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EXHIBIT 13.2
FINANCIAL STATEMENTS
PAGE NO.
I. GENZYME TISSUE REPAIR
Selected Financial Data............................................ 2
Management's Discussion And Analysis Of Financial Condition And
Results Of Operations............................................. 4
Combined Balance Sheets - December 31, 1997 and 1996............... 10
Combined Statements of Operations - For the Years Ended
December 31, 1997, 1996 and 1995.................................. 11
Combined Statements of Cash Flows - For the Years Ended
December 31, 1997, 1996 and 1995.................................. 12
Notes to Combined Financial Statements............................. 13
Report of Independent Accountants.................................. 21
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GENZYME TISSUE REPAIR
SELECTED FINANCIAL DATA
COMBINED STATEMENTS OF OPERATIONS DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Revenues:
Net service sales .......................... $10,856 $ 7,312 $ 5,220 $ 324 $ -
Related party revenues:
Technology license fee (1) ................ - - - - 2,000
Revenues from research and development
contracts ................................ - - - - 2,684
------- ------- ------- ------- -------
Total revenues .......................... 10,856 7,312 5,220 324 4,684
Operating costs and expenses:
Cost of services sold ...................... 11,788 11,193 4,731 287 -
Selling, general and administrative ........ 25,571 27,111 12,927 964 701
Research and development (including research
and development related to contracts) ..... 10,845 10,880 10,938 3,638 2,805
Purchase of in-process research and
development (2) ........................... - - - 11,215 25,000
------- ------- ------- ------- -------
Total operating costs and expenses ...... 48,204 49,184 28,596 16,104 28,506
------- ------- ------- ------- -------
Operating loss ................................ (37,348) (41,872) (23,376) (15,780) (23,822)
Other income (expenses):
Interest income ............................ 979 1,432 1,386 29 -
Interest expense ........................... (2,896) (148) (40) - -
Equity in net loss of joint venture (3) .... (6,719) (1,727) - - -
------- ------- ------- ------- -------
Total other income (expenses) .......... (8,636) (443) 1,346 29 -
------- ------- ------- ------- -------
Loss before income taxes ...................... (45,984) (42,315) (22,030) (15,751) (23,822)
------- ------- ------- ------- -------
Provision for income taxes .................... - - - - (38)
Tax benefit allocated to Genzyme General ...... - - - - (255)
Net loss attributable to Genzyme Tissue Repair
stock (4) ................................... (45,984) (42,315) (22,030) (15,751) (24,115)
======= ======= ======= ======= =======
Per Genzyme Tissue Repair common share
(basic and diluted):
Net loss (4) ................................ $ (3.07) $ (3.38) $ (2.28) $ (4.40) $ (7.43)
======= ======= ======= ======= =======
Weighted average shares outstanding (4) ..... 14,976 12,525 9,659 3,578 3,245
======= ======= ======= ======= =======
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GENZYME TISSUE REPAIR
SELECTED FINANCIAL DATA (CONTINUED)
COMBINED BALANCE SHEET DATA(7): DECEMBER 31,
- --------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
Cash and investments (5) ...... $31,915 $16,230 $47,573 $24,808 $ -
Working capital ............... 31,434 14,232 44,374 20,557 -
Total assets .................. 56,818 42,593 52,649 28,435 -
Long-term debt (6) ............ 30,681 18,000 - - -
Division equity (6,7,8) ....... 20,203 18,084 45,926 23,313 -
There were no cash dividends paid.
- -----------------------
NOTES TO SELECTED FINANCIAL DATA:
(1) Genzyme Tissue Repair Division ("Genzyme Tissue Repair" or "GTR") received a
$2.0 million technology license fee from the Neozyme Corporation ("Neozyme I")
in July 1993 related to the expansion of the Vianain(R) debriding product.
(2) GTR acquired (a) the rights to the Neozyme I Vianain(R) development program
in 1993, and (b) all of the outstanding stock of BioSurface Technology, Inc.
("BioSurface") in 1994. These acquisitions were accounted for as purchases.
In-process research and development acquired in connection with the acquisitions
was charged to operations.
(3) In 1996, in connection with the formation of a joint venture with Diacrin,
Inc., the Genzyme Board of Directors (the "Genzyme Board") authorized the
allocation of up to $20.0 million in cash from Genzyme General Division
("Genzyme General" or "GGD") to GTR. In 1997 and 1996, GTR received $5.1 million
and $1.9 million, respectively, in cash from Genzyme General to fund the joint
venture in exchange for the rights to 489,810 and 231,645 GTR Designated
Shares, respectively. (See Note F., "Investments and Other Noncurrent
Assets" below).
(4) Net loss attributable to GTR and net loss per share for the year ended
December 31, 1993 gives effect to the management and accounting policies adopted
by the Genzyme Board in connection with the creation of GTR and, accordingly, is
a pro forma presentation.
(5) Cash and investments includes cash, cash equivalents, and short- and
long-term investments.
(6) In December 1996, GTR borrowed $18.0 million under Genzyme Corporation's
("Genzyme" or the "Company") $225.0 million revolving credit facility to fund
operations. At December 31, 1997 this $18.0 million is still outstanding.
On February 28, 1997, GTR raised $13.0 million through the private placement of
a 5% convertible note due February 27, 2000 (the "GTR Note") to an affiliate of
Credit Suisse First Boston Corporation. In the first quarter of 1997, GTR
recorded $11.5 million of proceeds attributed to the value of the debt and $1.5
million attributed to the value of the conversion feature (recorded as an
increase to division equity). (See Note H., "Long-term Obligations and
Leases" below).
(7) In December 1994, the outstanding shares of Genzyme common stock were
redesignated as Genzyme General Division Common Stock ("GGD Stock") on a
share-for-share basis and a second class of common stock designated as Genzyme
Tissue Repair Division Common Stock ("GTR Stock") was distributed on the basis
of .135 of one share of GTR Stock for each share of Genzyme's previous common
stock held by stockholders of record on December 16, 1994. In December 1994,
Genzyme issued 5,000,000 shares of GTR Stock valued at $25.3 million in
connection with the acquisition of BioSurface.
(8) In November 1997, GTR sold 4,000,000 shares of GTR Stock to the public for
$7.75 per share. Net proceeds from the offering after underwriting discounts and
commissions were $29.0 million. In September 1995, GTR completed the sale of
3,000,000 shares of GTR Stock for net proceeds of $42.3 million. In June 1996
and June 1997, GTR received $10.0 million from Genzyme General for 1,000,000 GTR
Designated Shares issued pursuant to the terms of the purchase option agreement
between Genzyme General and GTR.
.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF GENZYME TISSUE REPAIR'S FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
DESCRIPTION OF BUSINESS
This discussion contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements represent the expectations of the management of GTR
and Genzyme as of the filing date of this Annual Report. The actual results for
both GTR and Genzyme could differ materially from those anticipated by the
forward-looking statements due to the risks and uncertainties described under
the caption "Factors Affecting Future Operating Results" for GTR and Genzyme,
respectively. Stockholders and potential investors should consider carefully
each of these risks and uncertainties in evaluating the financial condition and
results of operations of GTR and Genzyme.
Genzyme provides separate financial statements for the Company and its
subsidiaries on a consolidated basis and for each of Genzyme General, GTR and
Genzyme Molecular Oncology Division ("Genzyme Molecular Oncology" or "GMO"). The
financial statements of each division include the financial position, results of
operations and cash flows of programs and products allocated to the division
under the Company's Restated Articles of Organization, as amended (the "Genzyme
Charter"), and the management and accounting policies adopted by the Genzyme
Board to govern the relationship of the divisions. The financial information of
Genzyme General, GTR and GMO, taken together, include all accounts which
comprise the consolidated financial information presented for Genzyme and its
subsidiaries.
For purposes of financial statement presentation, all of Genzyme's programs and
products are allocated to Genzyme General, GTR or GMO. Notwithstanding this
allocation, Genzyme continues to hold title to all of the assets and is
responsible for all of the liabilities allocated to each of the divisions.
Holders of Genzyme General Stock, GTR Stock and Genzyme Molecular Oncology
Division Common Stock ("GMO Stock") have no specific claim against the assets
attributed to the division whose performance is associated with the series of
stock they hold. Liabilities or contingencies of one division that affect
Genzyme's resources or financial condition could affect the financial condition
or results of operations of any other division.
Stockholders and potential investors should, therefore, read this discussion and
analysis of GTR's financial position and results of operations in conjunction
with the financial statements and related notes of GTR and the discussion and
analysis of Genzyme's financial position and results of operations and financial
statements and related notes of Genzyme, all of which are included with this
Annual Report.
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
REVENUES.
Revenues in 1997 increased 49% to $10.9 million from $7.3 million in 1996. Sales
of the Carticel(TM) autologous cultured chondrocytes ("Carticel(TM) AuCC") were
$6.6 million, compared to $3.1 million in 1996. The growth in sales of
Carticel(TM) AuCC is primarily attributable to increased acceptance by
orthopedic surgeons and insurance companies, most notably following issuance by
the U.S. Food and Drug Administration ("FDA") of a biologics license to GTR in
August 1997 for Carticel(TM) AuCC, and a continued increase in the number of
orthopedic surgeons trained in the procedure utilizing the service. Sales of the
Epicel[SM] Service were $4.3 million in 1997, compared to $4.2 million in 1996,
due to a slight increase in the number of burn incidents requiring the service.
MARGINS AND OPERATING EXPENSES.
GTR's costs of services sold were $11.8 million in 1997 as compared to $11.2
million in 1996. Costs of services sold exceeded revenues by 9% in 1997 and 53%
in 1996. The improvement in service margins is primarily attributable to the
higher sales volume and efficiencies gained in the manufacturing process.
Selling, general and administrative ("SG&A") expenses in 1997 were $25.6
million, a decrease of 6% from SG&A expenses of $27.1 million in 1996. The
decrease is due primarily to a decrease in expenses incurred in connection with
the marketing of Carticel(TM) AuCC in 1996. GTR incurs direct SG&A expenses as
well as a SG&A charge, based on actual amounts incurred, from Genzyme General
for SG&A work performed by Genzyme General on behalf of GTR. In 1997, $7.7
million of SG&A services were provided by Genzyme General, compared to $9.1
million in 1996 due to a decrease in expenses incurred in connection with the
marketing of Carticel (TM) AuCC in 1996.
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GENZYME TISSUE REPAIR (CONT.)
Research and development expenses were $10.8 million in 1997 and $10.9 million
in 1996. In 1997, $7.7 million of the total research and development expenses
incurred by GTR resulted from charges for research and development services
provided by Genzyme General to GTR, compared to $6.9 million in 1996.
OTHER INCOME AND EXPENSES.
Interest income was $1.0 million in 1997 as compared to $1.4 million in 1996,
due primarily to lower average cash balances during the year.
Interest expense in 1997 was $2.9 million as compared to $0.1 million in 1996.
Interest expense increased in 1997 as a result of $0.5 million of interest
related to the addition of $11.5 million of debt from the GTR Note in February
1997 (see "Liquidity and Capital Resources"), $1.1 million of interest charges
to accrete this debt to its face value and additional interest from increases in
borrowing under a revolving credit facility in June 1996 and December 1996 of
$8.0 million and $3.0 million, respectively.
On October 1, 1996, Diacrin/Genzyme LLC was established as a joint venture
between GTR and Diacrin, Inc. to develop and commercialize products and
processes using porcine fetal cells for the treatment of Parkinson's disease and
Huntington's disease in humans. Under the terms of the joint venture agreement,
GTR is required to provide 100% of the initial $10.0 million of the funding
requirements and 75% of the next $40.0 million of funding requirements for
products to be developed by the joint venture. Thereafter, all costs will be
shared equally between GTR and Diacrin. Profits from the joint venture will be
shared equally by the two parties. For the year ended December 31, 1997, GTR had
provided $6.8 million of funding to the joint venture and realized a net loss of
$6.7 million from the joint venture, compared to $1.9 million of funding to the
joint venture and a net loss of $1.7 million from the joint venture as of
December 31, 1996. GTR's funding commitment to the joint venture is expected to
be approximately $10.0 million for 1998.
1996 COMPARED TO 1995
REVENUES.
Revenues in 1996 increased 40% to $7.3 million from $5.2 million in 1995. Sales
of Carticel(TM) AuCC were $3.1 million, compared to $0.6 million in 1995, the
year in which Carticel(TM) AuCC was launched. The increase in Carticel(TM) AuCC
sales resulted primarily from the increase in the number of surgeons trained in
the procedure utilizing Carticel(TM) AuCC. Sales of the Epicel[SM] Service in
1996 decreased 9% to $4.2 million, due to a decrease in the number of burn
incidents requiring the service.
MARGINS AND OPERATING EXPENSES.
GTR's costs of services sold exceeded revenues by 53% in 1996, compared to a
gross profit of 9% in 1995, due to increased spending for the expansion of
manufacturing capacity.
SG&A expenses in 1996 were $27.1 million, an increase of 110% over 1995. The
increase resulted from the expenses and staffing to support revenue growth and
increased surgeon training costs related to Carticel(TM) AuCC. GTR incurs direct
SG&A expenses as well as a SG&A charge, based on actual amounts incurred, from
Genzyme General for SG&A work performed by Genzyme General on behalf of GTR. In
1996, $9.1 million of SG&A services were provided by Genzyme General, compared
to $4.4 million in 1995, due to an increase in the level of operations related
to Carticel(TM) AuCC.
Research and development expenses were $10.9 million in each of 1996 and 1995.
Increases in expenses associated with the TGF[Beta](2) program were offset by
decreases in the Vianain(R) program. In 1996, $6.9 million of the total research
and development expense incurred by GTR resulted from charges for services
provided by Genzyme General to GTR, compared to $4.7 million in 1995.
OTHER INCOME AND EXPENSES.
Interest income was $1.4 million in each of 1996 and 1995, due primarily to
level average cash balances during the year. Interest expense in 1996 was
$0.1 million, net of capitalized interest on construction in-progress of
$0.2 million, compared to $0.05 million in 1995. Interest expense increased in
1996 due to interest on borrowings. See "Liquidity and Capital Resources " for a
description of the borrowings.
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GENZYME TISSUE REPAIR (CONT)
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, GTR had cash, cash equivalents and short-term
investments of $31.9 million, an increase of $15.7 million from December 31,
1996. In 1997, GTR used $37.2 million of cash for operations and $16.8 million
for investing activities. In the year ended December 31, 1997, investing
activities provided $0.8 million from the sale of equipment and used $6.8
million of cash to fund GTR's investment in Diacrin/Genzyme LLC, and $0.5
million to purchase equipment. Financing activities provided $59.2 million of
cash, of which $14.9 million was allocated to GTR from Genzyme General, $13.0
million consisted of proceeds from the issuance of debt, $29.0 million consisted
of proceeds from the sale of GTR Stock to the public and $2.4 million consisted
of proceeds from the exercise of stock options and stock issued under the
employee stock purchase plan. Of the $13.0 million in proceeds from the GTR
Note, GTR recorded $11.5 million of proceeds attributable to the value of the
convertible debt and $1.5 million attributable to the value of the conversion
feature (recorded as an increase to division equity). The $11.5 million will be
accreted to the face value of the debt by a charge to interest expense of $1.5
million over the term of the initial 15 month conversion period. As of December
31, 1997, $18.0 million of funds allocated to GTR in December 1996 under the
Revolving Credit Facility remained outstanding.
In November 1997, GTR sold 4,000,000 shares of GTR Stock to the public for $7.75
per share. Net proceeds from the offering after underwriting discounts and
commissions were $29.0 million.
GTR believes its available cash and investments, including the proceeds from the
November 1997 stock offering, will be sufficient to finance planned operations
and capital requirements through the end of 1998. GTR must raise significant
additional capital in order to continue operations at current levels beyond
1998. GTR's plans to raise additional capital include the consideration of the
sale of additional equity securities, strategic alliances with third parties to
fund further developments and marketing of Carticel(TM) AuCC and other business
transactions that would generate capital resources to assure continuation of
GTR's operations and research programs. If these initiatives are not successful,
GTR may be required to delay, scale back or eliminate certain of its programs,
or to license third parties to commercialize technologies or products that the
division would otherwise undertake itself.
For a discussion of the demands, commitments and events that may affect the
liquidity and capital reserves of Genzyme Corporation and GTR, see also
Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries'
Financial Condition and Results of Operations - Liquidity and Capital Resources
included in this Annual Report.
NEW ACCOUNTING PRONOUNCEMENTS AND YEAR 2000
For a discussion of new accounting pronouncements and Year 2000 impact, see
Management's Discussion and Analysis of Financial Condition and Results of
Operations - New Accounting Pronouncements, Year 2000 and Financial Reporting
Release No. 48 ("FRR 48") included in this Annual Report.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The future operating results of GTR could differ materially from the results
described above due to the risks and uncertainties described below and under the
heading "Management's Discussion and Analysis of Genzyme Corporation and
Subsidiaries' Financial Condition and Results of Operations -- Factors Affecting
Future Operating Results" included in this Annual Report.
NO ASSURANCE OF COMMERCIAL SUCCESS OF CARTICEL(TM) AuCC. In August 1997, the FDA
approved GTR's BLA for Carticel(TM) AuCC. As a condition to such approval, GTR
has agreed to conduct two confirmatory post-marketing studies, one of which will
compare the long-term clinical effects of treatment with Carticel(TM) AuCC to
certain other available treatments and the other of which will compare treatment
with Carticel(TM) AuCC against a placebo implant. Should these post-marketing
studies demonstrate that treatment with Carticel(TM) AuCC is not superior to the
alternatives studied, the FDA may suspend or terminate GTR's license to market
the product. If GTR were prohibited from marketing Carticel(TM) AuCC in the
U.S., its results of operations would be materially adversely affected.
The commercial success of Carticel(TM) AuCC will also depend materially on the
ability of GTR to increase the approval rate for reimbursement of the product
from third party payers. Although GTR has seen a substantial increase in the
development of broad policy coverage for Carticel(TM) AuCC since the August 1997
FDA approval of the product, there can be no assurance that the recent increase
in reimbursement approvals will continue.
Although FDA approval is a critical requirement for most plans to adopt
favorable policy coverage for new treatments, a number of major insurance plans
also base their decisions on technology assessments conducted by individual
plans or by independent associations such as the Blue Cross Blue Shield
Association ("BCBSA"). The BCBSA Technology Assessment Committee (the "BCBSA
Committee") met in late September 1997 to review the Carticel(TM) AuCC
treatment.
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GENZYME TISSUE REPAIR (CONT.)
The BCBSA has indicated that it does not believe Carticel(TM) AuCC meets all of
the published criteria used by BCBSA to evaluate new treatments. GTR is in
discussions with BCBSA regarding this assessment. While a favorable review by
the BCBSA Committee is not required for individual Blue Cross/Blue Shield plans
to approve policy coverage for a new treatment, it is a factor in the decision
process for many plans. Because of the BCBSA Committee report, implementation of
policy coverage for Carticel(TM) AuCC by many Blue Cross/Blue Shield plans could
be delayed. Since these plans represent approximately 60 million, or 25% of
insured lives in the U.S., GTR's ability to access a substantial portion of the
market for Carticel(TM) AuCC could also be delayed. Other indemnity plans have
given GTR coverage for approximately 115 million insured lives in the U.S.
GTR is marketing Carticel(TM) AuCC to orthopedic surgeons. The commercial
success of the product depends on the extent to which sufficient numbers of
surgeons who are trained by GTR incorporate the product into their existing
practices. There can be no assurance that GTR will be successful in marketing
Carticel(TM) AuCC to such surgeons or that such surgeons will use Carticel(TM)
AuCC to the extent anticipated by GTR.
GTR OPERATING LOSSES AND CASH REQUIREMENTS. GTR is expected to experience
significant operating losses at least through 1998 as the market introduction of
Carticel(TM) AuCC continues and its research and development and clinical
programs progress. There can be no assurance that GTR will ever achieve a
profitable level of operations or that profitability, if achieved, can be
sustained on an ongoing basis. GTR anticipates that its existing cash, together
with existing cash balances allocated to GTR or approved for reallocation from
Genzyme General and cash generated from the sale of Carticel(TM) AuCC and the
Epicel[SM] Service, will be sufficient to fund GTR's operations through the end
of 1998. Significant additional funds may be required to continue operations at
anticipated levels beyond 1998, however, and GTR may be required to delay, scale
back or eliminate certain of its programs or to license third parties to
commercialize technologies or products that it would otherwise undertake itself
if it does not have sufficient capital or is not successful in raising
additional capital.
GTR's cash requirements may vary from those now planned as a result of numerous
factors, including revenue fluctuations, reimbursement denials for GTR's
products, results of research and development and clinical testing by GTR and
its collaborators, competing technological and market developments and the cost
and timing of clinical trials and regulatory approvals. In addition, if GTR
commits to fund additional joint ventures or strategic collaborations or uses
cash to effect acquisitions, its cash requirements may increase significantly.
FLUCTUATIONS IN GTR'S QUARTERLY RESULTS. Revenues generated from the sale of
Carticel(TM) AuCC are expected to fluctuate as GTR enrolls and trains additional
orthopedic surgeons and the product gains market and third party payer
acceptance. GTR's management is unable to predict the timing or magnitude of
such fluctuations, although GTR expects that its revenues from the sale of
Carticel(TM) AuCC may be lower in the summer months as fewer operative
procedures are typically performed during those months. Sales of the Epicel[SM]
Service for the treatment of severe burns also comprise a material percentage of
GTR's revenues. Revenues realized from the Epicel[SM] Service fluctuate from
quarter to quarter due to the dependency of such revenues on many unpredictable
factors, including the number and survival rate of patients for which the
Epicel[SM] Service is the indicated treatment. Since GTR is required to maintain
extensive tissue culture facilities and a staff of trained personnel for both
Carticel(TM) AuCC and the Epicel[SM] Service, a significant portion of GTR's
costs are fixed and, therefore, fluctuations in demand can have a material
adverse effect on GTR's results of operations.
COLLABORATION WITH DIACRIN, INC. - NO CURRENTLY APPROVED XENOTRANSPLANTATION-
BASED PRODUCTS; RELIANCE ON CELL TRANSPLANTATION TECHNOLOGY. GTR has formed a
joint venture with Diacrin to develop and commercialize products based on
transplantable fetal porcine brain cells for the treatment of Parkinson's
disease and Huntington's disease. Human therapeutic products based on the
transplantation of cells obtained from animals ("xenotransplantation") represent
a novel therapeutic approach that has not been subject to extensive clinical
testing. Xenotransplantation also poses a risk that viruses or other animal
pathogens will be unintentionally transmitted to a human patient. The joint
venture has been required by the FDA to perform certain assays to
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GENZYME TISSUE REPAIR (CONT.)
determine whether porcine retrovirus is present in patients that have received
porcine cells. These assays have been performed on samples taken from all
patients who have received NeuroCell(TM)-PD and no porcine retrovirus was
detected in those samples. The joint venture has also been required by the FDA
to perform additional assays on its porcine cellular products to determine if
active porcine retroviruses are present and no retrovirus was detected. The
joint venture has been required by the FDA to develop an additional test for the
detection of porcine retrovirus and has been instructed to routinely monitor
patient blood samples for the presence of porcine retrovirus. If porcine
retrovirus is detected in this test or samples, additional tests may be required
to assess the risk to patients of porcine retrovirus infection. If such
additional tests are required, trials of the joint venture's porcine cell
products may be delayed. While porcine retrovirus has not been shown to cause
any disease in pigs, it is not known what effect, if any, porcine retrovirus may
have on human beings. The joint venture's porcine cell product development
programs would be negatively impacted by the detection of infectious porcine
retrovirus in porcine cells or clinical trial subjects. An inability to proceed
with further trials or a substantial delay in the clinical trials would have a
material adverse effect on the Company.
The FDA has issued draft regulatory guidelines to reduce the risk of
contamination of xenotransplanted cellular products with infectious agents.
Although GTR's management believes the processes used to produce the porcine
cell products under development by the joint venture would comply with the
guidelines as drafted, such guidelines may undergo substantial revision before
definitive guidelines are issued by the FDA. There can be no assurance that
definitive guidelines will be issued by the FDA or that processes used by the
joint venture will comply with any guidelines that may be issued.
No xenotransplantation-based therapeutic product has been approved by the FDA
and there can be no assurance that any products developed by the joint venture
will be approved by the FDA or regulatory authorities in other countries. There
can also be no assurance that xenotransplantation-based products, including the
joint venture's product candidates, will be accepted by the medical community or
third party payers or that the degree of such acceptance will not limit the size
of the market for such products.
The success of the joint venture is also dependent upon the successful
development of cell transplantation technology. This technology currently has
limited clinical applications and there can be no assurance that it will result
in the development of any therapeutic products. If the cell transplantation
technology does not result in the development of such products, the joint
venture may be required to change dramatically the scope and direction of its
product development activities.
RELIANCE ON AGREEMENTS WITH KEY COLLABORATORS. Carticel(TM) AuCC has been
developed based on the work of a group of Swedish physicians, the two leaders of
which are performing consulting services for GTR relating to the
commercialization and further development of the product. These two physicians
are parties to research and development consulting agreements with GTR (the
"Consulting Agreements") which prohibit them, without GTR's consent, from
performing consulting services for others in the field of cartilage and bone
repair. In addition, pursuant to the Consulting Agreements, each physician (i)
is prohibited from engaging in any business activity that is in competition with
the products or services being developed, manufactured or sold by GTR during the
term of the Consulting Agreements (currently through 1998) and for a period of
one year after termination thereof, (ii) is subject to non-disclosure
obligations and (iii) has assigned to GTR all rights to inventions resulting
from work performed by each physician as a consultant to GTR, subject to
royalties payable to the inventing physician. There can be no assurance that the
two physicians will honor their obligations under the Consulting Agreements or
that such agreements will be renewed beyond 1998. In addition, there can be no
assurance that individuals who are familiar with the know-how underlying
Carticel(TM) AuCC through their association with these physicians will not
disclose such information to GTR's competitors. The occurrence of either of
these events could have a material adverse effect on GTR's results of
operations.
GTR is conducting additional research relating to Carticel(TM) AuCC pursuant to
a sponsored research agreement with the University of Gotenburg in Sweden and
certain physicians, including the two referred to above. The sponsored research
agreement requires that all members of the investigative team maintain the
confidentiality of all information pertaining to GTR and its business that may
become known to them in connection to their work under the agreement. The
agreement also states that all inventions conceived or reduced to practice
during the course of the research program will be the property of GTR, subject
to royalties payable to the inventing physician. There can be no assurance that
the sponsored research agreement will be honored by the individuals performing
services thereunder.
COMPETITION. GTR is engaged in a segment of the human health care products
industry that is extremely competitive. Competitors in the U.S. and elsewhere
are numerous and include major pharmaceutical, chemical and biotechnology
companies, many of which have substantially greater capital resources marketing
experience, research and development staffs and facilities than GTR. These
companies may succeed in developing products that are more effective than any
that have been or may be developed
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GENZYME TISSUE REPAIR (CONT.)
by GTR and may also be more successful than GTR in producing and marketing these
products. GTR is aware of at least one company that is culturing autologous
chondrocytes for cartilage repair in Europe and numerous additional companies
developing competing products for cartilage repair and the treatment of
Parkinson's disease, Huntington's disease, burns, chronic wounds and multiple
sclerosis.
The process used by GTR to grow autologous chondrocytes is not patentable, and
GTR does not yet have significant patent protection covering the other
methodologies used in providing Carticel(TM) AuCC. Consequently, GTR is unable
to prevent a competitor from developing the ability to grow cartilage cells and
from offering a product that is similar or superior to Carticel(TM) AuCC. GTR's
results of operations could be materially adversely affected if a competitor
were to develop such know-how and obtain FDA approval for an autologous
chondrocyte product. GTR is aware of at least one other company that is
culturing autologous chondrocytes for cartilage repair in Europe.
UNCERTAINTY REGARDING PATENTS AND PROPRIETARY TECHNOLOGY. GTR does not yet have
significant patent protection covering the methodologies used in providing
Carticel[TM] AuCC. Consequently, GTR is unable to prevent a competitor from
developing the ability to grow cartilage cell cultures and from offering a
service that is similar or superior to Carticel[TM] AuCC. GTR's results of
operations could be materially and adversely affected if a competitor were to
develop such know-how.
DILUTION.
Pursuant to an agreement made at the time of formation of GTR, the Genzyme Board
may allocate up to $10.0 million from Genzyme General to GTR on or before June
14, 1998 in exchange for 1,000,000 GTR Designated Shares. In addition, the
Genzyme Board has authorized the allocation of up to $20.0 million in cash from
Genzyme General to GTR (the "GTR Equity Line"). Any amounts allocated to GTR
under the GTR Equity line will result in an increase in such number of GTR
Designated Shares determined by dividing (i) the amount of cash allocated by
(ii) the average of the daily closing prices of GTR Stock for the 20 consecutive
trading days commencing on the 30th trading day prior to the date of such
allocation. Of the $20.0 million authorized for allocation to GTR, approximately
$7.0 million had been allocated as of December 31, 1997.
The GTR Designated Shares are not issued or outstanding, but may be issued from
time to time by the Genzyme Board without allocating any proceeds to GTR or
distributed as a stock dividend to the holders of GGD Stock. As of December 31,
1997, there were approximately 885,000 GTR Designated Shares reserved for
issuance. Pursuant to the management and accounting policies adopted by the
Genzyme Board, Genzyme is required to distribute or sell the GTR Designated
Shares annually to the extent that the number of such shares (excluding those
reserved for GGD option holders and the holders of instruments convertible into
GGD Stock) exceeds 10% of the shares of GTR Stock outstanding. Genzyme is unable
to predict the effect that the sales or distributions described in this
paragraph may have on the then prevailing market price of GTR Stock.
In addition, Genzyme currently has reserved approximately 2,577,000 shares of
GTR Stock for issuance upon conversion of amounts payable under the GTR Note.
The actual number of shares issued upon conversion of the GTR Note may be more
or less than the number currently reserved. The GTR Note is convertible into
shares of GTR Stock at a discount to the average of the closing bid prices of
GTR Stock as reported by the Nasdaq National Market for the 25 trading days
immediately preceding the applicable conversion date (the "Conversion Price").
This discount began at 2% on August 27, 1997 and increases by an additional one
percent per month thereafter until May 27, 1998. After May 27, 1998, the
Conversion Price will be equal to the lesser of : (i) 89% of the Conversion
Price calculated as of the actual conversion date and (ii) 89% of the Conversion
Price calculated as of May 27, 1998.
POSSIBLE VOLATILITY OF SHARE PRICE AND ABSENCE OF DIVIDENDS.
The market prices for securities of biotechnology companies have been volatile.
Factors such as announcements of technological innovations or new commercial
products by Genzyme or its competitors, governmental regulation, patent or
proprietary rights developments, public concern as to the safety or other
implications of biotechnology products and market conditions in general may
have a significant impact on the market price of GTR Stock. No cash dividends
have been paid to date on Genzyme common stock, nor does Genzyme anticipate
paying cash dividends on such stock in the foreseeable future.
9
10
GENZYME TISSUE REPAIR
COMBINED BALANCE SHEETS
(AMOUNTS IN THOUSANDS) DECEMBER 31,
- --------------------------------------------------------------------------------
1997 1996
---- ----
ASSETS
Current assets:
Cash and cash equivalents ................................ $21,120 $15,912
Short-term investments ................................... 10,795 318
Accounts receivable, net.................................. 2,221 1,677
Inventories .............................................. 1,973 1,823
Prepaid expenses and other current assets ................ 732 334
------- -------
Total current assets .................................... 36,841 20,064
Property, plant and equipment, net ......................... 19,524 22,229
Other noncurrent assets .................................... 453 300
------- -------
Total assets ............................................ $56,818 $42,593
======= =======
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable ................................... $ 1,378 $ 1,749
Accrued expenses ................................... 2,816 2,479
Due to Genzyme General ............................. 1,213 1,604
------- -------
Total current liabilities ........................ 5,407 5,832
Long-term debt ....................................... 18,000 18,000
Convertible debenture, net ........................... 12,681 -
Other noncurrent liabilities ......................... 527 677
------- -------
Total liabilities ................................. 36,615 24,509
Commitments and Contingencies (See Notes) ............
Division equity (Note J) ............................. 20,203 18,084
------- -------
Total liabilities and division equity ............. $56,818 $42,593
======= =======
The accompanying notes are an integral part of these combined financial
statements.
10
11
GENZYME TISSUE REPAIR
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
Revenues:
Net service sales ..................... $ 10,856 $ 7,312 $ 5,220
Operating costs and expenses:
Cost of services sold ................. 11,788 11,193 4,731
Selling, general and administrative ... 25,571 27,111 12,927
Research and development .............. 10,845 10,880 10,938
-------- -------- --------
Total operating costs and expenses .... 48,204 49,184 28,596
-------- -------- --------
Operating loss .......................... (37,348) (41,872) (23,376)
Other income (expenses):
Equity in loss of joint venture ....... (6,719) (1,727) -
Interest income ....................... 979 1,432 1,386
Interest expense ...................... (2,896) (148) (40)
-------- -------- --------
Total other income (expenses) ......... (8,636) (443) 1,346
-------- -------- --------
Net loss ................................ $(45,984) $(42,315) $(22,030)
======== ======== ========
Per Genzyme Tissue Repair basic and diluted
common share:
Net loss .............................. $ (3.07) $ (3.38) $ (2.28)
======== ======== ========
Weighted average shares outstanding ... 14,976 12,525 9,659
======== ======== ========
The accompanying notes are an integral part of these combined financial
statements.
11
12
GENZYME TISSUE REPAIR
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------
OPERATING ACTIVITIES: 1997 1996 1995
---- ---- ----
Net loss .......................................... $(45,984) (42,315) (22,030)
Reconciliation of net loss to net cash used
by operating activities:
Depreciation and amortization ................... 2,482 935 628
Loss on disposal of property, plant and equipment 24 59 160
Non-cash compensation expense ................... 221 312 882
Accrued interest/amortization on bonds .......... (188) 85 (76)
Provision for bad debts ......................... 480 238 210
Accretion of debt discount ...................... 1,071 - -
Equity in net loss of joint venture ............. 6,719 1,727 -
Increase (decrease) in cash from working capital:
Accounts receivable ........................... (1,024) (77) (562)
Inventories ................................... (150) (1,062) (685)
Prepaid expenses and other .................... (398) (148) 98
Accounts payable, accrued expenses and
deferred revenue ............................. (39) 444 33
Due to Genzyme General ........................ (391) (430) 1,863
-------- -------- --------
Net cash used by operating activities ....... (37,177) (40,232) (19,479)
INVESTING ACTIVITIES:
Purchases of investments .......................... (10,614) (5,004) (16,687)
Sales and maturities of investments ............... 318 11,447 17,991
Investment in joint venture ....................... (6,820) (1,911) -
Purchases of property, plant and equipment ........ (496) (26,573) (1,294)
Sale of property, plant and equipment ............. 852 5,311 -
Other ............................................. (52) 151 (13)
-------- -------- --------
Net cash used by investing activities ....... (16,812) (16,579) (3)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net ....... 31,475 2,437 43,516
Proceeds from issuance of convertible
debentures, net .................................. 12,977 56,000 -
Payments of debt and capital lease obligations .... 3 (38,169) (286)
Cash allocated from Genzyme General ............... 14,892 11,714 -
Other ............................................. (150) - -
-------- -------- --------
Net cash provided by financing activities ..... 59,197 31,982 43,230
Increase (decrease) in cash and cash equivalents ..... 5,208 (24,829) 23,748
Cash and cash equivalents at beginning of period ..... 15,912 40,741 16,993
-------- -------- --------
Cash and cash equivalents at end of period ........... $ 21,120 $ 15,912 $ 40,741
======== ======== ========
Supplemental cash flow information:
Cash paid during the year for:
Interest ......................................... $ 1,127 $ 334 $ 40
Supplemental Disclosures of Non-Cash Transactions:
GTR Designated Shares - Note J.
Transfer of Property, Plant and Equipment - Note E.
The accompanying notes are an integral part of these combined financial
statements.
12
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NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Genzyme Tissue Repair ("GTR"), a division of Genzyme Corporation (the "Company"
or "Genzyme") is a leading developer of biological products for the treatment of
cartilage damage, severe burns, chronic skin ulcers, and neurodegenerative
diseases. GTR uses cell, enzyme, growth factor and matrix technologies to
develop products that will augment or positively modify naturally-occurring
biological processes involved in tissue repair.
BASIS OF PRESENTATION
The combined financial statements of GTR include the balance sheets, results of
operations and cash flows during the periods presented. GTR's financial
statements are prepared using the amounts included in Genzyme's consolidated
financial statements. Corporate allocations reflected in these financial
statements are determined based upon methods which management believes to be
reasonable. The approval effective December 16, 1994 (the "Effective Date") by
the stockholders of Genzyme of the Genzyme Stock Proposal as described in
Genzyme's Prospectus/Proxy Statement dated November 10, 1994 resulted in the
redesignation of Genzyme's common stock. The outstanding shares of Genzyme
common stock were redesignated as GGD Stock and a second class of common stock,
designated as GTR Stock was distributed on the basis of .135 of one share of
GTR Stock for each share of Genzyme's common stock.
PRINCIPLES OF COMBINATION
The accompanying combined financial statements reflect the combined accounts of
all of GTR's businesses. All material intradivisional items and transactions
have been eliminated in combination. The equity method is used to account for
investments in companies and joint ventures in which GTR has a substantial
ownership interest (20% to 50%), or in which GTR participates in policy
decisions. Accordingly, GTR's share of the earnings or losses of such entities
is included in computation of GTR's net loss.
FINANCIAL INFORMATION
Genzyme will provide to holders of GTR Stock separate financial statements,
management's discussion and analysis, descriptions of business and other
relevant information for GTR. Notwithstanding the attribution of assets and
liabilities, including contingent liabilities, between GTR, Genzyme General and
GMO for the purposes of preparing their respective financial statements, Genzyme
continues to hold title to all of the assets and is responsible for all of the
liabilities allocated to each of the divisions. Holders of GTR Stock, GGD Stock
and GMO Stock have no specific claim against the assets attributed to the
division whose performance is associated with the series of common stock they
hold. Liabilities or contingencies of GTR, Genzyme General or GMO could affect
the financial condition or results of operations of the other divisions.
Accordingly, the GTR combined financial statements should be read in connection
with Genzyme's consolidated financial statements included in this Annual Report.
Accounting policies and financial information specific to GTR are presented in
GTR's combined financial statements. Accounting policies and financial
information relevant to Genzyme, Genzyme General, GTR and GMO are presented in
the consolidated financial statements of Genzyme Corporation and Subsidiaries.
The Company prepares the financial statements of GTR in accordance with
generally accepted accounting principles, the management accounting policies of
Genzyme and the divisional accounting policies approved by the Company's Board
of Directors (the "Genzyme Board"). (see Note A., "Summary of Significant
Accounting Policies" to Genzyme's Consolidated Financial Statements (the
"Consolidated Financial Statements") which are incorporated herein by
reference). Except as otherwise provided in such policies, the management and
accounting policies applicable to the presentation of the financial statements
of GTR may be modified or rescinded at the sole discretion of the Genzyme Board
without approval of the stockholders, subject only to the Genzyme Board's
fiduciary duty to Genzyme's stockholders.
DIVIDEND POLICY
Under the terms of the Genzyme Charter, dividends may be paid to the holders of
GTR Stock only out of the lesser of funds of Genzyme legally available for the
payment of dividends and the Available GTR Dividend Amount, as defined in the
Genzyme Charter. Although there is no requirement to do so, the Genzyme Board
would declare and pay cash dividends on GTR Stock, if any, based primarily on
earnings, financial condition, cash flow and business requirements of GTR. There
is currently no intention of paying any cash dividends.
REVENUE RECOGNITION
GTR's two commercial tissue repair services are autologous epidermal skin grafts
produced using the Epicel(SM) Service and the culturing of autologous cartilage
cells using Carticel(TM) AuCC. GTR recognizes service revenue at the time skin
grafts or cartilage cells are shipped. Cancellation charges may be assessed upon
the cancellation of an Epicel(SM) order. These charges are dependent upon order
size and stage of skin graft growth and are recognized upon order cancellation
and when collection is determined to be probable.
13
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NET INCOME(LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per
Share" ("SFAS 128"). SFAS 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted net income per
share is very similar to the previously reported fully diluted earnings per
share except that the new treasury stock method used in determining the dilutive
effect of options uses the average market price for the period rather than the
higher of the average market price or the ending market price. All net income
(loss) per common share amounts have been restated to conform to SFAS 128
requirements.
The following table sets forth the computation of basic and diluted earnings
per share:
(Amounts in thousands, except per share amounts) December 31,
- -------------------------------------------------------------------------------
1997 1996 1995
-------- -------- --------
Net loss ...................................... $(45,984) $(42,315) $(22,030)
Basic and diluted weighted average shares
outstanding.................................. 14,976 12,525 9,659
Net loss per common share - basic.............. $ (3.07) $ (3.38) $ (2.28)
Net loss per common share - diluted............ $ (3.07) $ (3.38) $ (2.28)
During the years ended December 31, 1997, 1996 and 1995, certain securities
which were not included in the computation of diluted earnings per share because
they would have an anti-dilutive effect due to the net loss for the years, were
as follows: (i) options to purchase approximately 2,777,000, 2,574,000 and
1,985,000 shares of GTR Stock with a price range of $4.84-$12.88 per share,
respectively, (ii) 885,000, 1,794,000 and 1,287,000 GTR Designated shares
issuable for the benefit of Genzyme General; (iii) debentures convertible into
1,772,000 shares of GTR Stock computed as of December 31, 1997.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Genzyme stockholders have approved amendments to the existing Genzyme 1990
and 1997 Equity Incentive Plan (the "Equity Plans") and the 1988 Director Stock
Option Plan (the "Director Stock Option Plan") that would allow for the issuance
of shares of GTR Stock under such plans, in addition to the GGD Stock and GMO
Stock already included in such plans. The Equity Plan will permit the granting
of options to purchase GTR Stock to employees. GTR has adopted the disclosure
only alternative for accounting for stock-based employee compensation as
required by SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123")
and GTR has disclosed pro form net income (loss) and pro forma earnings per
share information in the footnotes to the combined financial statements using
the fair value based method when employee stock options are granted.
NOTE B. RELATED PARTY TRANSACTION POLICIES
Genzyme allocates certain corporate costs for general and administrative
expenses, research and development expenses and cash management services in
accordance with the policies summarized below. Genzyme files a consolidated tax
return and allocates income taxes to the divisions in accordance with the
policies described below. Effective upon the merger of GMO and Pharmagenics
Inc., the Genzyme Board amended certain of the policies which govern the
management of GTR and Genzyme General to include the management of GMO and to
add certain new policies governing interdivision transactions. The policies
summarized below, with the exception of Interdivision Asset Transfers, may be
further modified or rescinded by action of the Genzyme Board, or the Genzyme
Board may adopt additional policies, without approval of the stockholders of
Genzyme, subject only to the Genzyme Board's fiduciary duty to the Genzyme
stockholders. In addition, generally accepted accounting principles require that
any change in policy be preferable (in accordance with such principles) to the
previous policy.
FINANCIAL MATTERS
The Company manages the financial activities of Genzyme General, GTR and GMO on
a centralized basis. These financial activities include the investment of
surplus cash, the issuance, repayment and repurchase of short-term and long-term
debt and the issuance of equity instruments.
Loans may be made from time to time between divisions. Any such loan of $1.0
million or less will mature within 18 months and interest will accrue at the
lowest borrowing rate available to Genzyme for a loan with similar terms and
duration. Amounts borrowed in excess of $1.0 million will require approval of
the Genzyme Board, which approval shall include a determination by the Genzyme
Board that the material terms of such loan, including the interest rate and
maturity date, are fair and reasonable to each participating division and to
holders of the common stock representing such division.
SHARED SERVICES
GTR operates as a division of Genzyme with its own personnel and financial
resources. However, GTR has access to Genzyme's extensive research and
development capabilities, manufacturing facilities, worldwide clinical
development and regulatory affairs staffs, marketing, infrastructure, and
experience in raising capital and Genzyme's corporate and general administrative
functions, the costs of which are allocated to each division in a reasonable and
consistent manner based on utilization by the division of the services to which
such costs relate. Genzyme's corporate general and administrative and research
and development functions are performed primarily by Genzyme General.
Administrative expenses and research and development expenses have been
allocated to GTR as if GTR operated on a stand-alone basis. Management believes
that such allocation is a reasonable estimate of such expenses. These
allocations for research and development were $7.7 million in 1997 compared
14
15
to $6.9 million in 1996. The charges for sales, general and administrative
services were $7.7 million in 1997 compared with $9.1 million in 1996.
INTERDIVISION INCOME TAX ALLOCATIONS
GTR is included in the consolidated U.S. federal income tax return filed by
Genzyme. Genzyme allocates current and deferred taxes to the divisions using the
asset and liability method of accounting for income taxes as if the divisions
were separate taxpayers. Accordingly, the realizability of deferred tax assets
is assessed at the division level. The sum of the amounts calculated for
individual divisions of Genzyme may not equal the consolidated amount under this
approach.
Pursuant to the management and accounting policies adopted by the Genzyme Board,
as of the end of any fiscal quarter of Genzyme, any projected tax benefit
attributable to any division that cannot be utilized by such division to offset
or reduce its current or deferred income tax expense may be allocated to any
other division without any compensating payment or allocation. The treatment of
such allocation for purposes of earnings per share computation is discussed in
Note A., "Earnings (loss) per share" in the Consolidated Financial Statements
which are incorporated herein by reference.
ACCESS TO TECHNOLOGY AND KNOW-HOW
GTR has free access to all technology and know-how of Genzyme that may prove
useful in GTR's business, subject to any obligations or limitations applicable
to Genzyme.
INTERDIVISION ASSET TRANSFERS
The following policy regarding the transfer of assets between divisions may not
be changed by the Genzyme Board without the approval of the holders of GTR Stock
and GMO Stock, each voting as a separate class; provided, however, that if a
policy change affects GTR or GMO alone, only holders of shares representing the
affected division will be entitled to a class vote on such matter.
The Genzyme Board may at any time and from time to time reallocate any program,
product or other asset from one division to any other division. All such
reallocations will be done at fair market value, determined by the Genzyme
Board, taking into account, in the case of a program under development, the
commercial potential of the program, the phase of clinical development of the
program, the expenses associated with realizing any income from the program, the
likelihood and timing of any such realization and other matters that the Genzyme
Board and its financial advisors, if any, deem relevant. The consideration for
such reallocation may be paid by one division to another in cash or other
consideration, with a value equal to the fair market value of the assets being
reallocated or, in the case of a reallocation of assets from Genzyme General to
GTR or GMO, the Genzyme Board may elect to account for such reallocation of
assets as an increase in Designated Shares representing the division to which
such assets are reallocated. Notwithstanding the foregoing, no Key GTR Program,
as defined in the management and accounting policies, may be transferred out of
GTR without a class vote of the holders of GTR Stock and no Key GMO Program, as
defined in the management and accounting policies, may be transferred out of GMO
without a class vote of the holders of GMO Stock.
OTHER INTERDIVISION TRANSACTIONS
From time to time, a division may engage in transactions with one or more other
divisions or jointly with one or more other divisions and one or more third
parties. Such transactions may include agreements by one division to provide
products and services for use by another division and joint ventures or other
collaborative arrangements involving more than one division to develop new
products and services jointly and with third parties. Research and development
performed by one division for the benefit of another division will be charged to
the division for which work is performed on a cost basis. The division
performing the research will not recognize revenue as a result of performing
such research. Other interdivisional transactions shall be on terms and
conditions that would be obtainable in transactions negotiated with unaffiliated
third parties. Any interdivisional transaction to be performed on terms and
conditions other than those previously set forth and that is material to one or
more of the participating divisions will require the approval of the Genzyme
Board, which approval shall include a determination by the Genzyme Board that
the transaction is fair and reasonable to each participating division and to
holders of the common stock representing each such division.
If a division (the "purchasing division") requires any product or service from
which another division (the "selling division") derives revenues from sales to
third parties (a "commercial product or service"), the purchasing division may
solicit from the selling division a bid to provide such commercial product or
service in addition to any bids solicited by the purchasing division from third
parties. Subject to determination by the Genzyme Board that the bid of the
selling division is fair and reasonable to each division and to their respective
stockholders and that the purchasing division is willing to accept the selling
division's bid, the purchasing division may accept any bid deemed to offer the
most favorable terms and conditions for providing the commercial product or
service sought by the purchasing division.
15
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NOTE C. ACCOUNTS RECEIVABLE
GTR performs ongoing credit evaluations of its customers and generally does not
require collateral. Accounts receivable are stated at fair value after
reflecting the allowance for doubtful accounts of $840,000 at December 31, 1997
and $408,000 at December 31, 1996.
NOTE D. INVENTORIES
Inventories at December 31 consist of the following:
(DOLLARS IN THOUSANDS) 1997 1996
-------------------------------------------------------
Raw materials.................... $ 243 $ 136
Work-in-process.................. 1,730 1,687
------- -------
$1,973 $1,823
======= =======
NOTE E. PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment at December 31 includes the following
(DOLLARS IN THOUSANDS) 1997 1996
-----------------------------------------------------------
Plant and equipment.............. $ 16,847 $ 1,404
Land and buildings............... 2,324 2,324
Leasehold improvements........... 2,428 2,387
Furniture and fixtures........... 1,842 1,718
Construction in progress......... - 15,988
-------- --------
23,441 23,821
Less accumulated depreciation.. (3,917) (1,592)
-------- --------
Property, plant and equipment,
net............................. $ 19,524 $ 22,229
======== ========
Depreciation expense was $2,326,000 in 1997, $935,000 in 1996, and $628,000 in
1995.
In August 1996, GTR effected an interdivisional transfer of certain land and a
building in Framingham, Massachusetts, acquired in January 1996, to Genzyme
General for $5.2 million, which represented the cost and approximate fair market
value of the property at the date of the sale. There was no gain or loss
recorded as a result of this transaction.
NOTE F. INVESTMENTS AND OTHER NONCURRENT ASSETS
Investments in marketable securities at December 31, consisted of the following:
1997 1996
-----------------------------------------------
MARKET MARKET
(DOLLARS IN THOUSANDS) COST VALUE COST VALUE
- -----------------------------------------------------------------------------
Short Term:
Certificates of deposit . $ - $ - $ 318 $ 318
Corporate notes ......... 10,804 10,795 - -
------- ------- ------- -------
$10,804 $10,795 $ 318 $ 318
======= ======= ======= =======
Gross unrealized holding losses of $9,000 were recorded at December 31, 1997 in
division equity as compared to no unrealized gross holding losses at December
31, 1996.
16
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DIACRIN/GENZYME LLC
On October 1, 1996, Diacrin/Genzyme LLC was established as a joint venture
between GTR and Diacrin, Inc. to develop and commercialize products and
processes for use in the treatment of Parkinson's disease and Huntington's
disease in humans using porcine fetal cells. Under the terms of the joint
venture agreement, GTR will provide 100% of the initial $10.0 million of the
funding requirements and 75% of the next $40.0 million of funding requirements
for products to be developed by the joint venture. After that, all costs will be
shared equally between GTR and Diacrin. Profits from the joint venture will be
shared equally by the two parties. For the years ended December 31, 1997 and
1996, $5.1 million and $1.9 million, respectively, of Genzyme General cash had
been allocated to GTR under the GTR Equity Line and 489,810 and 231,645, GTR
Designated Shares respectively, have been reserved for issuance at the sole
discretion of the Genzyme Board. As of December 31, 1997 and 1996, GTR realized
a net loss of $6.7 million and $1.7 million, respectively, from the joint
venture. For the year ended December 31, 1997, GTR had provided $6.8 million of
funding to the joint venture. The Company's Chairman and Chief Executive Officer
is a Director of Diacrin.
NOTE G. ACCRUED EXPENSES
Accrued expenses at December 31 include the following:
(DOLLARS IN THOUSANDS) 1997 1996
------------------------------------------------------
Professional fees................ $ 797 $ 743
Compensation..................... 1,837 1,375
Royalties........................ 58 113
Other............................ 124 248
------- -------
$ 2,816 $ 2,479
======= =======
NOTE H. LONG-TERM OBLIGATIONS AND LEASES
Long-term obligations at December 31 is comprised of the following:
(DOLLARS IN THOUSANDS) 1997 1996
------------------------------------------------------
Revolving Credit Facility........ $18,000 $18,000
Convertible Debenture............ 12,681 -
------- -------
$30,681 $18,000
======= =======
Although the Company retains responsibility for the repayment of all long-term
debt obligations (See Note J., "Long-term Debt and Leases" to the Consolidated
Financial Statements which are incorporated herein by reference), such debt is
allocated to either Genzyme General, GTR or GMO for reporting purposes based on
the intended use of the funds borrowed under each instrument.
GTR PRIVATE PLACEMENT
On February 28, 1997, GTR raised $13 million through the private placement of a
5% convertible note (the "GTR Note"), to an affiliate of Credit Suisse First
Boston due February 27, 2000. The GTR Note is convertible beginning May 29, 1997
into shares of GTR Stock and, beginning August 1997, at a discount to the
average of the closing bid prices of the GTR Stock on the Nasdaq National Market
for the 25 trading days immediately preceding the conversion date (the "Average
GTR Stock Price"). The discount will start at 2% beginning six months from the
date the GTR Note was issued and will increase to 11% at 15 months after the
date of issue. Thereafter, the conversion price will be the lesser of 89% of the
Average GTR Stock Price preceding the conversion date or the date 15 months
after the date of issue. In the first quarter of 1997, GTR recorded $11.5
million of proceeds attributed to the value of the debt and $1.5 million
attributed to the value of the conversion feature (recorded as an increase to
division equity). The debt will be accreted to its $13.0 million face value by a
charge to interest expense of $1.5 million over the term of the initial 15 month
conversion period. As of December 31, 1997, GTR had accreted $1.1 million of the
value of the conversion feature.
Future minimum payments due under GTR's long-term obligations are as follows:
LONG-TERM
(DOLLARS IN THOUSANDS) DEBT
-----------------------------------------------------
[S] [C]
1998...................................... $ -
1999...................................... 20,160
2000...................................... 14,583
-------
Total minimum payments............... 34,743
Less interest........................ (4,062)
-------
$30,681
=======
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OPERATING LEASES
GTR rents facilities and equipment under noncancellable operating leases
expiring through 2001. For a GTR Facility there is an option to renew the lease
expiring in 2001 for an additional five years. Rent expense under all operating
leases was $1.8 million in 1997, $2.1 million in 1996 and $1.4 million in 1995.
Future minimum payments due under Genzyme Tissue Repair non-cancellable
operating leases are as follows:
OPERATING
(DOLLARS IN THOUSANDS) LEASES
------------------------------------------------------
1998........................................ $1,680
1999........................................ 1,655
2000........................................ 1,653
2001........................................ 1,531
------
Total minimum payments................. $6,519
======
NOTE I. COMMITMENTS AND CONTINGENCIES
From time to time GTR has been subject to legal proceedings and claims arising
in connection with its business. At December 31, 1997, there were no asserted
claims against GTR which, in the opinion of management, if adversely decided,
would have a material adverse effect on GTR's financial position and results of
operations.
NOTE J. DIVISION EQUITY
The following presents the equity of GTR for the periods presented:
(AMOUNTS IN THOUSANDS) DECEMBER 31,
- -------------------------------------------------------------------------------
1997 1996 1995
---- ---- -----
Balance at beginning of period ........... $ 18,084 $ 45,926 $ 23,313
Net loss ................................. (45,984) (42,315) (22,030)
Exercise of stock options ................ 706 540 241
Shares issued in connection with
the Employee Stock Purchase Plan ....... 1,732 1,896 983
Shares issued in public offering ......... 29,037 - 42,292
Allocation from Genzyme General for
designated shares....................... 14,892 11,714 -
Stock compensation........................ 221 312 882
Value of debt conversion feature.......... 1,524 - -
Equity adjustments ....................... (9) 11 245
-------- ------- --------
Balance at end of period ................. $ 20,203 $ 18,084 $ 45,926
======== ======== ========
At December 31, 1997 and 1996, GTR had 40,000,000 of $.01 par value GTR stock
authorized and approximately 19,941,000 and 13,161,000 issued and outstanding.
PREFERRED STOCK, DIRECTORS' DEFERRED COMPENSATION PLANS, STOCK RIGHTS, STOCK
OPTIONS, EMPLOYEE STOCK PURCHASE PLAN, STOCK COMPENSATION PLANS AND GTR
DESIGNATED SHARES
The disclosures relating to Genzyme's Preferred Stock, Directors' Deferred
Compensation Plan, Stock Rights, Employee Stock Purchase Plan, Stock
Compensation Plans, and GTR Designated Shares are included in Note K.,
"Stockholders' Equity" to the Consolidated Financial Statements which are
incorporated herein by reference.
Pursuant to Genzyme's charter, as amended, GTR Designated Shares are authorized
shares of GTR Stock which are not issued and outstanding, but which the Genzyme
Board may from time to time issue, sell or otherwise distribute without
allocating the proceeds or other benefits of such issuance, sale or
distribution to GTR. GTR Designated Shares are created in certain circumstances
when cash or other assets are transferred from Genzyme General to GTR.
As of December 31, 1997, there were approximately 885,000 GTR Designated Shares
reserved for issuance. During 1997, GTR distributed approximately 2,292,000
Designated Shares as a dividend to Genzyme General shareholders.
Further disclosures relating to Genzyme's stock options and GTR Designated
Shares are included in Note K., "Stockholders' Equity" to the Consolidated
Financial Statements which are incorporated herein by reference.
STOCK OFFERING
In November 1997, Genzyme sold 4,000,000 shares of GTR stock to the public at a
price of $7.75 per share for net proceeds of $29.0 million after underwriting
discounts and commissions.
STOCK COMPENSATION PLANS
The Company applies Accounting Principles Board Opinion 25 and related
Interpretations in accounting for its four stock-based compensation plans, the
1997 Equity Incentive Plan and the 1990 Equity Incentive Plan (both of which are
stock option plans), the 1990 Employee Stock Purchase Plan (a stock purchase
plan) and the 1988 Director Stock Option Plan and accordingly, no compensation
expense has been recognized for options granted and shares purchased by
employees under the provisions of these plans for options granted to employees
with an exercise price equal to fair market value.
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Had compensation expense for the stock-based compensation plans been determined
based on the fair value at the grant dates for options granted and shares
purchased under the plans consistent with the method of SFAS No. 123 "Accounting
for Stock-based Compensation" ("SFAS 123"), GTR's net loss and loss per share
would have been as follows:
DECEMBER 31,
--------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1995
- ------------------------------------------------------------------------------
Net income (loss):
As reported..................... $(45,984) $(42,315) $(22,030)
Pro forma....................... $(49,547) $(45,735) $(23,168)
Basic and diluted loss per share:
As reported..................... $(3.07) $(3.38) $(2.28)
Pro forma....................... $(3.31) $(3.65) $(2.40)
For assumptions used in the SFAS 123 calculations for GTR for the three years
ended December 31, 1997, 1996 and 1995 -- see Note K., "Stockholders Equity" to
the Consolidated Financial Statements which are incorporated herein by
reference.
The effects of applying SFAS 123 in this pro forma disclosure are not likely to
be representative of the effects on reported net income for future years. SFAS
123 does not apply to awards granted prior to 1995. Additional awards are
anticipated in future years.
NOTE K. INCOME TAXES
The differences between the effective tax rates and the U.S. federal statutory
tax rates were as follows:
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
------ ------ ------
U.S. Federal income tax statutory rate ........ (35.0)% (35.0)% (35.0)%
State taxes, net .............................. (3.0) (5.2) (5.2)%
Tax credits ................................... (1.4) - -
Other ......................................... 1.0 - -
Deductions subject to deferred tax
valuation allowance .......................... 38.4 40.2 40.2
----- ----- -----
Effective tax rate ............................ -% -% -%
===== ===== =====
At December 31, 1997 and 1996, the components of deferred tax assets were as
follows (in thousands):
1997 1996
-------- --------
Deferred tax assets:
Net operating loss carryforwards.............. $ 40,554 $ 24,802
Tax credits................................... 964 -
Intangible amortization....................... 10,856 11,282
Reserves and other............................ 3,695 1,983
-------- --------
Gross deferred tax assets..................... 56,069 38,067
Valuation allowance........................... (56,069) (38,067)
-------- --------
Net deferred tax assets....................... $ - $ -
======== ========
Due to uncertainty surrounding the realization of favorable tax attributes GTR
placed a valuation allowance of $56.1 million and $38.1 million for December 31,
1997 and December 31, 1996, respectively, against otherwise recognizable
deferred tax assets. At the time GTR recognizes these tax assets in accordance
with generally accepted accounting principles, the resulting deferred tax
benefits will be reflected in the tax provision for GGD. However, the benefit of
these deferred tax assets has been previously allocated to Genzyme General in
accordance with the management and accounting policies, and will be reflected as
a reduction of GTR net income to determine net income attributable to GTR Stock.
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NOTE L. BENEFIT PLANS
The disclosures relating to Genzyme's domestic employee savings plan under
Section 401(k) of the Internal Revenue Code (the "401(k) Plan") included in Note
O., "Benefit Plans" to the Consolidated Financial Statements which are
incorporated herein by reference. Substantially all employees of GTR are covered
under the 401(k) Plan.
The plan allows employees to make contributions up to a specified percentage of
their compensation, a portion of which are matched by GTR. GTR made $183,000,
$165,000, and $36,000 in contributions to the plan in 1997, 1996 and 1995,
respectively.
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GENZYME TISSUE REPAIR
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Genzyme Corporation:
We have audited the accompanying combined balance sheets of Genzyme Tissue
Repair (as described in Note A) as of December 31, 1997, and 1996, the related
combined statements of operations and cash flows, and the combined financial
statement schedule for each of the three years in the period ended December 31,
1997. The combined financial statements and financial statement schedule are the
responsibility of Genzyme Corporation's management. Our responsibility is to
express an opinion on these combined financial statements and the financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements of Genzyme Tissue Repair
present fairly, in all material respects, the financial position of Genzyme
Tissue Repair as of December 31, 1997 and 1996 and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles. In addition,
in our opinion, the combined financial statement schedule taken as a whole
presents fairly, in all material respects, the information required to be
included therein.
As more fully described in Note A to these financial statements, Genzyme Tissue
Repair is a business group of Genzyme Corporation; accordingly, the combined
financial statements of Genzyme Tissue Repair should be read in conjunction with
the audited consolidated financial statements of Genzyme Corporation and
Subsidiaries.
/s/ Coopers & Lybrand L.L.P.
-------------------------------
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 27, 1998
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