding period of last year. Other product revenues for Genzyme Surgical Products include sales of its Snowden-Pencer line of products which includes instruments for plastic surgery and products sold to original equipment manufacturers, primarily sutures. Genzyme Surgical Products' other revenues were $2.4 million and $4.5 million for the three and six months ended June 30, 1999 in comparison to $2.7 million and $4.7 million for corresponding periods of 1998. Seprafilm[R] Bioresorbable Membrane is being marketed in the United States and Canada by Genzyme General on behalf of Genzyme Ventures II ("GVII"), a joint venture between Genzyme and Genzyme Development Partners, L.P. ("GDP"). In connection with the creation of GZSP, all of Genzyme's rights and obligations with respect to GDP and GVII have been reallocated from Genzyme General to GZSP. Since June 28, 1999, GZSP has marketed Seprafilm[R] Bioresorbable Membrane through Genzyme General and third party distributors. In March 1997, Genzyme and GDP reached agreement concerning the operation of and allocations of profits and losses from GVII. Under the terms of this agreement, Genzyme purchases product from GVII for resale by Genzyme. Genzyme funds the activities of GVII and is reimbursed at cost for SG&A expenses. The first $200,000 of losses generated by GVII were allocated to GDP and thereafter losses are allocated 40% to GDP and 60% to Genzyme, except that if losses would be allocated to the general partner of GDP rather than the limited partners, all of such losses are allocated to Genzyme. GDP will receive the first $5.6 million in profits generated by GVII, GZSP will receive the next $8.4 million in profits and, thereafter, GZSP and GDP will receive 60% and 40%, respectively, of the profits of GVII. In 1997, Genzyme General contributed an additional $1.5 million to GVII through GDP. There were no capital contributions in the three and six months ended June 30, 1999. International sales as a percentage of total sales for both the three and six months ended June 30, 1999 were 30% as compared to 29% for both the three and six months ended June 30, 1998. MARGINS AND OPERATING EXPENSES Total gross margins for the three and six months ended June 30, 1999 were 35% and 38%, respectively, as compared to 44% and 42% for the same periods in 1998. GZSP has several product lines which have a range of gross margins depending on the particular market conditions of each product line. The decrease in product margins in both periods was primarily due to a decrease in fluid management product margins. SG&A expenses and amortization of intangibles for the three and six months ended June 30, 1999 were $17.9 million and $34.6 million, respectively, as compared to $18.0 million and $33.4 million, respectively, for the same period last year. GZSP incurs direct SG&A costs as well as an SG&A charge, based on actual amounts incurred, from Genzyme General for SG&A work performed by Genzyme General on behalf of GZSP. In the three and six months ended June 30, 1999, $3.6 million and $2.7 million, respectively, of SG&A services were provided by Genzyme General as compared to $2.9 million and $5.7 million in the corresponding periods of last year primarily due to higher fringe benefit expenses and $1.6 million in other expenses associated with the establishment of Genzyme Surgical Products as a division of Genzyme. Research and development expenses for the three and six months ended June 30, 1999 were $9.0 million and $14.6 million, respectively, as compared to $3.8 million and $7.0 million in the same periods of 1998. The increase in both periods is primarily due to higher costs related to the initiation of several clinical trials and a $2.0 million milestone recorded in June 1999 to the company with which Genzyme Surgical Products is collaborating to develop cell therapies for cardiovascular disease. In the three and six months ended June 30, 1999, $4.9 million and $9.2 million, respectively, of research and development services were provided by Genzyne General as compared to $2.5 million and $4.7 million in the corresponding periods of 1998. OTHER INCOME AND EXPENSES Other income and expenses was a net other income of $19,000 and $71,000 for the three and six months ended June 30, 1999, respectively, as compared to net other expenses of $8,000 and $26,000, respectively, for the corresponding periods of 1998. -36- 37 GENZYME TISSUE REPAIR REVENUES Total revenues for the three and six months ended June 30, 1999 were $4.7 million and $8.7 million, respectively, representing increases of 7% and 9% over the same periods in 1998. Sales of Carticel[R] AuCC were $3.8 million and $6.7 million for the three and six months ended June 30, 1999, respectively, as compared to $2.5 million and $5.0 million for the three and six months ended June 30, 1998, respectively, representing increases of 52% and 35%. These increases are the result of continued growth. Sales of Epicel[TM] skin grafts decreased to $0.9 million in the three months ended June 30, 1999 from $1.8 million in the three months ended June 30, 1998. For the six months ended June 30, 1999, sales of Epicel[TM] skin grafts decreased to $1.9 million from $3.0 million in the same period of 1998. Revenues from the sale of Epicel[TM] skin grafts fluctuate from period to period depending on the need for severe burn care. MARGINS AND OPERATING EXPENSES GZTR's gross margin for the three months ended June 30, 1999 was 31%, as compared to 13% for the three months ended June 30, 1998. Gross margin for the six months ended June 30, 1999 was 28% as compared to 12% in the same period of 1998. The improvement in gross margin is primarily the result of an increase in Carticel[R] AuCC sales and a reduction in labor and manufacturing expenses and decreased material expenses. SG&A expenses for the three and six months ended June 30, 1999 were $6.1 million and $12.4 million, respectively, as compared to $6.0 million and $12.3 million for the corresponding periods of 1998. GZTR incurs direct SG&A costs as well as an SG&A charge, based on actual amounts incurred, from Genzyme General for SG&A work performed by Genzyme General on behalf of GZTR. In the three and six months ended June 30, 1999, $1.4 million and $2.7 million, respectively, of SG&A services were provided by Genzyme General as compared to $1.7 million and $3.4 million for the same periods of 1998. Research and development expenses for the three and six months ended June 30, 1999 were $2.0 million and $4.0 million, respectively, as compared to $2.8 million and $5.9 million in the comparable periods of 1998, representing decreases of 29% and 33%, respectively. The decreases were the result of a cessation of certain research and development projects. In the three and six months ended June 30, 1999, $1.5 million and $3.0 million, respectively, of research and development services were provided to GZTR by Genzyme General, compared to $2.3 million and $4.5 million in the same periods of 1998. OTHER INCOME AND EXPENSES Interest income was $0.1 million and $0.2 million for the three and six months ended June 30, 1999, respectively, compared to interest income of $0.2 million and $0.7 million in the three and six months ended June 30, 1998. The decrease was due primarily to lower average cash balances. Interest expense was $0.4 million and $0.9 million for the three and six months ended June 30, 1999, respectively, as compared to $0.7 million and $1.5 million for the same periods of 1998. The decrease in interest expense was the result of the completion of the accretion of the conversion feature related to the 6% convertible subordinated note due February 2000 (the "GZTR Note") in the second quarter of 1998, and the conversion of $5.0 million of principal amount of the GZTR Note into shares of GZTR Stock. On May 26, 1999, Genzyme reallocated its interest in Diacrin/Genzyme LLC from GZTR to Genzyme General in exchange for $25.0 million of cash and a 3% worldwide royalty on any products sold by Diacrin/Genzyme LLC. For the period from April 1, 1999 through May 26, 1999, GZTR provided $1.5 million in funding to, and realized a net loss of $1.4 million from the joint venture, and in the period from January 1, 1999 through May 26, 1999, GZTR provided $3.6 million to, and realized a net loss of $3.4 million from the joint venture. For the three and six months ending June 30, 1998, GZTR provided $1.4 million and $3.4 million, respectively, of funding to, and realized net losses of $1.7 million and $3.6 million, respectively, from the joint venture. -37- 38 GENZYME MOLECULAR ONCOLOGY REVENUES GZMO recorded service revenues of $0.6 million and $1.5 million, respectively, for the three and six months ended June 30, 1999 as compared to $0.3 million and $1.2 million in the same periods of 1998. Service revenues consisted of service contracts relating to the SAGE[TM] technology performed primarily for third parties. GZMO also recorded research and development revenues of $0.2 million and $0.5, respectively, in the three and six months ended June 30, 1999, as compared to $1.4 million and $3.3 million in the same periods of 1998. These revenues consisted of work performed on behalf of StressGen/Genzyme LLC, in both the three and six months ended June 30, 1999 and 1998, as well as work performed on behalf of Schering-Plough Corporation in the three and six months ended June 30, 1998 for which there was no comparable amount in the same periods of 1999. GZMO recorded licensing revenue of $0.3 million and $0.7 million in the three and six months ended June 30, 1999, as compared to no licensing revenue in the three and six months ended June 30, 1998. Licensing revenue consists of licenses to the SAGE[TM] technology and other of GZMO's therapeutics and diagnostics technology. MARGINS AND OPERATING EXPENSES For the three and six months ended June 30, 1999, GZMO recorded cost of revenues of $0.4 million and $1.0 million, respectively, as compared to $1.1 million and $2.3 million in the three and six months ended June 30, 1998. Cost of revenues for each period consisted of work performed on behalf of StressGen/Genzyme LLC, as well as work performed under SAGE[TM] contracts with third parties, and for the three and six months ended June 30, 1998, included contract research in gene therapy. The decrease in cost of revenues was the result of the absence of contract research for the three and six months ended June 30, 1999 and a reduction in the amount of royalties due to a third party on sales of services related to the SAGE[TM] technology. GZMO recorded $1.4 million and $3.0 million of SG&A expenses in the three and six months ended June 30, 1999, respectively, as compared to $2.0 million and $3.2 million in the comparable periods in 1998. The decrease is due primarily to reduced legal expenses related to patents. GZMO incurs direct SG&A costs as well as an SG&A charge, based on actual amounts incurred, from Genzyme General for SG&A work performed by Genzyme General on behalf of GZMO. In the three and six months ended June 30, 1999, $1.1 million and $2.5 million, respectively, of SG&A services were provided by Genzyme General as compared to $1.6 million and $2.6 million in the corresponding periods of 1998. Research and development expenses incurred by GZMO in the three and six months ended June 30, 1999 were $4.7 million and $8.6 million, respectively, compared to $2.2 million and $5.5 million in the same periods of 1998. The increase in research and development costs relates to the initiation of a clinical trial for GZMO's melanoma tumor vaccine product and increased research personnel and related expenses associated with the continued development of GZMO's immunotherapy and anti-angiogenesis programs. In the three and six months ended June 30, 1999, $4.6 million and $8.5 million, respectively, of research and development services, were provided by Genzyme General as compared to $2.8 million and $5.5 million in the corresponding periods of 1998. GZMO's amortization of intangibles was $3.0 million and $5.9 million for the three and six months ended June 30, 1999, respectively, as compared to $3.0 million and $6.1 million for the three and six months ended June 30, 1998, respectively. Amortization of intangibles is attributable to certain intangible assets acquired in connection with the acquisition of PharmaGenics, Inc. on June 18, 1997. OTHER INCOME AND EXPENSES Interest income was $0.2 million and $0.3 million for the three and six months ended June 30, 1999 as compared to $0.2 million and $0.5 million in the same periods of 1998. Interest expense was zero and $3,000 for the three and six months ended June 30, 1999 as compared to $1.1 million and $2.3 million in the corresponding periods of 1998. The decrease in interest income results from lower average cash balances. The decrease in interest expense is due to the exchange of debentures convertible into GZMO Stock for the GENZ Debentures in August 1998. GZMO recorded an equity in the loss of StressGen/Genzyme LLC of $0.6 million and $1.0 million for the three and six months ended June 30, 1999, respectively, and $0.5 million and $1.0 million for the three and six months ended June 30, 1998, respectively. GZMO recorded a tax benefit of $0.7 million and $1.3 million for both the three and six months ended June 30, 1999 and June 30, 1998, respectively. This tax benefit is the result of the amortization of the deferred tax liability established upon the acquisition of PharmaGenics. -38- 39 LIQUIDITY AND CAPITAL RESOURCES GENZYME CORPORATION AND SUBSIDIARIES As of June 30, 1999, Genzyme had cash, cash equivalents, and short- and long-term investments of $651.8 million, an increase of $76.0 million from December 31, 1998. Operating and financing activities provided $78.6 million and $34.5 million of cash, respectively, investing activities used $83.8 million of cash and fluctuations in exchange rates caused a reduction in cash of $1.9 million. In the six months ended June 30, 1999, financing activities provided $31.5 million of cash proceeds from the exercise of stock options and used $0.8 million of cash for the repayment of debt and capital lease obligations. In the six months ended June 30, 1999, investing activities provided $11.1 million of cash from the sale of Genzyme's remaining shares of TECHNE common stock and $8.3 million from the payment of a note receivable related to the sale of Genetic Design, Inc. Investing activities used $51.4 million of cash for the investment portfolios, $30.4 million of cash to fund capital expenditures, $22.2 million of cash to fund Genzyme's investments in joint ventures and $10.9 million to fund other noncurrent assets. At June 30, 1999, $100.0 million was outstanding under Genzyme's $225 million revolving credit facility with a syndicate of commercial banks (the "Revolving Credit Facility"), of which $82.0 million was allocated to Genzyme General and $18.0 million was allocated to GZTR. Genzyme believes that its available cash, investments and cash flow from product and service sales will be sufficient to finance its planned operations and capital requirements for the foreseeable future. Although Genzyme currently has substantial cash resources, it has committed to utilize a portion of its resources for certain purposes, such as: (i) paying strategic collaborators and funding joint venture obligations, including a $10.0 million milestone payment to GelTex in October 1999 and a $10.0 million equity investment in BioMarin upon completion of their initial public equity offering (see "Subsequent Events" below); (ii) product development and marketing; (iii) expanding facilities; and (iv) marketing Carticel[R] AuCC, Thyrogen[R] hormone and the Sepra Products. Genzyme's cash resources will be further reduced to pay principal and interest on the following debt: (i) $100.0 million payable in November 1999 under the Revolving Credit Facility; (ii) $21.2 million in principal amount under the GENZ Debentures, which are convertible into GENZ Stock and mature on August 29, 2003; (iii) $7.4 million in principal amount under the GZTR Note, which is convertible into GZTR Stock and matures on February 27, 2000; and (iv) $250.0 million in principal amount under the GENZ Notes, which are convertible into shares of GENZ Stock, GZMO Stock and GZSP Stock and which mature on June 1, 2005. To the extent cash is used to pay or redeem these debt instruments, including the interest payable thereon, Genzyme's cash resources will be diminished. Genzyme may also require additional capital to finance its activities. There can be no assurance that such financing will be available on terms acceptable to Genzyme, if at all. GENZYME GENERAL As of June 30, 1999, Genzyme General had cash, cash equivalents, and short- and long-term investments of $466.5 million, a decrease of $89.6 million from December 31, 1998. Operating activities provided $117.0 million of cash, investing and financing activities used $79.2 million and $48.6 million of cash, respectively, and fluctuations in exchange rates caused a reduction in cash of $1.9 million. In the six months ended June 30, 1999, investing activities provided $11.1 million of cash from the sale of Genzyme's investment in TECHNE common stock $8.3 million from the payment of a note receivable related to the sale Genetic Design, Inc., and $71.5 million of cash from the investment portfolio. Investing activities used $52.4 million for the turnover of the investment portfolio, $28.2 million of cash to fund capital expenditures; $18.6 million of cash to fund Genzyme General's investments in joint ventures; and $9.0 million to fund other noncurrent assets. In the six months ended June 30, 1999, financing activities provided $31.3 million of cash proceeds from the exercise of stock options and used $53.2 million of cash for the allocation of certain assets to GZSP in connection with the creation of GZSP as a separate division of Genzyme, $25.0 million of cash allocated to GZTR in exchange for Genzyme's 50% interest in Diacrin/Genzyme LLC, $5.0 million of cash allocated to GZTR under GZTR's equity line of credit from Genzyme General (the "GZTR Equity Line") and $0.6 million of cash for the repayment of debt and capital lease obligations. At June 30, 1999, $82.0 million of funds allocated to Genzyme General under the Revolving Credit Facility remained outstanding. In 1998, the Genzyme Board made $30.0 million of Genzyme General's cash available to GZMO under an equity line of credit (the "GZMO Equity Line"). Under the terms of the GZMO Equity Line, GZMO may draw down funds as needed each fiscal quarter in exchange for GZMO Designated Shares. GZMO Designated Shares are shares of GZMO's Stock that are not issued and outstanding, but which Genzyme's board of directors may from time to time issue, sell or otherwise distribute without allocating the proceeds to GZMO. GZMO has not yet drawn any funds under the GZMO Equity Line in 1999. In 1998, the Genzyme Board made $50.0 million of Genzyme General's cash available to GZTR under the GZTR Equity Line. Under the terms of the GZTR Equity Line, GZTR may draw down funds as needed each fiscal quarter in exchange for GZTR Designated Shares. GZTR Designated Shares are shares of GZTR Stock that are not issued and outstanding but which Genzyme's board of directors may from time to time issue, sell or otherwise distribute without allocating the proceeds to GZTR. In February 1999, GZTR made a $5.0 million draw under the GZTR Equity Line in exchange for 1,633,399 GZTR Designated Shares. In May 1999, the amount available under the GZTR Equity Line was reduced to $20.0 million due to the transfer of Genzyme's 50% interest in Diacrin/Genzyme LLC from GZTR to Genzyme General. -39- 40 On June 28, 1999, Genzyme distributed 0.17901 of a share of GZSP Stock for each share of GENZ Stock owned on June 14, 1999. Approximately 14.8 million shares of GZSP Stock were distributed. On June 28, 1999, Genzyme General transferred $150.0 million in cash, cash equivalents and investments to GZSP in connection with the creation of GZSP as a separate division of Genzyme. Genzyme General believes that its available cash, investments and cash flow from operations will be sufficient to finance its planned operations and capital requirements for the foreseeable future. Although Genzyme General currently has substantial cash resources, it has committed to utilize a portion of its resources for certain purposes, such as: (i) paying strategic collaborators and funding joint venture obligations, including a $10.0 million milestone payment to GelTex in October 1999 and a $10.0 million equity investment in BioMarin upon completion of their initial public equity offering (see "Subsequent Events" below); (ii) product development and marketing; (iii) expanding facilities; and (iv) marketing Thyrogen[R] hormone. Genzyme General's cash resources will be further reduced to pay principal and interest on the following debt: (i) $82.0 million under the Revolving Credit Facility; (ii) $21.2 million in principal amount under the GENZ Debentures, which are convertible into shares of GENZ Stock and mature on August 29, 2003; and (iii) $250.0 million in principal amount under the GENZ Notes, which are convertible into shares of GENZ Stock and mature on June 1, 2005. To the extent cash is used to pay or redeem these debt instruments, including the interest payable thereon, Genzyme General's cash will also be diminished. Further, to the extent the liabilities or contingencies of GZSP, GZTR and GZMO affect Genzyme's resources or financial condition, such liabilities or contingencies could affect the financial condition or results of operations of Genzyme General. Genzyme General may require additional capital to finance any activities. There can be no assurance that such financing will be available on terms acceptable to Genzyme General, if at all. GENZYME SURGICAL PRODUCTS As of June 30, 1999, Genzyme Surgical Products had cash, cash equivalents, and short- and long-term investments of $152.7 million. GZSP had no cash, cash equivalents, short- and long-term investments as of December 31, 1998. In the six months ended June 30, 1999, operating activities used $25.7 million of cash. In the six months ended June 30, 1999, investing activities used $1.6 million to fund capital expenditures. In the six months ended June 30, 1999, financing activities provided $53.2 million of cash due to the allocation of certain assets from Genzyme General to GZSP in connection with the creation of GZSP as a separate division of Genzyme. On June 28, 1999, Genzyme distributed 0.17901 of a share of GZSP Stock for each share of GENZ Stock owned on June 14, 1999. Approximately 14.8 million shares of GZSP Stock were distributed. On June 28, 1999, Genzyme General transferred $150.0 million of cash, cash equivalents and investments to GZSP in connection with the creation of GZSP as a separate division of Genzyme. GZSP believes that its cash resources, together with the revenues generated from its products and distribution agreements, will be sufficient to finance its planned operations and capital requirements through 2001. Although GZSP has substantial cash resources, it may have to utilize a portion of its resources for certain purposes, such as: (i) product development and marketing; (ii) expanding facilities; and (iii) marketing the Sepra Products. In addition, in the event that GZSP exercises the option to purchase the limited partnership interests in GDP and uses cash to pay all or a portion of the purchase price, GZSP's cash resources will be diminished. GZSP's cash requirements may vary materially from those currently anticipated by its management as a result of numerous factors, including without limitation the results of research and development efforts, the ability to establish and maintain strategic alliances, licensing arrangements and additional distribution arrangements, the costs involved in enforcing patent claims 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 governmental authorities. Insufficient funds may require GZSP to delay, scale back or eliminate certain of its research and development programs or to license third parties to commercialize technologies or products that GZSP would otherwise commercialize itself. -40- 41 GENZYME TISSUE REPAIR As of June 30, 1999, GZTR had cash and cash equivalents of $25.3 million, an increase of $17.6 million from December 31, 1998. In the six months ended June 30, 1999, GZTR used $8.3 million of cash for operations. Investing activities used $4.1 million of cash, which included $3.6 million used to fund GZTR's investment in Diacrin/Genzyme LLC and $0.6 million used for purchases of property, plant and equipment. Financing activities provided $30.0 million of cash, which consisted of the $25.0 million paid to GZTR in connection with the transfer of Genzyme's interest in Diacrin/Genzyme LLC to Genzyme General, $5.0 million allocated to GZTR under the GZTR Equity Line and $0.2 million of cash proceeds from employee stock plans. As of June 30, 1999, $18.0 million of funds allocated to GZTR in December 1996 under the Revolving Credit Facility remained outstanding. This $18.0 million is due to be repaid in November 1999. In the first two quarters of 1999, the holder of the GZTR Note converted an aggregate of $5,040,000 in principal amount in exchange for a total of 2,445,014 shares of GZTR Stock. GZTR paid approximately $306,000 of accrued interest to the holder in connection with these conversions. On May 26, 1999, the holders of GZTR Stock approved the reallocation of Genzyme's interest in Diacrin/Genzyme LLC from GZTR to Genzyme General in exchange for $25.0 million of cash and a 3% worldwide royalty on any products sold by Diacrin/Genzyme LLC. In connection with the transfer, GZTR received $25.0 million in cash from Genzyme General and the funds available under the GZTR Equity Line were reduced to $20.0 million from $45.0 million. Of the $25.0 million in cash paid to GZTR, $5.0 million is non-refundable and $20.0 million is subject to the successful achievement of certain future milestones by Diacrin/Genzyme LLC. If the milestones are not met, GZTR is required to repay Genzyme General for the advanced milestone funds plus interest in cash or GZTR Designated Shares, at GZTR's option. GZTR believes its available cash and investments, and amounts available under the GZTR Equity Line will be sufficient to finance planned operations and capital requirements through the end of 1999. GZTR will require substantial additional funds in order to continue operations at current levels beyond 1999. GZTR's plans to raise additional funds include the consideration of the sale of additional equity securities, strategic alliances with third parties to fund further developments and marketing of Carticel[R] AuCC and other business transactions that would generate capital resources to assure continuation of GZTR's operations and research programs. If these initiatives are not successful, GZTR may be required to delay, scale back or eliminate certain of its programs, or to license third parties to commercialize technologies or products that GZTR would otherwise undertake itself. GENZYME MOLECULAR ONCOLOGY As of June 30, 1999, GZMO had cash, cash equivalents, and short-term investments of $7.3 million, a decrease of $4.6 million from December 31, 1998. Substantially all of this decrease is attributable to operating activities. GZMO believes that the existing cash balances, revenues generated from SAGE[TM] agreements, committed research funding from collaborators and cash available under the GZMO Equity Line, will enable GZMO to maintain its current and planned operations through 2000. CMDF has the option to require Genzyme to purchase a portion of CMDF's membership interest in StressGen/Genzyme LLC. If CMDF exercises this option, GZMO may pay the purchase price, at GZMO's option, in cash, shares of GZMO Stock, or a combination of both. To the extent that CMDF exercises its option and GZMO elects to use cash to complete this purchase, GZMO's cash resources will be diminished. Substantial additional funds will be required to complete development and commercialization of GZMO's products and services (other than services related to the SAGE[TM] technology). In addition, GZMO's cash requirements may vary materially from those now planned as a result of numerous factors, including the progress of GZMO's research and development programs, achievement of milestones under strategic alliance arrangements, the ability of GZMO to establish and maintain additional strategic alliances and licensing arrangements, the progress of development efforts of GZMO's strategic partners, competing technological and market developments, the costs involved in enforcing patent claims and other intellectual property rights, the development of competitor products and services and the cost and timing of regulatory approvals. Insufficient funds may require GZMO to delay, scale back or eliminate certain of its programs or to license third parties to commercialize technologies or products that GZMO would otherwise undertake itself. EURO-THE NEW EUROPEAN CURRENCY Since December 31, 1998, there have been no material changes related to Genzyme's outstanding derivatives and forward contracts, or any other material contracts as a result of the Euro conversion nor have there been any material changes in Genzyme's competitive position as a result of the conversion. The Company's disclosures related to the Euro conversion are described 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 the 1998 Genzyme 10-K/A and which is incorporated herein by reference. -41- 42 YEAR 2000 There have been no material changes in the Company's Year 2000 compliance program or its potential Year 2000 exposure since December 31, 1998. The Company's disclosures related to Year 2000 issues are described 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 the 1998 Genzyme 10-K/A and which is incorporated herein by reference. MARKET RISK There have been no material changes in the Company's market risk since December 31, 1998. The Company's disclosure related to market risks are described 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 the 1998 Genzyme 10-K/A and which is incorporated herein by reference. SUBSEQUENT EVENTS On July 1, 1999, Genzyme sold its bioreagent and ELISA immunochemistry product lines to Alexon-Trend Inc., an operating unit of Sybron Laboratory Products Corp., which is a wholly-owned subsidiary of Sybron International Corporation, for $5.0 million in cash. On July 27, 1999, Genzyme acquired Peptimmune, a privately-held biotechnology company that develops therapies for inherited autoimmune disorders, for $6.5 million in cash. The acquisition will be accounted for as a purchase. Peptimmune's lead development program focuses on a treatment for pemphigus vulgaris, a rare genetic disease characterized by severe and potentially fatal blistering of the skin and mucous membranes. In July 1999, Genzyme purchased 769,230 shares of the common stock of BioMarin Pharmaceutical, Inc. at a price of $13.00 per share in a private placement contemporaneous with the closing of BioMarin's initial public offering. Following this purchase, Genzyme owns approximately 6.2% of the outstanding shares of BioMarin common stock. In July and August 1999, the holder of the GZTR Note converted a total of $810,000 in principal amount in exchange for 466,357 shares of GZTR Stock. GZTR paid approximately $67,000 of accrued interest to the holder in connection with these conversions. -42- 43 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, JUNE 30, 1999 ITEM 3. QUANTITATIVE AND QUALITATIVE ANALYSIS OF MARKET RISK There have been no material changes in the Company's market risk since December 31, 1998. The Company's disclosure related to market risks are described under the heading "Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and Results of Operation -- Market Risk," in Exhibit 13.1 to the 1998 Genzyme 10-K/A and which is incorporated herein by reference. PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS In June 1999, Genzyme's board of directors designated GZSP Stock as a new series of Genzyme common stock. Sixty million shares of GZSP Stock were authorized for issuance from the pool of Genzyme common stock that is undesignated as to series. A description of GZSP Stock is contained in Genzyme's Registration Statement on Form 8-A filed with the SEC on June 11, 1999. This description is incorporated herein by reference. Also in June 1999, Genzyme's board of directors amended its shareholder rights plan to provide for preferred stock purchase rights to trade with GZSP Stock. A description of these GZSP Stock Purchase Rights is contained in Genzyme's Registration Statement on Form 8-A/A filed with the SEC on June 11, 1999. This description is incorporated herein by reference. ITEM 4. Submission of Matters to a Vote of Security Holders The Company held its annual meeting of stockholders on May 26, 1999. The following represents the results of the voting on proposals submitted to the stockholders at the annual meeting for a vote: a. Proposal to elect three directors for a term of office expiring in 2002:
NUMBER OF VOTES ----------------------------- NOMINEE FOR WITHHELD ------------ -------------- Constantine E. Anagnostopoulos GENZ 61,432,667 13,352,420 GZTR* 1,187,990 18,574 GZMO** 824,345 9,799 ------------ -------------- Total 63,445,002 13,380,793 NUMBER OF VOTES ----------------------------- NOMINEE FOR WITHHELD ------------ -------------- Robert J. Carpenter GENZ 63,212,508 11,572,579 GZTR* 1,188,051 18,513 GZMO** 824,349 9,794 ------------ -------------- Total 65,224,908 11,600,886 NUMBER OF VOTES ----------------------------- NOMINEE FOR WITHHELD ------------ -------------- Charles L. Cooney GENZ 63,212,476 11,572,611 GZTR* 1,188,052 18,512 GZMO** 824,349 9,795 ------------ -------------- Total 65,224,877 11,600,918
Each nominee received a majority of the votes cast and, therefore, was duly elected as a director of the Company. The terms in office of Henri A. Termeer, Henry R. Lewis, Henry E. Blair and Douglas A. Berthiaume continued after the meeting. b. Proposal to approve the Company's 1999 Employee Stock Purchase Plan.
Number of Number of Number of Votes Number of Votes For Votes Against Abstaining Broker Non-Votes --------- ------------- --------------- ---------------- GENZ 71,797,000 2,585,911 393,592 -- GZTR* 986,742 201,457 12,039 -- GZMO** 800,755 27,739 5,649 -- ---------- --------- ------- ---------------- Total 73,584,497 2,815,107 411,280 --
The proposal received the affirmative vote of a majority in interest of the stock present, or represented, and entitled to vote and, therefore, was adopted.*** --------------------- * Represents the actual number of GZTR shares voted multiplied by .06 ** Represents the actual number of GZMO shares voted multiplied by .08 *** For this purpose, abstentions and broker non-votes were not counted. -43- 44 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, JUNE 30, 1999 ITEM 4. Submission of Matters to a Vote of Security Holders (continued) c. Proposal to amend the Company's 1990 Equity Incentive Plan to make 500,000 shares of GZSP Stock available for issuance under the plan.
Number of Number of Number of Votes Number of Votes For Votes Against Abstaining Broker Non-Votes --------- ------------- --------------- ---------------- GENZ 59,401,537 14,906,417 477,132 -- GZTR* 975,106 211,799 13,332 -- GZMO** 789,299 37,214 7,631 -- ---------- ---------- ------- Total 61,165,942 15,155,430 498,095 --
The proposal received the affirmative vote of a majority in interest of the stock present, or represented, and entitled to vote and, therefore, was adopted. *** d. Proposal to amend the Company's director stock option plan to make 100,000 shares of GZSP Stock available for issuance under the plan.
Number of Number of Number of Votes Number of Votes For Votes Against Abstaining Broker Non-Votes --------- ------------- --------------- ---------------- GENZ 71,466,259 2,830,833 487,994 -- GZTR* 968,323 217,160 14,754 -- GZMO** 790,256 36,199 7,688 -- ---------- --------- ------- Total 73,224,838 3,084,192 510,436 --
The proposal received the affirmative vote of a majority in interest of the stock present, or represented, and entitled to vote and, therefore, was adopted. *** e. Proposal to amend the directors' deferred compensation plan to make 50,000 shares of GZSP Stock available for issuance under the plan.
Number of Number of Number of Votes Number of Votes For Votes Against Abstaining Broker Non-Votes --------- ------------- --------------- ---------------- GENZ 72,693,864 1,522,141 569,081 -- GZTR* 1,132,352 52,793 15,093 -- GZMO** 800,163 26,093 7,887 -- ---------- --------- ------- Total 74,626,379 1,601,027 592,061 --
The proposal received the affirmative vote of a majority in interest of the stock present, or represented, and entitled to vote and, therefore, was adopted. *** ---------------------- * Represents the actual number of GZTR shares voted multiplied by .06 ** Represents the actual number of GZMO shares voted multiplied by .08 *** For this purpose, abstentions and broker non-votes were not counted. -44- 45 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, JUNE 30, 1999 ITEM 4. Submission of Matters to a Vote of Security Holders (continued) f. Proposal to approve the transfer of Genzyme's 50% interest in the joint venture with Diacrin from Genzyme Tissue Repair to Genzyme General.
Number of Number of Number of Votes Number of Votes For Votes Against Abstaining Broker Non-Votes --------- ------------- --------------- ---------------- GZTR 9,873,149 455,506 117,387 -- --------- ------- ------- Total 9,873,149 455,506 117,387 --
The proposal received the affirmative vote of a majority in interest of the GZTR Stock present, or represented, and entitled to vote, and therefore, was adopted. *** ------------------------ *** For this purpose, abstentions and broker non-votes were not counted. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.1 Restated Articles of Organization of Genzyme, as amended. Filed as Exhibit 1 to Genzyme's Registration Statement on Form 8-A filed with the SEC on June 18, 1997 (File No. 0-14680), and incorporated herein by reference. 3.2 By-laws of Genzyme. Filed as Exhibit 3.2 to Genzyme's Form 8-K dated December 31, 1991 (File No. 0-14680), and incorporated herein by reference. 4.1 Series Designation for Genzyme Molecular Oncology Division Common Stock, $.01 par value. Filed as Exhibit 2 to Genzyme's Registration Statement on Form 8-A filed with the SEC on June 18, 1997 (File No. 0-14680), and incorporated herein by reference. 4.2 Series Designation for Genzyme Surgical Products Division Common Stock, $.01 par value. Filed as Exhibit 2 to Genzyme's Registration Statement on Form 8-A filed with the SEC on June 11, 1999 (File No. 0-14680), and incorporated herein by reference. 4.3 Series Designation for the Series A, Series B, Series C and Series D Junior Participating Preferred Stock, $.01 par value, of Genzyme. Filed as Exhibit 2 to Amendment No. 1 to Genzyme's Registration Statement on Form 8-A filed with the SEC on June 11, 1999 (File No. 0-14680), and incorporated herein by reference. 4.4 Amended and Restated Renewed Rights Agreement, dated as of June 10, 1999, between Genzyme and American Stock Transfer and Trust Company. Filed as Exhibit 4 to Amendment No. 1 to Genzyme's Registration Statement on Form 8-A filed with the SEC on June 11, 1999 (File No. 0-14680), and incorporated herein by reference. 10.1 Collaboration Agreement dated September 4, 1998 among Genzyme, BioMarin Pharmaceutical, Inc. ("BioMarin") and BioMarin/Genzyme LLC. Previously filed as Exhibit 10.24 to BioMarin's Registration Statement on Form S-1 (File No. 333-77701) and incorporated herein by reference. 10.2 Purchase Agreement dated September 4, 1998 between Genzyme and BioMarin. Previously filed as Exhibit 10.25 to BioMarin's Registration Statement on Form S-1 (File No. 333-77701) and incorporated herein by reference. 10.3 Operating Agreement of BioMarin/Genzyme LLC. Previously filed as Exhibit 10.30 to BioMarin's Registration Statement on Form S-1 (File No. 333-77701) and incorporated herein by reference. 27.1 Financial Data Schedule for Genzyme for the six months ended June 30, 1999 (for EDGAR filing purposes only). Filed herewith. 27.2 Financial Data Schedule for Genzyme for the six months ended June 30, 1998 (for EDGAR Filing purpose only). Filed herewith. (b) Reports on Form 8-K On June 11, 1999, Genzyme filed a Current Report on Form 8-K to announce: - the declaration of a tax-free dividend of approximately 0.17901 of a share of GZSP Stock for each share of GENZ Stock held as of June 14, 1999; - the reservation of approximately 1,132,000 shares of GZSP Stock for future issuance upon conversion of the GENZ Notes and approximately 327 shares for future issuance in connection with distributions from existing stock accounts under its directors' deferred compensation plan; and - the anticipation that the GZSP Stock would begin trading on The Nasdaq National Market[R] under the ticker symbol GZSP on June 28, 1999. In this same report, Genzyme also provided: - unaudited, combined financial statements and notes thereto for Genzyme Surgical Products for the three months ended March 31, 1999 and 1998 and as of March 31, 1999; - certain audited financial statements and notes thereto for Genzyme Surgical Products for the years ended December 31, 1998, 1997 and 1996 and as of December 31, 1998 and 1997; and - unaudited combined pro forma financial statements and notes thereto for Genzyme General for the three months ended March 31, 1999, for the year ended December 31, 1998 and as of March 31, 1999 and 1998. -45- 46 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, JUNE 30, 1999 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED) On June 30, 1999, Genzyme filed a Current Report on Form 8-K to announce that on June 28, 1999, Genzyme distributed 0.17901 of a share of GZSP Stock for each share of GENZ Stock held as of the close of business on June 14, 1999. Genzyme announced that it had distributed approximately 14.8 million shares of GZSP Stock and paid cash for fractional shares at a rate of $25 per share. Genzyme also announced that it had reserved 1,130,123 shares of GZSP Stock for future issuance upon conversion of the GENZ Notes and 327 shares for future issuance in connection with distributions from existing stock accounts under Genzyme's directors' deferred compensation plan. Genzyme further announced that GZSP Stock began trading on The Nasdaq National Market[R] under the ticker symbol GZSP on June 28, 1999. In addition, Genzyme also provided in this report: - certain unaudited supplemental combined financial statements and notes thereto for Genzyme General for the three months ended March 31, 1999 and 1998 and as of March 31, 1999; and - certain audited supplemental combined financial statements and notes thereto for Genzyme General for the years ended December 31, 1998 and 1997 and as of December 31, 1998 and 1997. -46- 47 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, JUNE 30, 1999 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GENZYME CORPORATION DATE: August 16, 1999 By: /s/ Michael S. Wyzga ------------------------------ Michael S. Wyzga Senior Vice President, Finance; Corporate Controller; Chief Financial Officer and Chief Accounting Officer -47- 48 GENZYME CORPORATION AND SUBSIDIARIES FORM 10-Q, JUNE 30, 1999 EXHIBIT INDEX 3.1 Restated Articles of Organization of Genzyme, as amended. Filed as Exhibit 1 to Genzyme's Registration Statement on Form 8-A filed with the SEC on June 18, 1997 (File No. 0-14680), and incorporated herein by reference. 3.2 By-laws of Genzyme. Filed as Exhibit 3.2 to Genzyme's Form 8-K dated December 31, 1991 (File No. 0-14680), and incorporated herein by reference. 4.1 Series Designation for Genzyme Molecular Oncology Division Common Stock, $.01 par value. Filed as Exhibit 2 to Genzyme's Registration Statement on Form 8-A filed with the SEC on June 18, 1997 (File No. 0-14680), and incorporated herein by reference. 4.2 Series Designation for Genzyme Surgical Products Division Common Stock, $.01 par value. Filed as Exhibit 2 to Genzyme's Registration Statement on Form 8-A filed with the SEC on June 11, 1999 (File No. 0-14680), and incorporated herein by reference. 4.3 Series Designation for the Series A, Series B, Series C and Series D Junior Participating Preferred Stock, $.01 par value, of Genzyme. Filed as Exhibit 2 to Amendment No. 1 to Genzyme's Registration Statement on Form 8-A filed with the SEC on June 11, 1999 (File No. 0-14680), and incorporated herein by reference. 4.4 Amended and Restated Renewed Rights Agreement, dated as of June 10, 1999, between Genzyme and American Stock Transfer and Trust Company. Filed as Exhibit 4 to Amendment No. 1 to Genzyme's Registration Statement on Form 8-A filed with the SEC on June 11, 1999 (File No. 0-14680), and incorporated herein by reference. 10.1 Collaboration Agreement dated September 4, 1998 among Genzyme, BioMarin Pharmaceutical, Inc. ("BioMarin") and BioMarin/Genzyme LLC. Previously filed as Exhibit 10.24 to BioMarin's Registration Statement on Form S-1 (File No. 333-77701) and incorporated herein by reference. 10.2 Purchase Agreement dated September 4, 1998 between Genzyme and BioMarin. Previously filed as Exhibit 10.25 to BioMarin's Registration Statement on Form S-1 (File No. 333-77701) and incorporated herein by reference. 10.3 Operating Agreement of BioMarin/Genzyme LLC. Previously filed as Exhibit 10.30 to BioMarin's Registration Statement on Form S-1 (File No. 333-77701) and incorporated herein by reference. 27.1 Financial Data Schedule for Genzyme for the six months ended June 30, 1999 (for EDGAR filing purposes only). Filed herewith. 27.2 Financial Data Schedule for Genzyme for the six months ended June 30, 1998 (for EDGAR filing purposes only). Filed herewith. -48- EX-27.1 2 FINANCIAL DATA SCHEDULE
5 This document contains summary financial information extracted from (a) the Unaudited Consolidated Financial Statements of Genzyme Corporation and its Subsidiaries for the six months ended June 30, 1999 and is qualified in its Entirety by reference to such (b) financial statements as included in the form 10-Q for Genzyme Corporation dated June 30, 1999. 1,000 U.S. DOLLARS 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 1 146,069 505,699 184,699 23,556 112,822 786,246 544,587 165,206 1,732,175 237,776 0 0 0 1,341 1,216,707 1,732,175 368,104 370,428 88,386 112,888 198,540 8,300 11,088 39,612 17,264 22,348 0 0 0 23,348 1.01 0.95 This financial data schedule has been restated to reflect the creation of Genzyme Surgical Products Division on June 28, 1999. Genzyme Surgical Products was created from programs and products that had previously been included in the results of Genzyme General Division until the creation date of June 28, 1999. All Genzyme General Division historical net income (loss) and earnings (loss) per share amounts have been restated to reflect the creation of this new division and Genzyme Surgical Products Division is now included as a separate tracking stock of Genzyme Corporation. Genzyme Corporation reports earnings per share based on its four tracking stocks - Genzyme General Division Common Stock ("GENZ Stock"), Genzyme Surgical Products Division Common Stock ("GZSP Stock"), Genzyme Molecular Oncology Division Common Stock ("GZMO Stock") and Genzyme Tissue Repair Division Common Stock ("GZTR Stock"). The earnings per share data presented on this schedule reflects the earnings per share data for net income attributable to GENZ Stock. For the six months ended June 30, 1999, net income attributable to Genzyme General Division was $83,452 and net income per share of GENZ Stock on a basic and diluted basis was $1.01 and $0.95, respectively. Net loss for Genzyme Surgical Products Division for the six months ended June 30, 1999 was $(28,403), and pro forma net loss per basic and diluted share of GZSP Stock was $(1.92). Net loss for Genzyme Molecular Oncology Division for the six months ended June 30, 1999 was $(15,218) or $(1.20) per basic and diluted share of GZMO Stock. Net loss for Genzyme Tissue Repair Division for the six months ended June 30, 1999 was $(17,998) or $(0.81) per basic and diluted share of GZTR Stock.
EX-27.2 3 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from (a) the Unaudited Consolidated Financial Statements of Genzyme Corporation and its Subsidiaries for the six months ended June 30, 1998 and is qualified in its Entirety by reference to such (b) financial statements as included in the form 10-Q for Genzyme Corporation dated June 30, 1998. 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 306,296 43,722 137,749 21,152 135,788 671,602 515,205 129,796 1,574,937 132,705 0 0 0 1,029 1,046,296 1,574,937 330,048 335,425 94,923 119,178 168,293 3,393 9,122 35,439 14,559 20,880 0 0 0 20,880 0.96 0.93 This financial data schedule has been restated to reflect the creation of Genzyme Surgical Products Division on June 28, 1999. Genzyme Surgical Products was created from programs and products that had previously been included in the results of Genzyme General Division until the creation date of June 28, 1999. All Genzyme General Division historical net income (loss) and earnings (loss) per share amounts have been restated to reflect the creation of this new division and Genzyme Surgical Products Division is now included as a separate tracking stock of Genzyme Corporation. Genzyme Corporation reports earnings per share based on its four tracking stocks - Genzyme General Division Common Stock ("GENZ Stock"), Genzyme Surgical Products Division Common Stock ("GZSP Stock"), Genzyme Molecular Oncology Division Common Stock ("GZMO Stock") and Genzyme Tissue Repair Division Common Stock ("GZTR Stock"). The earnings per share data presented on this schedule reflects the earnings per share data for net income attributable to GENZ Stock. For the six months ended June 30, 1998, net income attributable to Genzyme General Division was $75,142 and net income per share of GENZ Stock on a basic and diluted basis was $0.96 and $0.93, respectively. Net loss for Genzyme Surgical Products Division for the six months ended June 30, 1999 was $(19,004), and pro forma net loss per basic and diluted share of GZSP Stock was $(1.28). Net loss for Genzyme Molecular Oncology Division for the six months ended June 30, 1999 was $(13,987) or $(3.56) per basic and diluted share of GZMO Stock. Net loss for Genzyme Tissue Repair Division for the six months ended June 30, 1999 was $(21,775) or $(1.08) per basic and diluted share of GZTR Stock.
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