<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
JUNE 28, 1999
GENZYME CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
MASSACHUSETTS 0-14680 06-1047163
(State or other jurisdiction (Commission File (IRS Employer
of incorporation) Number) Identification No.)
</TABLE>
ONE KENDALL SQUARE, CAMBRIDGE, MASSACHUSETTS 02139
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code:
(617) 252-7500
<PAGE> 2
NOTE REGARDING FORWARD-LOOKING STATEMENTS:
This report on Form 8-K (including the exhibits hereto 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 (i) the Company's ability to successfully complete preclinical and
clinical development and obtain timely regulatory approval and patent and other
proprietary rights protection of its products and services, (ii) the content and
timing of decisions made by the U.S. Food and Drug Administration (the "FDA")
and other agencies regarding the indications for which the Company's products
may be approved, (iii) the accuracy of the Company's estimates of the size and
characteristics of markets to be addressed by the Company's products and
services, (iv) market acceptance of the Company's products and services, (v) the
Company's ability to obtain reimbursement for its products from third-party
payers, where appropriate, and (vi) the accuracy of the Company's information
concerning the products and resources of competitors and potential competitors.
See also "Factors Affecting Future Operating Results" under the headings (x)
"Management's Discussion and Analysis of Genzyme General's Financial Condition
and Results of Operations" and "Management's Discussion and Analysis of Genzyme
Corporation and Subsidiaries' Financial Condition and Results of Operations" in
the Genzyme General Annual Report for the fiscal year ended December 31, 1998
(the "1998 Genzyme General Annual Report"), (y) "Management's Discussion and
Analysis of Genzyme Tissue Repair's Financial Condition and Results of
Operations" in the Genzyme Tissue Repair Annual Report for the fiscal year ended
December 31, 1998 (the "1998 GTR Annual Report") and (z) "Management's
Discussion and Analysis of Genzyme Molecular Oncology Division's ("Genzyme
Molecular Oncology" or "GMO") Financial Condition and Results of Operations" in
the Genzyme Molecular Oncology Annual Report for the fiscal year ended December
31, 1998 (the "1998 GMO Annual Report") set forth in Exhibits 13.1, 13.2 and
13.3, respectively, to Genzyme's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 (the "1998 Genzyme 10-K").
ITEM 5. OTHER EVENTS.
On June 28, 1999, Genzyme Corporation distributed 0.17901 of a share of
Genzyme Surgical Products Division Common Stock, which we refer to as GZSP
Stock, for each share of Genzyme General Division Common Stock held as of the
close of business on the record date, which was June 14, 1999. We distributed
approximately 14.8 million shares of GZSP Stock and paid cash for fractional
shares at a rate of $25 per share. We also reserved 1,130,123 shares of GZSP
Stock for future issuance upon conversion of our 5 1/4% convertible subordinated
notes due 2005 and 327 shares for future issuance in connection with
distributions from existing stock accounts under our directors' deferred
compensation plan. GZSP Stock began trading on The Nasdaq National Market(R)
under the ticker symbol GZSP on June 28, 1999.
GZSP Stock is intended to reflect the value and track the performance of
our Genzyme Surgical Products Division. We created the Genzyme Surgical Products
Division from our existing surgical products business, which was previously
operated as a business unit of our Genzyme General Division. Upon formation,
Genzyme Surgical Products Division was also funded with $150 million in cash
from Genzyme General Division. The Supplemental Combined Financial Statements
filed herewith reflect the financial position and results of Genzyme General
Division after giving effect for the distribution of GZSP Stock and the
creation of Genzyme Surgical Products Division.
ITEM 7. EXHIBITS.
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C>
23 Consent of PricewaterhouseCoopers LLP, independent
accountants. Filed herewith.
27.1 Restated Financial Data Schedule for the three
months ended March 31, 1999. Filed herewith.
27.2 Restated Financial Data Schedule for the year
ended December 31, 1998. Filed herewith.
27.3 Restated Financial Data Schedule for the three
months ended March 31, 1998. Filed herewith.
27.4 Restated Financial Data Schedule for the year
ended December 31, 1997. Filed herewith.
27.5 Restated Financial Data Schedule for the year
ended December 31, 1996. Filed herewith.
99 Genzyme General Division Supplemental Combined
Financial Statements. Filed herewith.
</TABLE>
<PAGE> 3
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 hereunto duly authorized.
Dated: June 30, 1999 GENZYME CORPORATION
By: /s/ Michael S. Wyzga
------------------------------------
Name: Michael S. Wyzga
Title: Senior Vice President, Finance
and Chief Financial Officer
2
<PAGE> 4
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
- ------ -----------
<S> <C>
23 Consent of PricewaterhouseCoopers LLP, independent
accountants. Filed herewith.
27.1 Restated Financial Data Schedule for the three
months ended March 31, 1999. Filed herewith.
27.2 Restated Financial Data Schedule for the year
ended December 31, 1998. Filed herewith.
27.3 Restated Financial Data Schedule for the three
months ended March 31, 1998. Filed herewith.
27.4 Restated Financial Data Schedule for the year
ended December 31, 1997. Filed herewith.
27.5 Restated Financial Data Schedule for the year
ended December 31, 1996. Filed herewith.
99 Genzyme General Division Supplemental Combined Financial
Statements. Filed herewith.
</TABLE>
3
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (File Nos. 33-8881, 33-15616, 33-26329, 33-29918,
33-35067, 33-37236, 33-41933, 33-55656, 33-68188, 33-58359, 33-60437, 333-10003,
333-33249, 33-30007, 33-68208, 33-58351, 333-33265, 333-10005, 333-33251,
33-22464, 33-29440, 33-51416, 33-68186, 33-58353, 33-58355, 33-60435, 333-33291,
33-21241, 333-42371, 333-64103, 333-81275, 333-81277) and on Form S-3 (File Nos.
33-61853, 333-59513, 333-68629, 33-64901) of Genzyme Corporation of our report
dated June 28, 1999 on our audits of the supplemental combined financial
statements and supplemental financial statement schedule of Genzyme General as
of December 31, 1998 and 1997, and for each of the three years in the period
ended December 31, 1998, which report is included in the Current Report on Form
8-K of Genzyme Corporation dated June 28, 1999.
PricewaterhouseCoopers LLP
Boston, Massachusetts
June 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Unaudited Consolidated Financial Statements of Genzyme Corporation and its
subsidiaries for the three months ended March 31, 1999 and is qualified in its
entirety by reference to such financial statements as included in the Form 10-Q
for Genzyme Corporation dated March 31, 1999.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 80,591
<SECURITIES> 247,668
<RECEIVABLES> 177,780
<ALLOWANCES> 17,807
<INVENTORY> 110,567
<CURRENT-ASSETS> 671,489
<PP&E> 536,314
<DEPRECIATION> 158,400
<TOTAL-ASSETS> 1,721,053
<CURRENT-LIABILITIES> 228,943
<BONDS> 284,415
1,176
0
<COMMON> 0
<OTHER-SE> 1,198,107
<TOTAL-LIABILITY-AND-EQUITY> 1,721,053
<SALES> 163,702
<TOTAL-REVENUES> 183,744
<CGS> 43,818
<TOTAL-COSTS> 55,906
<OTHER-EXPENSES> 95,630
<LOSS-PROVISION> 2,356
<INTEREST-EXPENSE> 5,498
<INCOME-PRETAX> 25,890
<INCOME-TAX> 9,833
<INCOME-CONTINUING> 16,057
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,057
<EPS-BASIC> 0.53<F1><F2>
<EPS-DILUTED> 0.49<F1><F2>
<FN>
<F1>This financial data schedule has been restated to reflect the creation of
Genzyme Surgical Products Division on June 28, 1999. Genzyme Surgical Products
Division was created from programs and products that had previously been
included in the results of Genzyme General Division until the creation date of
June 28, 1999. All Genzyme General Division historical net income (loss) and
earnings (loss) per share amounts have been restated to reflect the creation of
this new division and Genzyme Surgical Products Division is now included as a
separate tracking stock of Genzyme Corporation.
<F2>Genzyme Corporation reports earnings per share based on its four tracking
stocks - Genzyme General Division Common Stock ("GENZ Stock"), Genzyme 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 three months ended March 31, 1999, net income attributable to Genzyme
General Division was $43,226 and net income per share of GENZ Stock on a basic
and diluted basis was $0.53 and $0.49, respectively. Net loss for Genzyme
Surgical Products Division for the three months ended March 31, 1999 was
$(10,745), and pro forma net loss per basic and diluted share of GZSP Stock was
$(0.73). Net loss for Genzyme Molecular Oncology Division for the three months
ended March 31, 1999 was $(7,060) or $(0.56) per basic and diluted share of
GZMO Stock. Net loss for Genzyme Tissue Repair Division for the three months
ended March 31, 1999 was $(9,616) or $(0.44) per basic and diluted share of
GZTR Stock.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Financial Statements of Genzyme Corporation and Subsidiaries and is
qualified in its entirety by reference to such financial statements as presented
in the 1998 Annual Report on Form 10-K for Genzyme Corporation.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 118,612
<SECURITIES> 175,453
<RECEIVABLES> 176,922
<ALLOWANCES> 13,880
<INVENTORY> 109,833
<CURRENT-ASSETS> 638,132
<PP&E> 533,622
<DEPRECIATION> 151,003
<TOTAL-ASSETS> 1,690,554
<CURRENT-LIABILITIES> 222,704
<BONDS> 287,225
0
0
<COMMON> 1,149
<OTHER-SE> 1,171,398
<TOTAL-LIABILITY-AND-EQUITY> 1,690,554
<SALES> 613,685
<TOTAL-REVENUES> 709,335
<CGS> 211,076
<TOTAL-COSTS> 259,662
<OTHER-EXPENSES> 353,060
<LOSS-PROVISION> 5,482
<INTEREST-EXPENSE> 22,593
<INCOME-PRETAX> 102,437
<INCOME-TAX> 39,870
<INCOME-CONTINUING> 62,567
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 62,567
<EPS-BASIC> 2.16<F1><F2>
<EPS-DILUTED> 2.06<F1><F2>
<FN>
<F1>This financial data schedule has been restated to reflect the creation of
Genzyme Surgical Products Division on June 28, 1999. Genzyme Surgical Products
Division was created from programs and products that had previously been
included in the results of Genzyme General Division until the creation date of
June 28, 1999. All Genzyme General Division historical net income (loss) and
earnings (loss) per share amounts have been restated to reflect the creation of
this new division and Genzyme Surgical Products Division is now included as a
separate tracking stock of Genzyme Corporation.
<F2>Genzyme Corporation reports earnings per share based on its four tracking
stocks - Genzyme General Division Common Stock ("GENZ Stock"), Genzyme 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 year ended December 31, 1998, net income attributable to Genzyme General
Division was $170,909 and net income per share of GENZ Stock on a basic and
diluted basis was $2.16 and $2.06, respectively. Net loss for Genzyme Surgical
Products Division for the year ended December 31, 1998 was $(49,856), and pro
forma net loss per basic and diluted share of GZSP Stock was $(3.37). Net loss
for Genzyme Molecular Oncology Division for the year ended December 31, 1998 was
$(19,107) or $(3.81) per basic and diluted share of GZMO Stock. Net loss for
Genzyme Tissue Repair Division for the year ended December 31, 1998 was
$(40,386) or $(1.99) per basic and diluted share of GZTR Stock.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Unaudited Consolidated Financial Statements of Genzyme Corporation for the three
months ended March 31, 1998 and is qualified in its entirety by reference to
such financial statements as included in the Form 10-Q for Genzyme
Corporation dated March 31, 1998.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 101,219
<SECURITIES> 54,827
<RECEIVABLES> 137,615
<ALLOWANCES> 17,918
<INVENTORY> 135,558
<CURRENT-ASSETS> 464,583
<PP&E> 506,665
<DEPRECIATION> 111,379
<TOTAL-ASSETS> 1,310,182
<CURRENT-LIABILITIES> 104,858
<BONDS> 0
0
0
<COMMON> 1,024
<OTHER-SE> 1,030,571
<TOTAL-LIABILITY-AND-EQUITY> 1,310,182
<SALES> 157,614
<TOTAL-REVENUES> 160,551
<CGS> 46,350
<TOTAL-COSTS> 58,180
<OTHER-EXPENSES> 87,069
<LOSS-PROVISION> 1,446
<INTEREST-EXPENSE> 3,966
<INCOME-PRETAX> 13,537
<INCOME-TAX> 5,753
<INCOME-CONTINUING> 7,784
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,784
<EPS-BASIC> 0.43<F1><F2>
<EPS-DILUTED> 0.42<F1><F2>
<FN>
<F1>This financial data schedule has been restated to reflect the creation of
Genzyme Surgical Products Division on June 28, 1999. Genzyme Surgical Products
Division was created from programs and products that had previously been
included in the results of Genzyme General Division until the creation date of
June 28, 1999. All Genzyme General Division historical net income (loss) and
earnings (loss) per share amounts have been restated to reflect the creation of
this new division and Genzyme Surgical Products Division is now included as a
separate tracking stock of Genzyme Corporation.
<F2>Genzyme Corporation reports earnings per share based on its four tracking
stocks - Genzyme General Division Common Stock ("GENZ Stock"), Genzyme 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 three months ended March 31, 1998, net income attributable to Genzyme
General Division was $34,056 and net income per share of GENZ Stock on a basic
and diluted basis was $0.43 and $0.42, respectively. Net loss for Genzyme
Surgical Products Division for the three months ended March 31, 1998 was
$(9,118), and pro forma net loss per basic and diluted share of GZSP Stock was
$(0.62). Net loss for Genzyme Molecular Oncology Division for the three months
ended March 31, 1998 was $(6,540) or $(1.66) per basic and diluted share of
GZMO Stock. Net loss for Genzyme Tissue Repair Division for the three months
ended March 31, 1998 was $(11,320) or $(0.57) per basic and diluted share of
GZTR Stock.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Financial Statements of Genzyme Corporation and its Subsidiaries
and is qualified in its entirety by reference to such financial statements as
presented in the 1997 Annual Report on Form 10-K/A for Genzyme Corporation.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 102,406
<SECURITIES> 51,259
<RECEIVABLES> 130,377
<ALLOWANCES> 12,100
<INVENTORY> 139,681
<CURRENT-ASSETS> 456,585
<PP&E> 496,727
<DEPRECIATION> 111,379
<TOTAL-ASSETS> 1,295,453
<CURRENT-LIABILITIES> 105,763
<BONDS> 170,276
0
0
<COMMON> 1,015
<OTHER-SE> 1,011,035
<TOTAL-LIABILITY-AND-EQUITY> 1,295,453
<SALES> 529,927
<TOTAL-REVENUES> 608,841
<CGS> 206,028
<TOTAL-COSTS> 253,317
<OTHER-EXPENSES> 314,444
<LOSS-PROVISION> 2,835
<INTEREST-EXPENSE> 12,667
<INCOME-PRETAX> 25,729
<INCOME-TAX> 12,100
<INCOME-CONTINUING> 13,629
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,629
<EPS-BASIC> 1.40<F1><F2>
<EPS-DILUTED> 1.36<F1><F2>
<FN>
<F1>This financial data schedule has been restated to reflect the creation of
Genzyme Surgical Products Division on June 28, 1999. Genzyme Surgical Products
Division was created from programs and products that had previously been
included in the results of Genzyme General Division until the creation date of
June 28, 1999. All Genzyme General Division historical net income (loss) and
earnings (loss) per share amounts have been restated to reflect the creation of
this new division and Genzyme Surgical Products Division is now included as a
separate tracking stock of Genzyme Corporation.
<F2>Genzyme Corporation reports earnings per share based on its four tracking
stocks - Genzyme General Division Common Stock ("GENZ Stock"), Genzyme 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 year ended December 31, 1997, net income attributable to Genzyme General
Division was $107,175 and net income per share of GENZ Stock on a basic and
diluted basis was $1.40 and $1.36, respectively. Net loss for Genzyme Surgical
Products Division for the year ended December 31, 1997 was $(29,740), and pro
forma net loss per basic and diluted share of GZSP Stock was $(2.01). Net loss
for Genzyme Molecular Oncology Division for the year ended December 31, 1997 was
$(19,578) and pro forma net loss per basic and diluted share of GZMO Stock was
$(4.98). Net loss for Genzyme Tissue Repair Division for the year ended December
31, 1997 was $(45,984) or $(3.07) per basic and diluted share of GZTR Stock.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Financial Statements of Genzyme Corporation and its Subsidiaries
and is qualified in its entirety by reference to such financial statements as
presented in the 1996 Annual Report on Form 10-K for Genzyme Corporation.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 93,132
<SECURITIES> 56,608
<RECEIVABLES> 116,833
<ALLOWANCES> 16,508
<INVENTORY> 125,265
<CURRENT-ASSETS> 509,618
<PP&E> 393,839
<DEPRECIATION> 20,172
<TOTAL-ASSETS> 1,270,508
<CURRENT-LIABILITIES> 114,013
<BONDS> 241,998
887
0
<COMMON> 0
<OTHER-SE> 901,422
<TOTAL-LIABILITY-AND-EQUITY> 1,270,508
<SALES> 424,483
<TOTAL-REVENUES> 518,754
<CGS> 155,930
<TOTAL-COSTS> 210,012
<OTHER-EXPENSES> 384,066
<LOSS-PROVISION> 8,338
<INTEREST-EXPENSE> 6,990
<INCOME-PRETAX> (69,622)
<INCOME-TAX> (3,195)
<INCOME-CONTINUING> (72,817)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (72,817)
<EPS-BASIC> 0.20<F1><F2>
<EPS-DILUTED> 0.19<F1><F2>
<FN>
<F1>This financial data schedule has been restated to reflect the creation of
Genzyme Surgical Products Division on June 28, 1999. Genzyme Surgical Products
Division was created from programs and products that had previously been
included in the results of Genzyme General Division until the creation date of
June 28, 1999. All Genzyme General Division historical net income (loss) and
earnings (loss) per share amounts have been restated to reflect the creation of
this new division and Genzyme Surgical Products Division is now included as a
separate tracking stock of Genzyme Corporation.
<F2>Genzyme Corporation reports earnings per share based on its four tracking
stocks - Genzyme General Division Common Stock ("GENZ Stock"), Genzyme 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 year ended December 31, 1996, net income attributable to Genzyme General
Division was $13,811 and net income per share of GENZ Stock on a basic and
diluted basis was $0.20 and $0.19, respectively. Net loss for Genzyme Surgical
Products Division for the year ended December 31, 1996 was $(44,313), and pro
forma net loss per basic and diluted share of GZSP Stock was $(2.99). Net loss
for Genzyme Molecular Oncology Division for the year ended December 31, 1996 was
$(1,003) and pro forma net loss per basic and diluted share of GZMO Stock was
$(0.26). Net loss for Genzyme Tissue Repair Division for the year ended December
31, 1996 was $(42,315) or $(3.38) per basic and diluted share of GZTR Stock.
</FN>
</TABLE>
<PAGE> 1
EXHIBIT 99
FINANCIAL STATEMENTS
PAGE NO.
I. GENZYME GENERAL...............................................
Supplemental Combined Selected Financial Data................. 2
Management's Discussion and Analysis of Genzyme General's
Financial Condition and Results of Operations............. 4
Supplemental Combined Statements of Operations For the Three
Months Ended March 31, 1999 and 1998 (unaudited) and the
Years Ended December 31, 1998, 1997 and 1996.............. 10
Supplemental Combined Balance Sheets as of March 31, 1999
(unaudited) and December 31, 1998 and 1997................ 12
Supplemental Combined Statements of Cash Flows For the Three
Months Ended March 31, 1999 and 1998 (unaudited) and the
Years Ended December 31, 1998, 1997 and 1996.............. 13
Notes to Supplemental Combined Financial Statements........... 15
Report of Independent Accountants............................. 40
1
<PAGE> 2
GENZYME GENERAL
SUPPLEMENTAL COMBINED SELECTED FINANCIAL DATA(1)
The following Supplemental Combined Selected Financial Data reflects the results
of operations and financial position of Genzyme General Division ("Genzyme
General") and should be read in conjunction with the Supplemental financial
statements and accompanying footnotes of Genzyme General.
SUPPLEMENTAL COMBINED STATEMENTS OF OPERATIONS DATA
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
--------------------- ----------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Net product sales ............................... $136,349 $115,143 $509,727 $429,092 $373,769 $304,365 $238,645
Net service sales ............................... 13,892 13,700 55,445 55,835 61,638 47,230 49,686
Revenues from research and development contracts:
Related parties ................................ 480 894 3,568 8,041 23,011 26,758 20,883
Other .......................................... 45 159 579 3,400 2,310 202 600
-------- -------- -------- -------- -------- -------- --------
Total revenues ................................ 150,766 129,896 569,319 496,368 460,728 378,555 309,814
Operating costs and expenses:
Cost of products sold ........................... 27,967 31,627 138,802 146,226 123,276 113,231 92,226
Cost of services sold ........................... 8,755 8,127 34,240 35,451 42,889 31,137 32,116
Selling, general and administrative ............. 35,725 31,163 126,172 118,616 107,219 94,944 79,862
Research and development ........................ 21,065 15,193 73,139 62,905 62,276 51,936 44,293
Amortization of intangibles ..................... 2,086 1,768 7,610 6,887 5,865 4,647 4,741
Purchase of in-process research and development . -- -- -- -- 106,469 14,216 --
Other ........................................... -- -- -- -- 1,000 -- --
-------- -------- -------- -------- -------- -------- --------
Total operating costs and expenses ............ 95,598 87,878 379,963 370,085 448,994 310,111 253,238
-------- -------- -------- -------- -------- -------- --------
Operating income ................................... 55,168 42,018 189,356 126,283 11,734 68,444 56,576
Other income (expenses):
Equity in net loss of unconsolidated affiliates . (7,756) (2,854) (19,739) (5,782) (3,656) (1,809) (1,350)
Gain on affiliate sale of stock ................. 606 -- 2,369 -- 1,013 -- --
Minority interest ............................... 866 864 4,285 -- -- 1,608 1,659
Gain on sale of product line .................... -- -- 31,202 -- -- -- --
Gain on sale of investments ..................... 1,963 -- 3,391 -- 1,711 -- --
Charge for impaired investments ................. -- -- (3,397) -- -- -- (9,431)
Other ........................................... -- -- -- (2,000) -- -- (1,980)
Investment income ............................... 7,923 2,868 22,953 9,940 13,825 7,428 9,072
Interest expense ................................ (5,049) (1,971) (16,994) (8,074) (6,784) (1,069) (1,354)
-------- -------- -------- -------- -------- -------- --------
Total other income (expenses) ................. (1,447) (1,093) 24,070 (5,916) 6,109 6,158 (3,384)
-------- -------- -------- -------- -------- -------- --------
Income before income taxes ......................... 53,721 40,925 213,426 120,367 17,843 74,602 53,192
Provision for income taxes ......................... (20,216) (15,790) (80,374) (43,725) (28,530) (34,234) (19,056)
-------- -------- -------- -------- -------- -------- --------
Net income (loss) .................................. 33,505 25,135 133,052 76,642 (10,687) 40,368 34,136
Tax benefit allocated from Genzyme Tissue Repair ... 3,962 4,406 16,394 17,666 17,011 8,857 1,860
Tax benefit allocated from Genzyme Molecular
Oncology ......................................... 1,934 1,235 3,527 2,755 -- -- --
Tax benefit allocated from Genzyme Surgical
Products ......................................... 3,825 3,280 17,936 10,112 7,487 3,728 2,715
-------- -------- -------- -------- -------- -------- --------
Net income attributable to Genzyme General
Division Common Stock ("GENZ Stock") ............. $ 43,226 $ 34,056 $170,909 $107,175 $ 13,811 $ 52,953 $ 38,711
======== ======== ======== ======== ======== ======== ========
</TABLE>
2
<PAGE> 3
SUPPLEMENTAL COMBINED STATEMENTS OF OPERATIONS DATA (continued)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
-------------------------- -----------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
GENZYME GENERAL COMMON SHARE DATA:
Net income attributable to
GENZ Stock............................ $ 43,226 $ 34,056 $170,909 $107,175 $13,811 $52,953 $38,711
========== ========== ======== ======== ======= ======= =======
Per Genzyme General common share:
Net income per Genzyme
General common share - basic ......... $ 0.53 $ 0.43 $ 2.16 $ 1.40 $ 0.20 $ 0.95 $ 0.80
========== ========== ======== ======== ======= ======= =======
Weighted average shares outstanding ... 81,958 78,760 79,063 76,531 68,289 55,531 48,141
========== ========== ======== ======== ======= ======= =======
Net income per Genzyme General common
and common equivalent share-diluted .. $ 0.49 $ 0.42 $ 2.06 $ 1.36 $ 0.19 $ 0.83 $ 0.70
========== ========== ======== ======== ======= ======= =======
Adjusted weighted average shares
outstanding........................... 92,591 81,200 85,822 78,925 73,038 63,967 55,321
========== ========== ======== ======== ======= ======= =======
</TABLE>
COMBINED BALANCE SHEET DATA(1):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash and investments .............. $ 609,122 $ 556,097 $ 192,222 $ 169,543 $ 278,663 $ 128,652
Working capital ................... 415,575 381,685 273,697 340,817 307,918 83,114
Total assets ...................... 1,450,000 1,410,391 960,490 975,910 854,411 629,887
Long-term debt and convertible debt 274,883 274,646 117,978 223,846 124,473 126,555
Division equity ................... 973,625 939,967 745,895 645,185 659,106 395,394
</TABLE>
There were no cash dividends paid.
(1) On June 28, 1999 (the "Distribution Date"), Genzyme distributed to the
holders of GENZ Stock of record as of June 14, 1999, 0.17901 share of Genzyme
Surgical Products Division ("Genzyme Surgical Products" or "GSP") Common Stock
for each share of GENZ Stock held. Genzyme Surgical Products was created from
Genzyme's existing surgical products business, which previously operated as a
business unit of Genzyme General. The Supplemental Combined Financial
Statements reflect the financial position and results of operations and cash
flows of Genzyme General after giving effect for the distribution of GZSP
Stock. Upon publication of Genzyme General's combined financial statements for
a period which includes the Distribution Date, the Supplemental Combined
Financial Statements will become the historical combined financial statements
of Genzyme General.
3
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF GENZYME GENERAL'S FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion and analysis relates to the Supplemental Combined
Financial Statements of Genzyme General Division ("Genzyme General") as of March
31, 1999 and December 31, 1998 and 1997, and for the periods ended March 31,
1999 and 1998 and for the years ended December 31, 1998, 1997 and 1996 (the
"Supplemental Combined Financial Statements").
This discussion contains forward-looking statements. These forward-looking
statements represent the expectations of the management of both Genzyme General
and Genzyme as of the date of the filing of this Form 8-K. The actual results
for Genzyme General and Genzyme could differ materially from those anticipated
by the forward-looking statements due to the risks and uncertainties described
under the caption "Uncertainties" in Note A., "Summary of Significant Accounting
Policies" in the notes to the Supplemental Combined Financial Statements set
forth in this Form 8-K and under the caption "Factors Affecting Future Operating
Results" in the sections entitled "Management's Discussion and Analysis of
Genzyme General's Financial Condition and Results of Operations" and
"Management's Discussion and Analysis of Genzyme Corporation and Subsidiaries'
Financial Condition and Results of Operations" in Exhibit 13.1 of Genzyme's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (the
"1998 Genzyme 10-K") and are incorporated herein by reference. Stockholders and
potential investors should consider carefully each of these risks and
uncertainties in evaluating the financial condition and results of operations of
Genzyme General.
On June 28, 1999 (the "Distribution Date") Genzyme distributed to the holders of
Genzyme General Division Common Stock ("GENZ Stock") approximately 14.8 million
shares of Genzyme Surgical Products Division Common Stock ("GZSP Stock"). The
Supplemental Combined Financial Statements reflect the financial position and
results of operations and cash flows of Genzyme General after giving effect for
the distribution of GZSP Stock. Upon publication of Genzyme General's combined
financial statements for a period which includes the Distribution Date, the
Supplemental Combined Financial Statements will become the historical combined
financial statements of Genzyme General. See Note A to the Supplemental Combined
Financial Statements.
Genzyme provides separate financial statements for the Company and its
subsidiaries on a consolidated basis and for each of Genzyme General, Genzyme
Surgical Products Division ("Genzyme Surgical Products" or "GSP"), Genzyme
Molecular Oncology Division ("Genzyme Molecular Oncology" or "GMO") and Genzyme
Tissue Repair Division ("Genzyme Tissue Repair" or "GTR"). GSP was created from
Genzyme's existing surgical products business, which previously operated as a
business unit of Genzyme General. It 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 anti-adhesion
products and product candidates ("Sepra Products"), and Genzyme's research and
development programs in gene and cell therapy for cardiovascular disease. 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
"Charter"), and the management and accounting policies adopted by the Genzyme
Board of Directors (the "Genzyme Board") to govern the relationship of the
divisions. The financial information of Genzyme General, GSP, GMO and GTR 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 the Company's programs
and products are allocated to either Genzyme General, GSP, GMO or GTR.
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 GENZ Stock, GZSP Stock, Genzyme Molecular Oncology
Division Common Stock ("GZMO Stock") and Genzyme Tissue Repair Division Common
Stock ("GZTR 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 the other divisions.
Stockholders and potential investors should, therefore, read this discussion and
analysis of Genzyme General's financial position and results of operations in
conjunction with the supplemental financial statements and related notes of
Genzyme General. Stockholders and potential investors should also read the
discussion and analysis of Genzyme's financial position and results of
operations and the consolidated financial statements and related notes of
Genzyme which are included in Exhibit 13.1 of the 1998 Genzyme 10-K, and
Genzyme's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
1999, and are incorporated herein by reference.
RESULTS OF OPERATIONS
The following discussion summarizes the key factors management considers
necessary in reviewing Genzyme General's combined results of operations, which
are restated to reflect the Distribution of GZSP Stock, for the three months
ended March 31, 1999 and 1998 and for the years ended December 31, 1998, 1997
and 1996. Detailed discussion and analysis of the consolidated results of
operations of Genzyme and its subsidiaries, which include the combined results
of Genzyme General, Genzyme Molecular Oncology and Genzyme Tissue Repair, are
provided separately in Genzyme's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1999 under "Management's Discussion and Analysis of
Genzyme Corporation and Subsidiaries' Financial Condition and Results of
Operations" and in the 1998 Genzyme 10-K under "Management's Discussion and
Analysis of Genzyme Corporation and Subsidiaries' Financial Condition and
Results of Operations."
MARCH 31, 1999 AS COMPARED TO MARCH 31, 1998
REVENUES
Total revenues for the three months ended March 31, 1999 increased 16% to $150.8
million from $129.9 million in the corresponding period of 1998.
Product revenues for the three months ended March 31, 1999 increased 18% to
$136.3 million from $115.1 million in the comparable period of 1998.
Revenues for the Therapeutics business unit consisted primarily of sales of
Cerezyme(R) enzyme and Ceredase(R) enzyme, and increased 24% to $118.9 million
for the three months ended March 31, 1999 from $95.6 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 three
months ended March 31, 1999 were $113.8 million as compared to $93.5 million for
the same period of 1998. Genzyme General's results of operations are highly
dependent on these products, which together represent 83% of product sales for
the three months ended March 31, 1999, compared to 81% in the corresponding
period of last year. Therapeutics revenues for the first quarter of 1999 also
include sales of Thyrogen(R) hormone and lipids and peptides for drug delivery.
4
<PAGE> 5
Revenues from the Diagnostics business unit consist of product sales and genetic
testing service revenues. Revenues for the Diagnostics business unit decreased
6% to $28.6 million for the three months ended March 31, 1999 from $30.5 million
in the same period of last year. The decrease in Diagnostics revenues for the
quarter reflects the sale of Genzyme's research products business to TECHNE
Corporation and its wholly-owned subsidiary, Research Diagnostic Systems, Inc.
(collectively, "TECHNE") in July 1998 (the "TECHNE Sale"). The research products
business had revenues of approximately $4.0 million per quarter at the time it
was sold. Diagnostic product revenues now include royalties on sales by TECHNE's
biotechnology group. Excluding revenues from the research products business,
diagnostic product sales increased 16% for the three months ended March 31, 1999
to $14.7 million compared to the same period last year. Revenues from genetic
testing services were $13.9 million for the first quarter of 1999, up slightly
in comparison to the corresponding period of 1998.
International sales as a percentage of total product and service sales for the
three months ended March 31, 1999 decreased to 42% from 44% for the
corresponding period of 1998.
MARGINS AND OPERATING EXPENSES
Gross margins for the quarters ended March 31, 1999 and 1998 were 76% and 69%,
respectively, due primarily to increased Cerezyme(R) enzyme sales. Genzyme
General provides a broad range of health care products and services, resulting
in a range of gross margins depending on the particular market conditions of
each product or service. Product margins for the three months ended March 31,
1999 were 79% compared to 73% for the same period of 1998. The increase in
product margins is primarily due to increased sales volume of Cerezyme(R)
enzyme. Genetic testing service margins for the three months ended March 31,
1999 decreased to 37%, in comparison to 41% for the corresponding period of
1998, due primarily to less capacity utilization in the three months ended March
31, 1999.
Selling, general and administrative ("SG&A") expenses and amortization of
intangibles for the three months ended March 31, 1999 were $37.8 million as
compared to $32.9 million for the same period in 1998, an increase of 15%. The
increase was due primarily to increased staffing in support of the growth in
several product lines and costs associated with the market introduction of
Thyrogen(R) hormone in January 1999.
Research and development expenses for the three months ended March 31, 1999 were
$21.1 million compared to $15.2 million for the three months ended March 31,
1998, an increase of 39%, due primarily to increased costs in connection with
the spending of ATIII LLC, the joint venture between Genzyme and Genzyme
transgenics Corporation ("GTC") for the development and commercialization of
transgenic recombinant antithrombin III ("ATIII"), and increased spending on
alpha-galactosidase for Fabry disease.
OTHER INCOME AND EXPENSES
Other income and expenses for the three months ended March 31, 1999 was a net
other expense of $1.4 million compared to a net other expense of $1.1 million in
the three months ended March 31, 1998. Equity in net loss of Genzyme's
unconsolidated affiliates increased to $7.8 million for the three months ended
March 31, 1999 from $2.9 million for the three months ended March 31, 1998. The
change is primarily due to (i) increased losses from RenaGel LLC, Genzyme's
joint venture with GelTex Pharmaceuticals, Inc. ("GelTex") for the development
and commercialization of Renagel(R) Capsules (sevelamer hydrochloride), which
was established on June 17, 1997; (ii) Genzyme's portion of the losses resulting
from Pharming/Genzyme LLC, Genzyme's joint venture with Pharming Group N.V.
("Pharming") for the development and commercialization of human alpha
glucosidase ("hAG") as a treatment for Pompe disease, which became effective
on October 9, 1998; and (iii) Genzyme's portion of the losses resulting from
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 ("MPS I"), which was established on
September 14, 1998.
For the three months ended March 31, 1999, other income and expense, net, also
includes a gain of $0.6 million on Genzyme's investment in GTC due to issuance
by GTC of its common stock and a gain of $2.0 million on the sale of TECHNE
common stock that was acquired by Genzyme in the TECHNE sale. There were no
comparable amounts in the same period of 1998. For each of the three months
ended March 31, 1999 and 1998, Genzyme recorded minority interest of $0.9
million, representing the portion of the results of ATIII LLC allocated to GTC.
Investment income increased to $7.9 million for the three months ended March 31,
1999 from $2.9 million for the same period of 1998. The increase was due to
higher average cash balances resulting primarily from the net proceeds from the
issuance in May 1998 of $250.0 million in principal amount of 5 1/4% Convertible
Subordinated Notes due June 1, 2005 (the "GGD Notes") and increased cash
provided by operating activities. Interest expense was $5.0 million for the
three months ended March 31, 1999, compared to $2.0 million for the
corresponding period of 1998. The increase was due to additional interest
expense related to the GGD Notes and interest expense related to the $21.2
million in principal amount of 5% Convertible Subordinated Debentures due August
29, 2003 (the "GGD Debentures").
The tax provisions for the three months ended March 31, 1999 and 1998 vary from
the U.S. statutory tax rate because of the provision for state income taxes,
nondeductible interest, the foreign sales corporation, nondeductible
amortization of intangibles, tax credits and Genzyme General's share of the
losses of certain unconsolidated affiliates. The effective tax rate for the
three months ended March 31, 1999 decreased to 38% from 39% for the same period
of 1998. For the three months ended March 31, 1999, tax benefits allocated from
GSP, GMO and GTR of $3.8 million, $1.9 million and $4.0 million, respectively,
reduced Genzyme General's tax rate to 20% and in the corresponding period of
1998, tax benefits allocated from GSP, GMO and GTR of $3.3 million, $1.2 million
and $4.4 million, respectively, reduced Genzyme General's tax rate to 17%. The
difference is attributable to the fact that the same approximate dollar benefits
from GSP, GMO and GTR gave a lower percentage of benefit on an increased profit
before tax.
1998 AS COMPARED TO 1997
REVENUES
Total revenues for 1998 were $569.3 million compared to $496.4 million in 1997,
an increase of 15%. Product and service revenues were $565.2 million, compared
to $484.9 million in 1997, an increase of 17%. Revenues from research and
development contracts for 1998 were $4.1 million compared to $11.4 million in
1997, a decrease of 64%.
Product revenues in 1998 increased 19% to $509.7 million from $429.1 million in
1997, due primarily to increased sales of Cerezyme(R) enzyme.
5
<PAGE> 6
In 1998, sales of products by Genzyme General's Therapeutics business unit
consisted primarily of sales of Cerezyme(R) enzyme and Ceredase(R) enzyme. Sales
of Cerezyme(R) enzyme and Ceredase(R) enzyme increased 24% to $411.1 million
from $332.7 million in 1997 due to continued growth in new patient accruals in
existing markets and strong international sales. Genzyme General's results of
operations are highly dependent on sales of Cerezyme(R) enzyme and Ceredase(R)
enzyme, which together represented 81% of Genzyme General's product sales in
1998 compared to 78% in 1997.
Revenues from the Diagnostics business unit consist of product sales and genetic
testing service revenues. On July 1, 1998, Genzyme completed the sale of
substantially all of the assets of its research products business to TECHNE. The
research products business contributed $9.1 million and $15.8 million of revenue
in 1998 and 1997, respectively. Despite the sale of these assets, product sales
of diagnostic products in 1998 were level with 1997. Service revenues in 1998
were level with 1997.
International sales as a percentage of total product and service sales in 1998
increased to 43% from 39% in 1997, due primarily to a 32% increase in combined
international sales of Cerezyme(R) enzyme and Ceredase(R) enzyme.
Revenues from research and development contracts for 1998 decreased 64% to $4.1
million from $11.4 million in 1997, due primarily to a decrease in services
performed for GTC.
MARGINS AND OPERATING EXPENSES
Total gross margins for 1998 were 69% compared to 63% in 1997. Excluding other
charges described below, gross margins for 1998 were 72% compared to 66% in
1997. 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 1998 were 73%,
including certain other charges described below, compared to 66% in 1997,
including certain other charges described below. The increase in product margins
in 1998 is primarily due to increased sales of Cerezyme(R) enzyme.
In the third quarter of 1998, Genzyme General recorded charges of $14.8 million
associated with the write-down of inventories in the Therapeutics business unit.
The conversion of patients with Gaucher disease from Ceredase(R) enzyme to
Cerezyme(R) enzyme is substantially complete. Based on its successful progress
in converting patients from Ceredase(R) enzyme to Cerezyme(R) enzyme, Genzyme
General determined that its existing supply of finished goods of Ceredase(R)
enzyme was sufficient to meet patient needs. As a result, in the third quarter
of 1998, Genzyme General recorded a $14.8 million charge to cost of products
sold primarily for the excess inventory used to make Ceredase(R) enzyme.
Without the other charges described above, product margins in 1998 would have
been 76% compared to 70% in 1997, excluding the other charges described below.
Product margins, without other charges, increased in 1998 due to increased sales
of Cerezyme(R) enzyme. Service margins for 1998 were 38% compared to 37% in
1997.
SG&A expenses and amortization of intangibles for 1998 were $133.8 million
compared to $125.5 million in 1997, an increase of 7%. The increase was due
primarily to increased sales and marketing expenses related to the product
launch of Thyrogen(R) hormone and increased expenditures in support of
Cerezyme(R) enzyme.
Research and development expenses for 1998 were $73.1 million compared to $62.9
million in 1997, an increase of 16%. The increase was primarily due to $12.0
million of additional research and development expenses resulting from the
consolidation of the results of ATIII LLC, for which there were no comparable
amounts in 1997.
OTHER INCOME AND EXPENSES
Other income and expenses was a net other income of $24.1 million in 1998
compared to net other expense of $5.9 million in 1997. The 1997 amount includes
$2.0 million of other charges related to the uncertainty of collection of
certain notes receivable.
Other income and expenses includes $19.7 million in equity in net loss of
unconsolidated affiliates in 1998 compared to $5.8 million in equity in net loss
of unconsolidated affiliates in 1997. The increase in equity in net loss of
unconsolidated affiliates was primarily due to (i) increased losses from GTC;
(ii) increased losses resulting from RenaGel LLC; and (iii) Genzyme's portion of
the losses resulting from Pharming/Genzyme LLC and BioMarin/Genzyme LLC.
Other income and expense 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 June 1998.
6
<PAGE> 7
For the year ended December 31, 1998, Genzyme General recorded minority interest
in the results of ATIII LLC of $4.3 million, representing GTC's portion of the
losses of the joint venture for 1998. There was no comparable amount in the
corresponding period of 1997.
In July 1998, Genzyme General recorded a gain of $31.2 million in connection
with the TECHNE Sale. In addition, a gain on sale of investment of $3.4 million
was recorded in December 1998 upon the sale of a portion of the shares of TECHNE
common stock acquired by Genzyme in that transaction. There were no comparable
amounts in the corresponding period of 1997.
Genzyme General recorded a charge for an impaired investment of $3.4 million
related to a strategic investment in a company whose common stock price decline
was considered "other than temporary."
Investment income for 1998 was $23.0 million, compared with $9.9 million for
1997. The increase was due to higher average cash balances resulting primarily
from the proceeds from the issuance in May 1998 of the GGD Notes. Interest
expense for 1998 was $17.0 million, compared to $8.1 million in 1997. The
increase was due to additional interest expense related to the issuance of the
GGD Notes and interest expense related to the GGD Debentures.
The net tax provision for 1998 varies 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 certain unconsolidated affiliates. In 1998, the effective
tax rate was 38%, compared to 36% in 1997. The allocated tax benefit generated
by GSP, GMO and GTR of $17.9 million, $3.5 million and $16.4 million,
respectively, in 1998 and $10.1 million, $2.8 million and $17.7 million,
respectively, in 1997 reduced Genzyme General's tax rate to 20% and 11% in 1998
and 1997, respectively. The difference is attributable to the fact that the same
dollar benefits gave a lower percentage of benefit over an increased profit
before tax.
1997 AS COMPARED TO 1996
In the fourth quarter of 1997, Genzyme General recorded $21.8 million of charges
mainly associated with its Pharmaceutical businesses and the sale of Genetic
Design, Inc. ("GDI"), which was sold in 1996. The Pharmaceuticals business now
focuses on products that are more consistent with Genzyme General's long-term
business strategy of moving towards higher-value products and away from fine
chemical and bulk pharmaceuticals. This change in strategy resulted in an $18.1
million charge to cost of products sold, primarily related to the melatonin,
bulk pharmaceuticals and fine chemical product lines that were discontinued.
Genzyme General also recorded a $2.0 million charge to other expense related to
the uncertainty of collection on certain notes receivable and $1.7 million of
charges to SG&A expense primarily related to certain headcount reductions.
REVENUES
Total revenues for 1997 were $496.4 million compared to $460.7 million in 1996,
an increase of 8%. Product and service revenues were $484.9 million, compared to
$435.4 million in 1996, an increase of 11%. Revenues from research and
development contracts for 1997 were $11.4 million compared to $25.3 million in
1996, a decrease of 55%.
Product revenues in 1997 increased 15% to $429.1 million from $373.8 million in
1996, due primarily to increased sales of Cerezyme(R) enzyme.
Sales of Therapeutic products in 1997 consisted primarily of sales of
Cerezyme(R) enzyme and Ceredase(R) enzyme. Sales of Cerezyme(R) enzyme and
Ceredase(R) enzyme increased 26% to $332.7 million from $264.6 million in 1996,
due to continued growth in new patient accruals in existing markets. Sales of
Cerezyme(R) enzyme and Ceredase(R) enzyme together represented 78% of
consolidated product sales in 1997 compared to 71% in 1996.
Pharmaceuticals product sales in 1997 decreased 31% from 1996 due primarily to a
significant decline in sales of melatonin. Melatonin sales began to decline
materially during the second half of 1996 due to reduced demand and Genzyme
General discontinued this product line in the fourth quarter of 1997.
Product sales of diagnostic products in 1997 were level with 1996. Service
revenues for genetic testing in 1997 decreased 9% primarily due to the loss of
revenue from GDI, which was sold in November 1996. This decrease was offset in
part by higher unit volumes that were primarily attributable to the acquisition
of Genetrix, Inc. ("Genetrix"), which was included in Genzyme General's results
of operations from May 1, 1996.
International sales as a percentage of total product and service sales in 1997
increased to 39% from 37% in 1996, due primarily to a 32% increase in combined
international sales of Cerezyme(R) enzyme and Ceredase(R) enzyme.
Revenues from research and development contracts for 1997 decreased 55% to $11.4
million from $25.3 million in 1996, due primarily to
7
<PAGE> 8
the absence of revenue from Neozyme II Corporation ("Neozyme II"), which was
acquired by Genzyme in the fourth quarter of 1996. This decrease was offset in
part by increases in revenues from research and development contracts with third
parties. Revenues from Neozyme II were $19.8 million in 1996.
MARGINS AND OPERATING EXPENSES
Total gross margins for 1997 were 63% compared to 62% in 1996. Excluding the
effects of special charges, gross margins were 66% in 1997. 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 1997 decreased to 66% from 67% in 1996.
Excluding the effects of special charges, product margins in 1997 were 70%.
Service margins for 1997 increased to 37% from 30% in 1996 due to the
consolidation of Genetrix, the sale of GDI in 1996 and the resulting elimination
of redundant facilities and staffing.
SG&A expenses and amortization of intangibles for 1997 were $125.5 million
compared to $113.1 million in 1996, an increase of 11%. The increase in 1997 was
due primarily to increased staffing in support of the growth in several product
lines. The acquisition of Genetrix did not materially affect SG&A expenses in
1996 and 1997 due to the consolidation of operations.
Research and development expenses for 1997 were $62.9 million compared to $62.3
million in 1996.
OTHER INCOME AND EXPENSES
Other income and expenses was a net other expense of $5.9 million (which
includes a $2.0 million special charge) compared to net other income of $6.1
million in 1996. The change was due primarily to a decrease in investment income
and an increase in interest expense as well as increased equity in net losses of
unconsolidated affiliates. Investment income for 1997 was $9.9 million, compared
with $13.8 million for 1996. The decrease resulted from lower average cash and
investment balances. Interest expense for 1997 was $8.1 million, compared to
$6.8 million in 1996. The increase resulted from interest on funds borrowed to
finance portions of the acquisitions of DSP and Neozyme II. Equity in net loss
of unconsolidated affiliates increased from $3.7 million in 1996 to $5.8 million
in 1997. The change is primarily due to increased losses from GTC and Genzyme's
portion of the losses of RenaGel LLC which was established on June 17, 1997 and
for which there was no comparable amount in 1996.
The net tax provision for 1997 varies 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 certain unconsolidated affiliates. In 1997, the effective
tax rate was 36%, compared to 41% in 1996 before acquisitions. The decrease in
the rate was due to additional tax credits in 1997 as well as a change in
Massachusetts state law. The allocated tax benefit generated by GSP, GMO and GTR
of $10.1 million $2.8 million and $17.7 million, respectively, in 1997 and $7.5
million, zero and $17.0 million, respectively, in 1996 reduced Genzyme General's
tax rate to 11% and 23% in 1997 and 1996, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, Genzyme General had cash, cash equivalents and investments
(excluding equity securities) of $609.1 million compared to $556.1 million at
December 31, 1998, an increase of $53.0 million. During the first quarter of
1999, operating activities and financing activities provided $55.1 million and
$3.7 million of cash, respectively, while investing activities used $95.7
million of cash. Fluctuations in exchange rates caused a decrease in cash of
$2.6 million for the quarter ending March 31, 1999.
At December 31, 1998, Genzyme General had cash, cash equivalents and investments
(excluding equity securities) of $556.1 million compared to $192.2 million at
December 31, 1997, an increase of $363.9 million. In 1998, operating and
financing activities provided $193.0 million and $247.2 million of cash,
respectively, while investing activities used $405.8 million of cash and
fluctuations in exchange rates caused an increase in cash of $0.3 million.
At December 31, 1998, accounts receivable increased 34% to $137.6 million from
$102.4 million at December 31, 1997 primarily due to increased revenue in 1998.
At December 31, 1998, inventories decreased 24% to $85.2 million from $111.5
million at December 31, 1997, due primarily to the $14.8 million charge to
write-down inventory in the Therapeutics business unit. In 1998, Genzyme General
used $53.3 million for capital acquisitions and $320.6 million for net purchases
of investments. Genzyme General received $74.6 million of cash from issuances of
common stock and $250.0 million in cash from the issuance of debt and used $33.2
million of cash for payments of debt and capital leases.
In May 1998, Genzyme raised approximately $243.0 million, net of the initial
purchasers' discount and offering costs, from the issuance of the GGD Notes. The
GGD Notes bear interest at 5.25% per annum and interest is payable semi-annually
on June 1 and December 1 of each year, commencing on December 1, 1998. The GGD
Notes are convertible, at any time at or before maturity (unless previously
redeemed) into shares of GENZ Stock at a conversion price of $39.60 per share,
subject to adjustment in certain events. Holders of the GGD Notes will also be
entitled to receive 0.10805 share of GZMO Stock and 0.17901 share of GZSP Stock
for each share of GENZ Stock issued upon conversion. The GGD Notes may not be
redeemed prior to June 10, 2001 and are redeemable, subject to certain
subordination provisions, on such date and thereafter at the option of Genzyme,
as a whole or from time to time in part, at the following prices (expressed as
percentages of the principal amount) plus accrued interest to, but not
including, the redemption date: 102.63% if redeemed on or before May 31, 2002;
101.75% if redeemed between June 1, 2002 and May 31, 2003; 100.88% if redeemed
between June 1, 2003 and May 31, 2004; and 100% if redeemed on or after June 1,
2004.
On November 16, 1998 Genzyme distributed approximately 8,717,000 shares of GZMO
Stock to holders of GENZ Stock and released from escrow approximately 3,929,000
shares of GZMO Stock held by former PharmaGenics, Inc. ("PharmaGenics")
shareholders (the "GMO Dividend").
8
<PAGE> 9
On November 2, 1998, Genzyme General and GelTex announced that the FDA granted
marketing approval for Renagel(R) Capsules for the reduction of serum
phosphorus in patients with end-stage renal disease. Genzyme made a $15.0
million milestone payment to GelTex in connection with the receipt of FDA
approval of Renagel(R) Capsules, and is required to make an additional $10.0
million milestone payment to GelTex in October 1999.
In March 1999, Genzyme announced its intention to reallocate Genzyme's interest
in Diacrin/Genzyme LLC from Genzyme Tissue Repair to Genzyme General.
Diacrin/Genzyme LLC is Genzyme's joint venture with Diacrin, Inc. ("Diacrin")
for the development and commercialization of products based on fetal porcine
cells for the treatment of Parkinson's and Huntington's diseases. The transfer
of interest in Diacrin/Genzyme LLC was approved by the GTR shareholders in May
1999.
Genzyme General transferred $150.0 million of cash, cash equivalents and
investments to GSP as of the Distribution Date. 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; (ii)
product development and marketing; and (iii) expanding facilities. Genzyme
General's cash resources will be further reduced to pay principal and interest
on the following debt: (i) $82.0 million allocated to Genzyme General under
Genzyme's revolving credit facility with a syndicate of commercial banks, which
is payable in November 1999; (ii) $21.2 million in principal amount under the
GGD Debentures, which mature on August 29, 2003; and (iii) $250.0 million in
principal amount under the GGD Notes, which are convertible into shares of GENZ
Stock, and mature on June 1, 2005. To the extent cash is used to repay or redeem
these debt instruments, including the interest payable thereon, Genzyme
General's cash reserves will be diminished. Further, to the extent that
liabilities or contingencies of GSP, GMO and GTR 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 its activities. There can be no
assurance that such financing will be available on terms acceptable to Genzyme
General, if at all.
NEW ACCOUNTING PRONOUNCEMENTS, EURO, YEAR 2000 AND MARKET RISK
Genzyme's disclosures related to (i) new accounting pronouncements, (ii) the
business implications of the Euro conversion, (iii) Genzyme's Year 2000
compliance program and potential Year 2000 exposures and (iv) Genzyme's
financial market risks are described in Exhibit 13.1 of the 1998 Genzyme 10-K
under the heading "Management's Discussion and Analysis of Genzyme Corporation
and Subsidiaries' Financial Condition and Results of Operations -- New
Accounting Pronouncements, Euro, Year 2000 and Market Risk," which is
incorporated herein by reference. As of March 31, 1999, there had been no
material changes related to the Company's outstanding derivatives and forward
contracts or any other material contracts as a result of the Euro conversion and
no material changes in the Company's competitive position as a result of the
conversion since December 31, 1998. Additionally, as of March 31, 1999, there
had been no material changes in the Company's Year 2000 compliance program or
its potential Year 2000 exposures, and no material changes in the Company's
market risk, since December 31, 1998.
SUBSEQUENT EVENTS
In April 1999, Genzyme General received approximately $8.3 million ($8.0 million
in principal and $0.3 million in interest) in connection with certain notes
receivable that were previously fully reserved due to uncertainty surrounding
collection. Genzyme received these notes in partial consideration for the sale
of GDI in 1996. The $8.3 million will be recorded as a gain in the second
quarter of 1999.
On June 28, 1999, Genzyme General distributed to holders of GENZ Stock of record
as of June 14, 1999, 0.17901 share of GZSP Stock for each share of GENZ Stock
held.
9
<PAGE> 10
GENZYME GENERAL
SUPPLEMENTAL COMBINED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE YEARS
ENDED MARCH 31, ENDED DECEMBER 31,
1999 1998 1998 1997 1996
------------------------- -----------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Net product sales ............................... $ 136,349 $ 115,143 $ 509,727 $ 429,092 $ 373,769
Net service sales ............................... 13,892 13,700 55,445 55,835 61,638
Revenues from research and development contracts:
Related parties ................................ 480 894 3,568 8,041 23,011
Other .......................................... 45 159 579 3,400 2,310
--------- --------- --------- --------- ---------
Total revenues ................................ 150,766 129,896 569,319 496,368 460,728
Operating costs and expenses:
Cost of products sold ........................... 27,967 31,627 138,802 146,226 123,276
Cost of services sold ........................... 8,755 8,127 34,240 35,451 42,889
Selling, general and administrative ............. 35,725 31,163 126,172 118,616 107,219
Research and development ........................ 21,065 15,193 73,139 62,905 62,276
Amortization of intangibles ..................... 2,086 1,768 7,610 6,887 5,865
Purchase of in-process research and development . -- -- -- -- 106,469
Other ........................................... -- -- -- -- 1,000
--------- --------- --------- --------- ---------
Total operating costs and expenses ............ 95,598 87,878 379,963 370,085 448,994
--------- --------- --------- --------- ---------
Operating income ................................... 55,168 42,018 189,356 126,283 11,734
Other income (expenses):
Equity in net loss of unconsolidated affiliates . (7,756) (2,854) (19,739) (5,782) (3,656)
Gain on affiliate sale of stock ................. 606 -- 2,369 -- 1,013
Minority interest ............................... 866 864 4,285 -- --
Gain on sale of product line .................... -- -- 31,202 -- --
Gain on sale of investments ..................... 1,963 -- 3,391 -- 1,711
Charge for impaired investments ................. -- -- (3,397) -- --
Other ........................................... -- -- -- (2,000) --
Investment income ............................... 7,923 2,868 22,953 9,940 13,825
Interest expense ................................ (5,049) (1,971) (16,994) (8,074) (6,784)
--------- --------- --------- --------- ---------
Total other income (expenses) ................. (1,447) (1,093) 24,070 (5,916) 6,109
--------- --------- --------- --------- ---------
Income before income taxes ......................... 53,721 40,925 213,426 120,367 17,843
Provision for income taxes ......................... (20,216) (15,790) (80,374) (43,725) (28,530)
--------- --------- --------- --------- ---------
Net income (loss) .................................. 33,505 25,135 133,052 76,642 (10,687)
Tax benefit allocated from Genzyme Tissue Repair ... 3,962 4,406 16,394 17,666 17,011
Tax benefit allocated from Genzyme Molecular
Oncology ......................................... 1,934 1,235 3,527 2,755 --
Tax benefit allocated from Genzyme Surgical
Products ......................................... 3,825 3,280 17,936 10,112 7,487
--------- --------- --------- --------- ---------
Net income attributable to GENZ Stock .............. $ 43,226 $ 34,056 $ 170,909 $ 107,175 $ 13,811
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
supplemental combined financial statements.
10
<PAGE> 11
GENZYME GENERAL
SUPPLEMENTAL COMBINED STATEMENTS OF OPERATIONS (continued)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE YEARS
ENDED MARCH 31, ENDED DECEMBER 31,
1999 1998 1998 1997 1996
----------------------- --------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net income attributable to GENZ Stock ..................... $ 43,226 $ 34,056 $ 170,909 $ 107,175 $ 13,811
========= ======== ========= ========= ========
Per Genzyme General common share:
Net income per Genzyme General common share-- basic: $ 0.53 $ 0.43 $ 2.16 $ 1.40 $ 0.20
========= ======== ========= ========= ========
Weighted average shares outstanding ....................... 81,958 78,760 79,063 76,531 68,289
========= ======== ========= ========= ========
Net income per Genzyme General common
and common equivalent share-- diluted: ................. $ 0.49 $ 0.42 $ 2.06 $ 1.36 $ 0.19
========= ======== ========= ========= ========
Adjusted weighted average shares outstanding .............. 92,591 81,200 85,822 78,925 73,038
========= ======== ========= ========= ========
Net income (loss) ......................................... $ 33,505 $ 25,135 $ 133,052 $ 76,642 $(10,687)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments ............... (8,826) (698) 7,681 (11,704) 2,845
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising during the period ... (2,319) 1,327 (6,059) 833 (2,446)
Reclassification adjustment for gains (losses)
included in net income (loss) ........................ (1,214) -- 2,100 -- (1,077)
--------- -------- --------- --------- --------
Unrealized gains (losses) on securities, net ....... (3,533) 1,327 (3,959) 833 (3,523)
--------- -------- --------- --------- --------
Other comprehensive income (loss) ...................... (12,359) 629 3,722 (10,871) (678)
--------- -------- --------- --------- --------
Comprehensive income (loss) ............................... $ 21,146 $ 25,764 $ 136,774 $ 65,771 $(11,365)
========= ======== ========= ========= ========
</TABLE>
The accompanying notes are an integral part of these
supplemental combined financial statements.
11
<PAGE> 12
GENZYME GENERAL
SUPPLEMENTAL COMBINED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998 1997
----------- ----------------------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 60,469 $ 100,012 $ 65,301
Short-term investments ........................................ 247,668 174,421 35,294
Accounts receivable, net ...................................... 140,117 137,615 102,367
Inventories ................................................... 82,991 85,162 111,531
Prepaid expenses and other current assets ..................... 29,761 27,727 15,478
Due from Genzyme Tissue Repair ................................ 3,994 548 1,213
Due from Genzyme Molecular Oncology ........................... 4,526 4,773 5,434
Deferred tax assets-- current ................................. 39,690 39,725 27,601
---------- ---------- --------
Total current assets ........................................ 609,216 569,983 364,219
Property, plant and equipment, net ............................... 357,988 362,743 348,789
Long-term investments ............................................ 300,985 281,664 91,627
Notes receivable-- related parties ............................... -- -- 4,601
Intangibles, net ................................................. 83,751 85,851 59,915
Deferred tax assets-- noncurrent ................................. 28,245 28,138 35,988
Investments in equity securities ................................. 39,305 51,977 30,047
Other noncurrent assets .......................................... 30,510 30,035 25,304
---------- ---------- --------
Total assets ................................................ $1,450,000 $1,410,391 $960,490
========== ========== ========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable .............................................. $ 16,228 $ 22,324 $ 15,551
Accrued expenses .............................................. 71,651 65,643 62,850
Income taxes payable .......................................... 20,986 16,532 11,169
Deferred revenue .............................................. 1,618 1,231 217
Current portion of long-term debt and capital lease obligations 83,158 82,568 735
---------- ---------- --------
Total current liabilities ................................... 193,641 188,298 90,522
Noncurrent liabilities:
Long-term debt ................................................... 3,070 3,087 117,978
Convertible subordinated notes and debentures .................... 271,813 271,559 --
Other noncurrent liabilities ..................................... 7,851 7,480 6,095
---------- ---------- --------
Total liabilities ........................................... 476,375 470,424 214,595
Commitments and contingencies (See Notes)
Division equity (Note M) ......................................... 973,625 939,967 745,895
---------- ---------- --------
Total liabilities and division equity ....................... $1,450,000 $1,410,391 $960,490
========== ========== ========
</TABLE>
The accompanying notes are an integral part of these
supplemental combined financial statements.
12
<PAGE> 13
GENZYME GENERAL
SUPPLEMENTAL COMBINED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE YEARS
ENDED MARCH 31, ENDED DECEMBER 31,
1999 1998 1998 1997 1996
---------------------- --------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) .............................................. $ 33,505 $ 25,135 $ 133,052 $ 76,642 $ (10,687)
Reconciliation of net income (loss) to net cash provided
by operating activities:
Depreciation and amortization ............................. 12,156 11,286 37,758 34,822 25,777
Loss on disposal of fixed assets .......................... -- -- 108 1,234 42
Non-cash compensation expense ............................. -- -- 8,519 2,881 148
Accrued interest/amortization on bonds .................... (2,499) (108) (7,242) (571) 1,110
Provisions for bad debts and inventory .................... 2,754 1,374 8,113 13,440 9,441
Accretion of debt conversion feature ...................... -- -- 705 -- --
Equity in net loss of unconsolidated affiliates ........... 7,756 2,854 19,739 5,440 3,656
Gain on affiliate sale of stock ........................... (606) -- (2,369) -- (1,013)
Minority interest in net loss of subsidiaries ............. (866) (864) (4,285) -- --
Gain on sale of product line .............................. -- -- (31,202) -- --
Purchase of in-process research and development ........... -- -- -- -- 106,469
Gain on sale of investments ............................... (1,963) -- (3,391) -- (1,711)
Charge for impaired investment ............................ -- -- 3,397 -- --
Deferred income tax benefit ............................... -- -- (3,022) (3,969) (28,558)
Other ..................................................... (422) 133 26 528 153
Increase (decrease) in cash from working capital changes:
Accounts receivable .................................. (6,916) (5,923) (36,437) (13,669) (16,072)
Inventories .......................................... 2,038 4,365 27,928 (31,676) (40,929)
Prepaid expenses and other assets .................... (2,315) (4,708) (10,785) (9,033) (316)
Due from Genzyme Tissue Repair ....................... (3,446) (271) 665 391 430
Due from Genzyme Molecular Oncology .................. 247 261 (553) (2,011) --
Accounts payable, accrued expenses, income taxes
payable and deferred revenue ....................... 15,708 7,103 52,275 21,192 58,541
--------- -------- --------- --------- ---------
Net cash provided by operating activities ............ 55,131 40,637 192,999 95,641 106,481
INVESTING ACTIVITIES:
Purchases of investments ..................................... (196,387) (39,547) (439,431) (131,197) (117,089)
Sales and maturities of investments .......................... 105,106 30,071 118,871 80,867 195,952
Proceeds from sale of equity investment ...................... 11,090 -- 9,564 -- --
Acquisition of property, plant and equipment ................. (9,628) (11,525) (53,312) (25,344) (42,378)
Sales of property, plant and equipment ....................... -- 584 1,795 -- --
Proceeds from sale of product line ........................... -- -- 24,760 -- --
Acquisitions, net of acquired cash and assumed liabilities ... -- (6,190) (9,949) -- (106,664)
Purchase of technology rights ................................ -- -- (15,100)
Investment in unconsolidated affiliates ...................... -- -- (25,783) (6,449) (3,600)
Investment in joint ventures ................................. (9,592) (2,088) (14,811) -- --
Loans to affiliates .......................................... -- -- (1,000) (4,601) (1,676)
Repayment of loans by affiliates ............................. -- 2,019 3,019 -- --
Other ........................................................ 3,702 (1,263) (4,431) (134) (7,572)
--------- -------- --------- --------- ---------
Net cash used in investing activities ................ (95,709) (27,939) (405,808) (86,858) (83,027)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock ....................... 19,900 10,356 74,649 123,837 39,119
Proceeds from issuance of debt ............................... -- -- 250,000 -- 480,000
Payments of debt ............................................. (350) (407) (33,236) (100,945) (285,514)
Net cash allocated to Genzyme Tissue Repair .................. (5,000) 76 (155) (14,892) (11,714)
Net cash allocated to Genzyme Molecular Oncology ............. -- -- (5,000) (5,000) --
Net cash allocated to Genzyme Surgical Products .............. (12,421) (5,900) (41,484) (19,003) (275,528)
Other ........................................................ 1,548 636 2,412 (242) (330)
--------- -------- --------- --------- ---------
Net cash provided (used) by financing activities ..... 3,677 4,761 247,186 (16,245) (53,967)
Effect of exchange rate changes on cash ........................ (2,642) (1,059) 334 (2,275) 1,920
--------- -------- --------- --------- ---------
Increase (decrease) in cash and cash equivalents ............... (39,543) 16,400 34,711 (9,737) (28,593)
Cash and cash equivalents at beginning of period ............... 100,012 65,301 65,301 75,038 103,631
--------- -------- --------- --------- ---------
Cash and cash equivalents at end of period ..................... $ 60,469 $ 81,701 $ 100,012 $ 65,301 $ 75,038
========= ======== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
supplemental combined financial statements.
13
<PAGE> 14
Supplemental disclosure of non-cash transactions:
Allocation of tax benefit -- Note B
Other charges -- Note C
Sale of research products business assets -- Note D
Acquisitions liability -- Note E
Investment in unconsolidated affiliate -- Note J
GGD Debentures -- Note L
Debt conversion -- Note L
Warrant exercise -- Note M
GZTR and GZMO Designated Shares dividends -- Note M
The accompanying notes are an integral part of these
supplemental combined financial statements.
14
<PAGE> 15
GENZYME GENERAL
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS
(Information with respect to the three months ended March 31, 1999 and
March 31, 1998 is unaudited)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Genzyme General develops and markets therapeutic and diagnostic products and
services. It is a division of Genzyme Corporation and has a separate series of
common stock intended to reflect its value and track its economic performance.
BASIS OF PRESENTATION
The Supplemental Combined Financial Statements of Genzyme General include the
balance sheets, results of operations and cash flows of Genzyme's therapeutic
products, diagnostics and corporate operations during the periods presented.
Genzyme General's financial statements are prepared using the amounts included
in the consolidated financial statements of Genzyme and its subsidiaries
("Genzyme's Consolidated Financial Statements") included in the 1998 Genzyme
10-K and Genzyme's Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 1999. Corporate allocations reflected in these financial statements
are determined based upon methods which management believes to be reasonable and
consistent. The financial statements for the three months ended March 31, 1999
and 1998 are unaudited but include, in management's opinion, all adjustments
(consisting only of normally recurring accruals) necessary for a fair
presentation of the results for the periods presented.
On the Distribution Date, Genzyme distributed to holders of GENZ Stock
approximately 14.8 million shares of GZSP Stock. The Supplemental Combined
Financial Statements reflect the financial position and results of operations
and cash flows of Genzyme General after giving effect for the distribution of
GZSP Stock. Upon publication of Genzyme General's combined financial statements
for a period which includes the Distribution Date, the Supplemental Combined
Financial Statements become the historical combined financial statements of
Genzyme General.
PRINCIPLES OF COMBINATION
The accompanying Supplemental Combined Financial Statements of Genzyme General
reflect the combined accounts of all of Genzyme General's businesses. The equity
method is used to account for investments in companies and joint ventures, other
than joint ventures which Genzyme General controls, in which Genzyme General has
a substantial ownership interest (20% to 50%), or in which Genzyme General
participates in policy decisions. Investments of less than 20% are reported at
fair value. (See Note J., "Investments" below.) All significant interdivisional
items and transactions have been eliminated in combination. Certain items in
Genzyme General's Supplemental Combined Financial Statements for the years ended
December 31, 1998, 1997 and 1996 and for the three months ended March 31, 1998
have been reclassified to conform with the March 31, 1999 presentation.
FINANCIAL INFORMATION
Genzyme provides to holders of GENZ Stock separate financial statements,
management's discussion and analysis, descriptions of business and other
relevant information for Genzyme General. Notwithstanding the allocation of
assets and liabilities, including contingent liabilities, between Genzyme
General, GSP, GMO and GTR for the purposes of preparing their respective
financial statements, Genzyme Corporation 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 GENZ Stock are common stockholders of Genzyme and have no
specific claim against the assets attributed to Genzyme General. Liabilities or
contingencies of Genzyme General, GSP, GMO or GTR could affect the financial
condition or results of operations of the other divisions. Accordingly, the
Genzyme General combined financial statements should be read in connection with
Genzyme's Consolidated Financial Statements.
Genzyme prepares the financial statements of Genzyme General in accordance with
generally accepted accounting principles, the management and accounting policies
of Genzyme and the divisional accounting policies approved by the Genzyme Board.
Except as otherwise provided in the policies set forth below, the management and
accounting policies applicable to the presentation of the financial statements
of Genzyme General 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 Charter, dividends that may be paid to the holders of
GENZ Stock will be limited to the lesser of funds of Genzyme legally available
for the payment of dividends and the Available GGD Dividend Amount, as defined
in the Charter. Although there is no requirement to do so, the Genzyme Board
would declare and pay cash dividends on GENZ Stock, if any, based primarily on
earnings, financial condition, cash flow and business requirements of Genzyme.
Genzyme has never paid any cash dividends on shares of its capital stock.
Genzyme currently intends to retain its earnings to finance future growth and,
therefore, does not anticipate paying any cash dividends on GENZ Stock in the
foreseeable future.
15
<PAGE> 16
GENZYME GENERAL
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS - (CONTINUED)
(Information with respect to the three months ended March 31, 1999 and
March 31, 1998 is unaudited)
USE OF ESTIMATES
The preparation of supplemental financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Significant estimates include the collectability of
accounts receivable, valuation of inventory and revenue recognition. Actual
results could differ from those estimates.
FINANCIAL INSTRUMENTS
Financial instruments that potentially subject Genzyme General to significant
concentrations of credit risk consist principally of cash and cash equivalents,
current and non-current investments and accounts receivable. Genzyme General
generally invests its cash investments in investment-grade securities to
mitigate risk.
UNCERTAINTIES
Genzyme General is subject to risks common to companies in the biotechnology
industry, including (i) Genzyme General'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, (ii) the content and timing of decisions made by the FDA and other
agencies regarding the applications and indications for which Genzyme General's
products may be approved, (iii) the ability of Genzyme General to manufacture
adequate supplies of its products for development and commercialization
activities, (iv) the accuracy of Genzyme General's estimates of the size and
characteristics of markets to be addressed by Genzyme General's products and
services, (v) market acceptance of Genzyme General's products and services, (vi)
Genzyme General's ability to obtain reimbursement for its products from
third-party payers, where appropriate, (vii) the accuracy of Genzyme General's
information concerning the products and resources of competitors and potential
competitors, and (viii) the risk that products and technology developed by
competitors will render Genzyme General's products and technology obsolete.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents, consisting principally of money market funds and
municipal notes purchased with initial maturities of three months or less, are
valued at cost plus accrued interest, which approximates market.
INVESTMENTS
Short-term investments include all investments with remaining maturities of
twelve months or less. Long-term investments include all investments with
remaining maturities greater than twelve months. Genzyme General classifies its
equity investments as available-for-sale and its investments in debt securities
as either held-to-maturity or available-for-sale based on facts and
circumstances present at the time the investments are purchased. As of March 31,
1999 and December 31, 1998 and 1997, Genzyme General classified all of its
investments in debt and equity securities as available-for-sale.
Available-for-sale investments are reported at fair value as of the balance
sheet date with unrealized holding gains and losses (the adjustment to fair
value) included in division equity. If the adjustment to fair value reflects a
decline in the value of the investment, management considers all available
evidence to evaluate the extent to which the decline is "other than temporary"
and marks the investment to market through a charge to the income statement.
Investments in equity securities not listed or traded are valued on a security
by security basis, considering the types of securities, their marketability,
subsequent purchase of the same or similar securities by third parties and the
financial condition, operating results and progress of development programs of
the securities.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of investments is obtained from market quotations and is
disclosed in Note J., "Investments" below. The fair value of foreign currency
forward contracts is based on forward rates in effect at the balance sheet date
and is disclosed below (see -- "Foreign Currency Hedging" below).
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out method) or
market.
16
<PAGE> 17
GENZYME GENERAL
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS - (CONTINUED)
(Information with respect to the three months ended March 31, 1999 and
March 31, 1998 is unaudited)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. On disposal, the related cost
and accumulated depreciation or amortization are removed from the accounts and
any resulting gain or loss is included in the results of operations. Provision
for depreciation is generally computed using the straight-line method over the
estimated useful lives of the assets (three to ten years for plant and
equipment, five to seven years for furniture and fixtures, and 20 to 40 years
for buildings). Certain specialized manufacturing equipment and facilities
allocated to Genzyme General are depreciated over their remaining useful lives
using the units-of-production method. The remaining life and recoverability of
equipment is evaluated periodically based on the appropriate facts and
circumstances. Leasehold improvements are amortized over the lesser of the
useful life or the term of the respective lease. For products expected to be
commercialized, Genzyme General capitalizes, to construction-in-progress, the
costs of manufacturing process validation and optimization incurred beginning
when the product is deemed to have demonstrated technological feasibility and
ending when the asset is substantially complete and ready for its intended use.
Qualified costs include incremental labor and direct material, and incremental
fixed overhead and interest. These costs are generally depreciated using the
units of production method.
INTANGIBLES
Intangible assets consist of goodwill, covenants not to compete, customer lists,
patents, trademarks, trade names and technology rights and are being amortized
using the straight-line method over useful lives of five to 20 years.
Management's policy regarding intangible assets is to evaluate the
recoverability of its intangible assets when the facts and circumstances suggest
that these assets may be impaired. Evaluations consider factors including
operating results, business plans, economic projections, strategic plans and
market emphasis. Evaluations also compare expected cumulative, undiscounted
operating incomes or cash flows with net book values of related intangible
assets. Unrealizable intangible asset values are charged to operations if these
evaluations indicate an impairment in value, which is measured as the amount by
which the carrying amount of the asset exceeds the present value of estimated
expected future cash flows using a discount rate commensurate with the risk
involved.
TRANSLATION OF FOREIGN CURRENCIES
The financial statements of Genzyme's foreign subsidiaries are translated from
local currency into U.S. dollars using the current exchange rate at the balance
sheet date for assets and liabilities and the average exchange rate prevailing
during the period for revenues and expenses. The local currency for all of
Genzyme's foreign subsidiaries is considered to be the functional currency for
each entity and, accordingly, translation adjustments for these subsidiaries are
included in division equity.
Exchange gains and losses on intercompany balances of a long-term investment
nature are charged to division equity. Transaction gains and losses are included
in the results of operations. Genzyme General incurred net transaction gains of
$0.3 million in 1998 and net transaction losses of $0.1 million in 1997 and $1.0
million in 1996. Division equity includes cumulative foreign currency
translation charges of $4.8 million and $12.4 million at December 31, 1998 and
1997, respectively.
FOREIGN CURRENCY HEDGING
From time to time, Genzyme enters into forward contracts to reduce foreign
currency exchange risk. Such contracts are revalued using current exchange rates
at the balance sheet date. All gains and losses on revaluation of forward
contracts are included in net income. Related gains and losses were not material
to the supplemental financial statements. There were no foreign currency forward
contracts outstanding at December 31, 1998 and 1997.
INTEREST RATE HEDGE AGREEMENTS
Interest rate hedge agreements are used to reduce interest rate risks and costs
inherent in Genzyme's debt portfolio. Genzyme enters into these agreements to
change the fixed/variable interest rate mix of the portfolio to reduce Genzyme's
aggregate risk to movements in interest rates. Genzyme does not hold or issue
derivative financial instruments for trading purposes. The differentials to be
received or paid under contracts designated as hedges are recognized in income
over the life of the contracts as adjustments to interest expense. The fair
values of interest rate contracts are estimated based on the estimated amount
necessary to terminate the agreements.
REVENUE RECOGNITION
Revenues from product sales are recognized when goods are shipped to third party
customers and are net of third party contractual allowances and rebates, as
applicable. Revenues from service sales are recognized when the service
procedures have been completed or applicable milestones have been achieved.
Revenues from research and development contracts are recognized over applicable
contractual periods as specified by each contract and as costs related to the
contracts are incurred.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed in the period incurred. Costs of
purchased technology which management believes has not demonstrated
technological feasibility and for which there is no alternative future use are
charged to expense in the period of purchase.
17
<PAGE> 18
GENZYME GENERAL
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS - (CONTINUED)
(Information with respect to the three months ended March 31, 1999 and
March 31, 1998 is unaudited)
ISSUANCE OF STOCK BY A SUBSIDIARY OR AN AFFILIATE
Gains on the issuance of stock by a subsidiary or an affiliate are included in
net income unless the subsidiary or affiliate is a research and development,
start-up or development stage company or an entity whose viability as a going
concern is under consideration. In those situations Genzyme accounts for the
change in its proportionate share of subsidiary or affiliate equity resulting
from the additional equity raised by the subsidiary or affiliate as an equity
transaction.
INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes.
The provision for income taxes includes income taxes currently payable and those
deferred because of temporary differences between the financial statement and
tax bases of assets and liabilities. The Company has not provided for possible
U.S. taxes on the undistributed earnings of foreign subsidiaries that are
considered to be reinvested indefinitely. At December 31, 1998, such
undistributed foreign earnings were approximately $4.5 million. Based on the
Company's policy of indefinite reinvestment in non-US operations, it is not
currently practicable to determine the tax liability associated with the
repatriation of those earnings.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share attributable to Genzyme General, GSP, GMO and GTR
gives effect to the management and accounting policies adopted by the Genzyme
Board and is reported in lieu of consolidated per share data. Genzyme computes
net income (loss) per share for each division by dividing the earnings
attributable to each series of stock by the weighted average number of shares of
that stock outstanding during the period, for basic earnings per share, and by
the weighted average shares of that stock, plus other potentially dilutive
securities outstanding during the applicable period for diluted earnings per
share. Earnings (loss) attributable to GENZ Stock, GZSP Stock, GZMO Stock and
GZTR Stock equals the respective division's net income or loss for the relevant
period determined in accordance with generally accepted accounting principles in
effect at such time, adjusted by the amount of tax benefits allocated to or from
the other divisions pursuant to the management and accounting policies adopted
by the Genzyme Board.
The following table sets forth the computation of basic and diluted earnings per
share for Genzyme General (amounts in thousands, except per share amounts):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE YEARS ENDED
MARCH 31, DECEMBER 31,
1999 1998 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net income - basic...................................... $43,226 $34,056 $170,909 $107,175 $13,811
Effect of dilutive securities (net of tax):
GGD Notes:
Interest expense................................ 2,039 -- 4,911 -- --
Amortization of purchaser's discount and
offering costs(1).............................. 129 -- 348 -- --
GGD Debentures:
Interest expense................................ 191 -- 258 -- --
Accretion of conversion feature(2).............. -- -- 434 -- --
------- ------- -------- -------- -------
Net income-diluted...................................... $45,585 $34,056 $176,860 $107,175 $13,811
======= ======= ======== ======== =======
Shares used in net income per common share-basic........ 81,958 78,760 79,063 76,531 68,289
Effect of dilutive securities:
Employee and director stock options................... 3,642 2,432 2,661 2,387 2,898
Warrants.............................................. 32 8 10 7 1,851
GGD Notes(3).......................................... 6,313 -- 3,874 -- --
GGD Debentures(3)..................................... 646 -- 214 -- --
------- ------- -------- -------- -------
Dilutive potential common shares(4).................. 10,633 2,440 6,759 2,394 4,749
------- ------- -------- -------- -------
Shares used in net income per common share-diluted(4).. 92,591 81,200 85,822 78,925 73,038
======= ======= ======== ======== =======
Net income per common share - basic..................... $ 0.53 $ 0.43 $ 2.16 $ 1.40 $ 0.20
======= ======= ======== ======== =======
Net income per common share - diluted(4)................ $ 0.49 $ 0.42 $ 2.06 $ 1.36 $ 0.19
======= ======= ======== ======== =======
</TABLE>
(1) The purchaser's discount and offering costs of approximately $7.0 million
are being amortized over the term of the GGD Notes which mature in June
2005.
(2) The accretion of conversion feature represents the value attributed to
the portion of the GGD Debentures attributed to the conversion feature
which amounted to a total of $3.5 million. The conversion feature was
accreted over the term of the initial 15 month conversion period. (see Note
L., "Long-Term Debt and Leases" below).
(3) The GGD Notes were issued in May 1998 and the GGD 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 months ended March 31,
1999 and 1998 and for the years ended December 31, 1998, 1997 and 1996
because each such security had an exercise price greater than the average
market price of GENZ Stock during each respective period. Such securities
include:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
(AMOUNTS IN THOUSANDS) 1999 1998 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Shares of GENZ Stock issuable for options(a) ................ 1,381 3,860 2,827 5,921 3,824
Shares of GENZ Stock issuable for warrants .................. 80 80 40 40 --
----- ----- ----- ----- -----
Total shares with exercise prices greater than the average
market price of GENZ Stock during the period ........... 1,461 3,940 2,867 5,961 3,824
===== ===== ===== ===== =====
</TABLE>
(a) Options not included in diluted earnings per share had exercise price
ranges of $28.67-$47.88 in 1998, $23.59-$38.00 in 1997 and $3.79-$38.00
in 1996.
18
<PAGE> 19
GENZYME GENERAL
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS - (CONTINUED)
(Information with respect to the three months ended March 31, 1999 and
March 31, 1998 is unaudited)
COMPREHENSIVE INCOME
Genzyme General has adopted SFAS 130, "Reporting Comprehensive Income," which
establishes standards for reporting and displaying comprehensive income and its
components in a set of financial statements. Components of comprehensive income
are net income and all other non-owner changes in equity such as the change in
the cumulative translation adjustment. Genzyme General presents such information
in its statement of operations.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Genzyme General has elected the disclosure-only alternative permitted under SFAS
123, "Accounting for Stock-Based Compensation." Genzyme General has disclosed
herein pro forma net income and pro forma earnings per share in the footnotes
using the fair value based method for 1998, 1997 and 1996.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. SFAS 133
requires companies to recognize all derivatives as either assets or liabilities,
with the instruments measured at fair value. The accounting for changes in fair
value, gains or losses, depends on the intended use of the derivative and its
resulting designation. The statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. Genzyme is evaluating SFAS 133 to
determine its impact on its consolidated financial statements.
SEGMENT INFORMATION
Genzyme General has adopted SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 supersedes SFAS 14, "Financial
Reporting for Segments of a Business Enterprise," replacing the "industry
segment" approach with the "management" approach. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of Genzyme General's
reportable segments. SFAS 131 also requires disclosures about products and
services, geographic areas and major customers (see Note R., "Segment Reporting"
below).
NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S DIVISIONS
Genzyme allocates certain corporate costs for general and administrative,
research and development and cash management services to the divisions. Genzyme
files a consolidated tax return and allocates income taxes to the divisions in
accordance with the policies described below. With the exception of the policy
regarding Interdivisional Asset Transfers, policies 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.
REVENUE ALLOCATION
Revenues from the sale or licensing of a division's products and services to
entities external to Genzyme are credited to that division. Products and
services normally sold by a division to entities external to Genzyme that are
used by other divisions within Genzyme shall be recorded as interdivisional
revenues and interdivisional purchases subject to the policy regarding other
interdivisional transactions.
EXPENSE ALLOCATION
Direct expenses are charged to the division for whose benefit the direct
expenses have been incurred. Expenses other than direct expenses are subject to
the policy regarding other interdivisional transactions.
ASSET ALLOCATION
Assets that are exclusively dedicated to the production of goods and services of
a division shall be allocated to that division. Production assets that are
utilized by more than one division are subject to the policy regarding Other
Interdivisional Transactions.
TAX ALLOCATIONS
Genzyme General 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.
Income taxes are allocated to each division based upon the financial statement
income, taxable income, credits and other amounts properly allocable to such
division under generally accepted accounting principles as if each division were
a separate taxpayer; provided, however, that as of the end of any fiscal quarter
of Genzyme, any projected annual 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 the other divisions in proportion to
their taxable income without any compensating payment or allocation.
ACQUISITIONS OF PROGRAMS, PRODUCTS OR ASSETS
Upon the acquisition by Genzyme from a third party of any programs, products or
assets (whether by acquisitions of assets or stock, merger, consolidation or
otherwise), the aggregate cost of the acquisition and the programs, products or
assets acquired shall be allocated among the divisions of Genzyme. In the case
of material acquisitions, such allocation shall be made in a manner determined
by the Genzyme Board to be fair and reasonable to each division and to the
holders of the common stock representing each division, taking into account such
matters as the Genzyme Board and its financial advisors, if any, deem relevant.
Any such determination will be final and binding on the holders of common stock.
DISPOSITION OF PROGRAMS, PRODUCTS OR ASSETS
Upon the sale, transfer, assignment or other disposition by Genzyme of any
program, product or asset not consisting of all or substantially all of the
assets of the division, all proceeds from such disposition shall be allocated to
the division to which the program, product or asset had been allocated among
such divisions based on their respective interests in such program, product or
asset. Such allocations shall be made in a manner determined by the Genzyme
Board to be fair and reasonable to such divisions and to holders of the common
stock representing such divisions, taking into such matters as the Genzyme Board
and its financial advisors, if any, deem relevant. Any such determination by the
Genzyme Board will be final and binding on the holders of common stock.
19
<PAGE> 20
GENZYME GENERAL
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS - (CONTINUED)
(Information with respect to the three months ended March 31, 1999 and
March 31, 1998 is unaudited)
INTERDIVISIONAL ASSET TRANSFERS
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 shall 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 such program, the phase of clinical development of such
program, the expenses associated with realizing any income from such 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 GSP, GMO or GTR, the Genzyme Board may elect to account for
such reallocation as an increase in the designated shares representing the
division to which such assets are reallocated in accordance with the provisions
of Genzyme's articles of organization.
The foregoing policies regarding transfers of assets between divisions will not
be changed by the Genzyme Board without the approval of the holders of GZSP
Stock, GZMO Stock and GZTR Stock, each voting as a separate class; provided,
however, that if a policy change affects one or more, but not all of, Genzyme
Surgical Products, Genzyme Molecular Oncology and/or Genzyme Tissue Repair, only
holders of shares representing the affected division(s) will be entitled to vote
on such matter.
OTHER INTERDIVISIONAL TRANSACTIONS
This policy shall cover interdivisional transactions other than asset transfers,
which shall be subject to the policy regarding Interdivisional Asset Transfers.
From time to time, a division may engage in transactions directly 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 venture or
other collaborative arrangements involving more than one division to develop new
products and services jointly and with third parties. Such transactions shall be
subject to the following conditions:
(a) Research and development (including clinical and regulatory support),
distribution, sales, marketing, and general and administrative
services (including allocated space) 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. Direct costs shall be allocated in
a manner described above under "Expense Allocation" and such division
performing the work will not recognize revenue as a result of
performing such work. Direct labor and indirect costs shall be
allocated in a reasonable and consistent manner based on the
utilization by the division of the services to which such costs
relate.
20
<PAGE> 21
GENZYME GENERAL
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS - (CONTINUED)
(Information with respect to the three months ended March 31, 1999 and
March 31, 1998 is unaudited)
(b) Manufacturing of goods and performance of services by one division
exclusively for the benefit of another division and not for external
sale shall be charged to the division for which the work is performed
on a cost basis. Direct labor and indirect costs shall be allocated in
a reasonable and consistent manner based on the receipt of benefit by
the division of the goods and services to which such costs relate. The
division performing such work will not recognize revenue as a result
of performing such work.
(c) Other than research and development (including clinical and regulatory
support) manufacturing, distribution, sales, marketing, general and
administrative services (including allocated space), interdivisional
transactions shall be on terms and conditions that would be obtainable
in transactions negotiated at arm's length with unaffiliated third
parties. The division performing such work will not recognize revenue
as a result of performing such work.
(d) Any interdivisional transaction (i) to be performed on terms and
conditions that deviate from the policies set forth in subparagraphs
(a), (b) or (c) above and (ii) that is material to one or more of the
participating divisions will require approval by 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 the holders of the common stock representing each such
division.
(e) Loans may be made from time to time between divisions. Any such loan
of $1 million or less will mature within 18 months and interest will
accrue at the best borrowing rate available to Genzyme for a loan of
like type and duration. Amounts borrowed in excess of $1 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.
(f) All material interdivisional transactions shall be reduced to service
contracts and signed by an authorized member of the management team of
affected divisions.
ACCESS TO TECHNOLOGY AND KNOW-HOW
Each division of Genzyme Corporation shall have unrestricted access to all
technology and know-how of the Company that may be made useful to such
division's business, subject to any obligations or limitations applicable to
Genzyme and its divisions.
NOTE C. OTHER CHARGES
In the third quarter of 1998, Genzyme General recorded $14.8 million of charges
associated with its Therapeutics business.
The conversion of patients with Gaucher disease from Ceredase(R) enzyme to
Cerezyme(R) enzyme is substantially complete. Based on its successful progress
in converting patients from Ceredase(R) enzyme to Cerezyme(R) enzyme, Genzyme
General determined that its existing supply of finished goods of Ceredase(R)
enzyme was sufficient to meet patient needs. As a result, in the third quarter
of 1998, Genzyme General recorded a $14.8 million charge to cost of products
sold for the excess inventory used to make Ceredase(R) enzyme.
In the fourth quarter of 1997, Genzyme General recorded $21.8 million of
charges mainly associated with its Pharmaceuticals business and the sale of
GDI, which was sold in 1996. The Pharmaceuticals business now focuses on
products that are more consistent with Genzyme General's long-term business
strategy of moving towards higher-value products and away from fine chemical
and bulk pharmaceuticals. This change in strategy resulted in a $18.1 million
charge to cost of products sold primarily related to the melatonin, bulk
pharmaceuticals and fine chemical product lines that were discontinued. Genzyme
General also recorded a $2.0 million charge to other expense related to the
uncertainty of collection on certain notes receivable and $1.7 million of
charges to SG&A primarily related to certain headcount reductions.
NOTE D. SALE OF RESEARCH PRODUCTS BUSINESS ASSETS
On July 1, 1998, Genzyme General completed the sale of the primary assets of its
research products business to TECHNE. The purchase price consisted of $24.8
million in cash, approximately 987,000 shares of TECHNE common stock, and
royalties on TECHNE's biotechnology group sales for the next five years. Royalty
income will be recorded as earned. In the third quarter of 1998, Genzyme General
recorded a gain of $31.2 million related to the sale of the research products
business assets.
21
<PAGE> 22
GENZYME GENERAL
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS - (CONTINUED)
(Information with respect to the three months ended March 31, 1999 and
March 31, 1998 is unaudited)
NOTE E. ACQUISITIONS
The Company allocates all acquisitions to either Genzyme General, GSP, GMO or
GTR depending on the nature of the acquired business.
ALLOCATED TO GENZYME GENERAL:
In the fourth quarter of 1996, Genzyme acquired Neozyme II. The aggregate
purchase price of Neozyme II was $111.3 million and consisted of $108.2
million of cash, warrants valued at $0.5 million and acquisition costs of
$2.6 million. The acquisition was accounted for as a purchase. The excess
purchase price was allocated to Neozyme II's only remaining assets, which
were technologies still in the development stage. These technologies
consisted of specific programs for the treatment of cystic fibrosis and have
no alternative future use. Accordingly, the statement of operations for the
year ended December 31, 1996 reflects a $106.5 million charge for in-process
research and development and a related deferred tax benefit of $21.7 million
which were recorded upon consummation of the acquisition.
On May 1, 1996, the Company acquired Genetrix, a privately held genetic
testing laboratory, for an aggregate purchase price of $36.5 million.
Approximately $39.0 million was allocated to goodwill and is being amortized
over 15 years. The Company incurred restructuring charges of $1.0 million
related to closings of laboratories made redundant by the acquisition.
NOTE F. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
Off-balance-sheet financial instruments create various degrees and types of risk
to Genzyme, including credit, interest rate and liquidity risk.
In the normal course of business, Genzyme enters into interest rate swap
contracts to hedge interest rate risk related to its variable rate notes
payable. Interest rate swaps generally involve the exchange of fixed and
variable interest payments between two parties based on a common notional
principal amount and maturity date. The notional amount of interest rate
contracts is the amount upon which interest and other payments under the
contract are based. The primary risks associated with interest rate swaps are
the exposure to movements in interest rates and the ability of counterparties to
meet the terms of the contract.
In December 1996, Genzyme entered into a $100.0 million interest rate swap
contract to effectively convert the variable interest rate on borrowings under
its $225 million revolving credit facility to a fixed interest rate. Net
payments made or received under the interest rate swap contract are recorded as
interest expense. At December 31, 1998, the interest rate swap contract had a
termination value of approximately $1.2 million with a notional value of
approximately $100.0 million. The agreement matures in 1999.
NOTE G. ACCOUNTS RECEIVABLE AND INTANGIBLE ASSETS
Genzyme General's trade receivables primarily represent amounts due from
healthcare service providers and companies and institutions engaged in research,
development or production of pharmaceutical and biopharmaceutical products.
Genzyme General 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 $9.9 million and
$8.4 million at December 31, 1998 and 1997, respectively.
Net intangible assets for Genzyme General as of December 31, 1998 and 1997
includes $48.5 million and $51.7 million, respectively, of goodwill primarily
due to acquisitions.
As of December 31, 1998 and 1997, accumulated amortization of intangible assets
was $39.6 million and $30.4 million, respectively.
NOTE H. INVENTORIES
Inventories consist of the following (amount in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998 1997
- ------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C>
Raw materials ................. $25,506 $29,497 $ 39,125
Work-in-process ............... 42,036 23,359 28,870
Finished products ............. 15,449 32,306 43,536
------- ------- --------
Total ............ $82,991 $85,162 $111,531
======= ======= ========
</TABLE>
22
<PAGE> 23
GENZYME GENERAL
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS - (CONTINUED)
(Information with respect to the three months ended March 31, 1999 and
March 31, 1998 is unaudited)
NOTE I. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 includes the following (amounts in
thousands):
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Plant and equipment............................... $ 243,816 $ 223,986
Land and buildings................................ 147,806 130,526
Leasehold improvements............................ 68,414 62,857
Furniture and fixtures............................ 13,516 10,501
Construction-in-progress.......................... 30,191 24,622
---------- ----------
503,743 452,492
Less accumulated depreciation.................. (141,000) (103,703)
---------- ----------
Property, plant and equipment, net....... $ 362,743 $ 348,789
========== ==========
</TABLE>
Depreciation expense was $34.9 million, $28.4 million and $20.8 million in 1998,
1997 and 1996, respectively.
Genzyme General has capitalized approximately $34.6 million of gross process
validation and optimization costs related to its manufacturing facilities.
Genzyme General capitalized approximately $0.7 million, $0.5 million and $2.2
million of interest costs in 1998, 1997 and 1996, respectively, related to
facility construction.
NOTE J. INVESTMENTS
Investments in marketable securities at December 31 consisted of the following
(amounts in thousands):
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------
MARKET MARKET
COST VALUE COST VALUE
<S> <C> <C> <C> <C>
Cash Equivalents:
Corporate notes ................. $ 8,131 $ 8,129 $10,829 $10,829
Money Market Fund ............... 70,805 70,805 39,833 39,833
-------- -------- ------- -------
$ 78,936 $ 78,934 $50,662 $50,662
======== ======== ======= =======
Short Term:
Corporate notes ................. $173,970 $174,421 $35,298 $35,294
======== ======== ======= =======
Long Term:
Corporate notes ................. $226,002 $226,259 $69,932 $69,872
Federal agencies ................ 33,412 33,581 -- --
U.S. Treasury notes ............. 21,323 21,824 21,667 21,755
-------- -------- ------- -------
$280,737 $281,664 $91,599 $91,627
======== ======== ======= =======
Investment in equity securities.... $ 62,244 $ 51,977 $29,609 $30,047
======== ======== ======= =======
</TABLE>
REALIZED AND UNREALIZED GAINS AND LOSSES ON MARKETABLE SECURITIES AND
INVESTMENTS:
In 1998, Genzyme General recorded a gain of $3.4 million upon the sale of a
portion of its TECHNE common stock received from the sale of its research
products assets to TECHNE. Genzyme General recorded a charge of $3.4 million
related to a write-down of a strategic equity investment whose decline in value
was considered "other than temporary". Investment income for 1996 includes net
realized losses of $47,000.
Gross unrealized holding losses of $12.5 million and gross unrealized holding
gains of $3.6 million were recorded at December 31, 1998 in division equity as
compared to gross unrealized holding losses of $2.9 million and gross unrealized
holding gains of $3.4 million recorded at December 31, 1997.
23
<PAGE> 24
GENZYME GENERAL
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS - (CONTINUED)
(Information with respect to the three months ended March 31, 1999 and
March 31, 1998 is unaudited)
Information regarding the range of contractual maturities of investments in debt
securities at December 31 is as follows (amounts in thousands):
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
MARKET MARKET
COST VALUE COST VALUE
<S> <C> <C> <C> <C>
Within 1 year .................. $252,907 $253,355 $ 85,960 $ 85,956
After 1 year through 2 years ... 259,363 259,788 62,856 62,806
After 2 years through 10 years.. 21,373 21,876 28,743 28,821
-------- -------- -------- --------
$533,643 $535,019 $177,559 $177,583
======== ======== ======== ========
</TABLE>
Investments in marketable securities are attributed to either Genzyme General,
GSP, GMO or GTR. The Company holds certain strategic investments in
unconsolidated entities which may be attributed to either Genzyme General, GSP,
GMO or GTR.
INVESTMENTS ALLOCATED TO GENZYME GENERAL (amounts in thousands):
<TABLE>
<CAPTION>
ADJUSTED MARKET UNREALIZED
COST VALUE GAIN (LOSS)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ABIOMED, Inc. ............................................... $15,804 $11,323 $ (4,481)
Aronex Pharmaceuticals, Inc. ................................ 1,693 846 (847)
BioMarin Pharmaceutical, Inc. ............................... 8,000 8,000 --
Celtrix Pharmaceuticals, Inc.(3) ............................ 4,898 4,898 --
Dyax Corporation ............................................ 3,000 3,000 --
GelTex Pharmaceuticals, Inc. ................................ 2,500 2,263 (237)
Pharming Group, N.V.(1) ..................................... 13,983
Revaluation of investment in Pharming ................... 1,122
-------
Adjusted investment in Pharming ........................... 15,105 8,497 (6,608)
-------
TECHNE Corporation(2) ....................................... 9,126 11,196 2,070
Other ....................................................... 2,118 1,954 (164)
------- ------- --------
Total investment in equity securities as of December 31, 1998 $62,244 $51,977 $(10,267)
======= ======= ========
(1) The investment in Pharming is denominated in guilders and the revaluation
entry represents the translation of the historical guilder amount of the
investment into US dollars at the December 1998 month-end rate.
(2) In December 1998, Genzyme sold a portion of TECHNE common stock for net
proceeds of $9.6 million and recorded a gain of approximately $3.4 million
related to the sale.
(3) In December 1998, Genzyme determined that a portion of the impairment in
its investment in Celtrix was "other than temporary." Accordingly, a loss
of approximately $3.4 million was charged to operations in 1998.
</TABLE>
SUMMARY:
<TABLE>
<CAPTION>
DECEMBER 31,
(AMOUNTS IN THOUSANDS) 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Adjusted historical cost of investments in equity securities...... $ 62,244 $29,609
Net unrealized gains (losses)..................................... (10,267) 438
-------- -------
Investment in equity securities at market value................... $ 51,977 $30,047
======== =======
</TABLE>
EQUITY INVESTMENTS ALLOCATED TO GENZYME GENERAL
DYAX CORPORATION
In October 1998, Genzyme entered into a collaboration agreement with Dyax
Corporation ("Dyax") to develop and commercialize one of Dyax's proprietary
compounds for the treatment of chronic inflammatory diseases. Dyax will fund
the first $6.0 million in development costs, and the parties will split all
subsequent development costs equally. In connection with that agreement,
Genzyme made an investment of $3.0 million in the convertible preferred
stock of Dyax and made a $3.0 million line of credit available to help Dyax
fund its operations. As of December 31, 1998, Dyax had not borrowed any
money under the line of credit. Genzyme is required to make milestone
payments to Dyax upon FDA approval of products that arise out of the
collaboration, and will share equally with Dyax all profits from the sale of
these products. Genzyme's Chairman and Chief Executive Officer is a director
of Dyax and Dyax's Chief Executive Officer is a director of Genzyme.
GENZYME TRANSGENICS CORPORATION
Genzyme holds approximately 40.4% of the outstanding common stock of GTC,
and accounts for its investment in GTC under the equity method. Genzyme and
GTC are parties to a services agreement (which is currently under
renegotiation) under which GTC pays Genzyme for certain basic services
provided by Genzyme, such as treasury, data processing and laboratory
support services, a sublease agreement pursuant to which Genzyme subleases a
portion of one of its facilities in Framingham, Massachusetts to GTC and a
research and development agreement pursuant to which Genzyme and GTC each
perform certain research services for each other. During 1998, Genzyme
received approximately $4.8 million from GTC pursuant to the three
agreements between the companies and GTC received approximately $3.6 million
from Genzyme pursuant to the research and development agreement. At December
31, 1998, Genzyme had a receivable of $1.5 million from GTC.
24
<PAGE> 25
GENZYME GENERAL
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS - (CONTINUED)
(Information with respect to the three months ended March 31, 1999 and
March 31, 1998 is unaudited)
The fair market value of the GTC shares owned by Genzyme, based on quoted market
prices, was $41.8 million and $71.5 million at December 31, 1998 and 1997,
respectively. The Company reported equity in GTC's net losses of $7.4 million,
$2.9 million and $3.4 million for the years ended December 31, 1998, 1997 and
1996, respectively.
Following are condensed statements of operations and balance sheet data of GTC
(amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues................ $ 62,412 $62,938 $46,834
Operating loss.......... (19,365) (8,352) (7,253)
Net loss................ (19,950) (9,343) (7,746)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Current assets.............................. $32,417 $24,400
Noncurrent assets........................... 50,920 46,580
Current liabilities......................... 37,297 32,823
Noncurrent liabilities...................... 9,836 10,779
</TABLE>
GTC CREDIT FACILITIES
Genzyme has guaranteed GTC's obligations under a $17.5 million credit facility
and a $7.1 million term loan with a commercial bank. In exchange for this
guarantee, GTC issued Genzyme a warrant to purchase up to 288,000 shares of GTC
common stock at an exercise price of $4.875 per share. As of December 31, 1998,
96,000 of the shares subject to this warrant were exercisable. GTC also issued
Genzyme a warrant to purchase 145,000 shares of GTC common stock at an exercise
price of $2.84375 per share in connection with the guarantee by Genzyme of GTC's
obligations under a prior credit facility. All of the shares subject to this
warrant are exercisable.
CONVERTIBLE DEBT AGREEMENT
In December 1998, Genzyme and GTC further amended and restated their Convertible
Debt Agreement (the "Convertible Debt Agreement"). Under the Convertible Debt
Agreement, the available line of credit from Genzyme to GTC is $8,327,000 and
the expiration date is March 31, 2000. GTC has an option to convert any
outstanding balance to a three year term loan. The interest rate of the
Convertible Debt Agreement was 7% through April 1, 1998 increasing annually
through the end of the Convertible Debt Agreement; starting at the lower of 8%
or prime in the first year increasing to the lower of 10% or prime lending rate
plus 2% in the first year of the Convertible Debt Agreement. As a result of
GTC's preferred stock offering in March 1998 the Convertible Debt Agreement was
reduced to approximately $6.3 million. There are certain financial covenants
under the Convertible Debt Agreement. Any amounts outstanding under the
Convertible Debt Agreement may be converted into shares of GTC common stock at
Genzyme's option at any time or at GTC's option on a quarterly basis. All such
conversions are to be based on the average closing stock price over 20 trading
days ending two trading days prior to the date of conversion. The largest amount
outstanding under this line of credit during the fiscal year ended December 31,
1998 was $3.0 million. As of December 31, 1998, no balances remained outstanding
under this credit line.
ATIII LLC
Effective January 1998, Genzyme and GTC established ATIII LLC, a joint venture
for the development and commercialization of ATIII. Genzyme and GTC will provide
70% and 30%, respectively, of the first $33.0 million in development costs under
the program. Development costs in excess of $33.0 million will be shared equally
by the partners and all profits from the sale of ATIII will be split equally. To
the extent that either party fails to fund its share of costs and expenses, the
profit sharing interests and the future funding obligations of the parties may
be proportionately adjusted. The joint venture has the right to commercialize
ATIII worldwide, excluding Asia. GTC contributed ATIII and certain of the
product's underlying patents and technology to the joint venture. Genzyme also
contributed patents and technology underlying the product to the joint venture.
Pursuant to the terms of the joint venture agreements, Genzyme will pay GTC
certain amounts upon the achievement of certain milestones. GTC will manufacture
ATIII in bulk form and Genzyme will perform the finished processing work.
Genzyme, as the exclusive distributor for ATIII LLC, will market and sell
products for the joint venture in the territory. The joint venture agreements
supersede and replace the provisions of an earlier agreement between the parties
pursuant to which Genzyme had funded the ATIII program.
The minority interest of $4.3 million for the year ended December 31, 1998
relates to the portion of the results of operations of ATIII LLC that is
allocable to GTC. There were no corresponding amounts for the years ended
December 31, 1997 or 1996. Genzyme's Chairman and Chief Executive Officer is a
director of GTC.
25
<PAGE> 26
GENZYME GENERAL
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS - (CONTINUED)
(Information with respect to the three months ended March 31, 1999 and
March 31, 1998 is unaudited)
INVESTMENTS IN JOINT VENTURES ALLOCATED TO GENZYME GENERAL:
DIACRIN/GENZYME LLC (UNAUDITED)
On October 1, 1996, Diacrin/Genzyme LLC was established as a joint venture
between GTR and Diacrin to develop and commercialize products and processes
using porcine fetal cells for the treatment of Parkinson's disease and
Huntington's disease in humans. In March 1999, Genzyme announced its intention
to reallocate Genzyme's interest in Diacrin/Genzyme LLC from GTR to Genzyme
General in the second quarter of 1999 in exchange for $25.0 million of cash and
a 3% worldwide royalty on any products sold by Diacrin/Genzyme LLC (the
"Transfer"). The Transfer was approved by holders of GZTR Stock in May 1999. In
connection with the Transfer, Genzyme General paid to GTR $25.0 million in cash
and the funds available under the GTR Equity Line were reduced to $20.0 million
from $45.0 million. Of the $25.0 million in cash paid to GTR for the Transfer,
$5.0 million is non-refundable and $20.0 million represents a pre-payment
related to the achievement of certain future milestones by Diacrin/Genzyme LLC.
If the milestones are not met, GTR is required to repay Genzyme General for the
advanced milestone funds plus interest in cash or GTR Designated Shares, at
GTR's option.
RENAGEL LLC
In June 1997, Genzyme and GelTex established RenaGel LLC, a joint venture for
the final development and commercialization of Renagel(R) Capsules. The joint
venture has rights to commercialize Renagel(R) Capsules worldwide, except in
Japan and Pacific Rim countries. Genzyme will market and sell products for the
joint venture in the territory. Each of Genzyme and GelTex currently hold a 50%
ownership interest in RenaGel LLC. Genzyme and GelTex are each required to fund
50% of the joint venture's costs and expenses, and will share equally in the
profits. To the extent that either party fails to fund its share of costs and
expenses, the profit sharing interests and the future funding obligations of the
parties may be proportionately adjusted. GelTex contributed Renagel(R) Capsules
and the product's underlying patents and technologies to the joint venture.
Pursuant to the terms of the agreement, Genzyme committed to pay GelTex a total
of $27.5 million. When the joint venture agreements were signed, Genzyme made a
$2.5 million equity investment of GelTex common stock at $25.00 per share, which
represents less than 1% ownership in GelTex. Genzyme also paid GelTex $15.0
million in November 1998 when Renagel(R) Capsules received FDA marketing
approval. Genzyme will make an additional $10.0 million milestone payment in
October 1999. The $25.0 million in milestone payments has been capitalized.
As of December 31, 1998, Genzyme General has provided a total of $14.4 million
of funding to the joint venture and realized net losses from the joint venture
of $7.5 million in 1998 and $2.3 million in 1997. Summary financial information
is not presented as the impact of RenaGel LLC's activities on the Company's
statement of operations for the years ended December 31, 1998 and 1997 is not
considered to be material. At December 31, 1998, Genzyme had a receivable from
RenaGel LLC of $1.1 million. The Company's Chairman and Chief Executive Officer
is a director of GelTex and another director of the Company is Chairman of
GelTex.
BIOMARIN/GENZYME LLC
In September 1998, Genzyme formed BioMarin/Genzyme LLC, a joint venture with
BioMarin for the development and commercialization of alpha-L-iduronidase, a
recombinant enzyme to treat MPS I. Funding for and profits of the joint venture
will be shared equally by Genzyme and BioMarin. Pursuant to the terms of joint
venture agreement, Genzyme will pay BioMarin a $12.1 million milestone payment
upon receipt of FDA approval of a Biologics License Application for
alpha-L-iduronidase to treat MPS I. As of December 31, 1998, Genzyme General has
provided a total of $1.4 million of funding to the joint venture and realized
net losses from the joint venture of $0.9 million in 1998. Summary financial
information is not presented as the impact of BioMarin/Genzyme LLC's activities
on the Company's statement of operations for the year ended December 31, 1998 is
not considered to be material.
PHARMING/GENZYME LLC
On October 14, 1998 Genzyme General and Pharming formed Pharming/Genzyme LLC,
joint venture to develop and commercialize worldwide the human enzyme
alpha-glucosidase as a treatment for Pompe disease. Under the terms of the
agreement, Genzyme General will fund the first $14.0 million of development
costs. Thereafter, funding for and profits of the joint venture will be shared
equally by Genzyme and Pharming. As of December 31, 1998, Genzyme General has
provided a total of $3.2 million of funding to the joint venture and realized
net losses from the joint venture of $4.0 million in 1998. Summary financial
information is not presented as the impact of Pharming/Genzyme LLC's activities
on the Company's statement of operations for the year ended December 31, 1998 is
not considered to be material.
26
<PAGE> 27
GENZYME GENERAL
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS - (CONTINUED)
(Information with respect to the three months ended March 31, 1999 and
March 31, 1998 is unaudited)
NOTE K. ACCRUED EXPENSES
Accrued expenses at December 31 include the following (amounts in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Compensation....................................... $20,434 $17,902
Technology access fee.............................. 10,000 -
Professional fees.................................. 4,853 6,750
Royalties.......................................... 5,846 7,737
Rebates............................................ 5,663 4,575
Other.............................................. 18,847 25,886
------- -------
$65,643 $62,850
======= =======
</TABLE>
NOTE L. LONG-TERM DEBT AND LEASES
LONG-TERM DEBT
Long-term debt at December 31 is comprised of the following (amounts in
thousands):
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
5.25% GGD Notes.................................... $250,000 $ --
Revolving Credit Facility.......................... 82,000 95,000
5% GGD Debentures.................................. 21,559 --
Mortgage note payable, matures June 13, 1999....... -- 19,833
Other mortgage notes payable....................... 3,167 3,856
-------- --------
356,726 118,689
Less current portion............................... (82,080) (711)
------- --------
$274,646 $117,978
======= ========
</TABLE>
In February 1998, Genzyme repaid the remaining $0.7 million principal balance
due on a mortgage note due January 2008.
In November 1998, Genzyme repaid the remaining $19.4 million principal balance
due on a mortgage note due June 1999 plus accrued interest of $0.2 million.
Minimum annual principal repayment of long-term debt, excluding capital leases,
in each of the next five years are as follows: 1999-$82,080,000, 2000-$89,000,
2001-$98,000, 2002-$109,000, 2003-$25,920,000 and thereafter $248,430,000.
Although the Company retains responsibility for the repayment of all long-term
debt obligations such debt is allocated to either Genzyme General, GSP, GMO or
GTR for reporting purposes based on the intended use of the funds borrowed under
each instrument.
REVOLVING CREDIT FACILITY
Genzyme has a $225 million revolving credit facility with a syndicate of
commercial banks. Loans bear interest at LIBOR plus an applicable margin
pursuant to the terms and conditions defined in the credit agreement. Amounts
drawn under this facility may be allocated to Genzyme General, GSP, GMO or GTR.
As of December 31, 1998 and March 31, 1999, Genzyme had $100.0 million of debt
outstanding under the revolving credit facility, $82.0 million of which was
allocated to Genzyme General and $18.0 million of which was allocated to GTR.
The $100.0 million outstanding under this facility is due in November 1999.
The notes have certain covenants which require Genzyme to, among other things,
maintain certain levels of earnings and liquidity ratios. If Genzyme defaults
on the covenants the revolving credit facility is payable on demand. The stock
of Genzyme Securities Corporation, a Massachusetts securities corporation, is
pledged as collateral for this facility. As of December 31, 1998, the interest
rate on amounts outstanding under the revolving credit facility was
approximately 5.75%. Genzyme pays a commitment fee ranging from 0.15% to 0.375%
on the unused portion of the revolving credit facility.
5.25% CONVERTIBLE SUBORDINATED NOTES
In May 1998, Genzyme raised approximately $243.0 million, net of the initial
purchasers' discount and offering costs, from the issuance of the GGD Notes. The
GGD Notes bear interest at 5.25% per annum and interest is payable semi-annually
on June 1 and December 1 of each year, commencing on December 1, 1998. The GGD
Notes are convertible, at any time at or before maturity (unless previously
redeemed), into shares of GENZ Stock at a conversion price of $39.60 per share,
subject to adjustment for certain events. As a result of the GMO Dividend and
the Distribution, holders of the GGD Notes will also be entitled to receive
0.10805 share of GZMO Stock and 0.17901 share of GZSP Stock for each share of
GENZ Stock issued upon conversion. The GGD Notes may not be redeemed prior to
June 10, 2001 and are redeemable, subject to certain subordination
27
<PAGE> 28
GENZYME GENERAL
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS - (CONTINUED)
(Information with respect to the three months ended March 31, 1999 and
March 31, 1998 is unaudited)
provisions, on such date and thereafter at the option of Genzyme, as a whole or
from time to time in part, at the following prices (expressed as percentages of
the principal amount) plus accrued interest to, but not including, the
redemption date: 102.63% if redeemed on or before May 31, 2002, 101.75% if
redeemed between June 1, 2002 and May 31, 2003; 100.88% if redeemed between June
1, 2003 and May 31, 2004; and 100% if redeemed on or after June 1, 2004. The
fair value of the GGD Notes at December 31, 1998, based upon quoted market
prices, totaled $322.0 million.
GGD DEBENTURES
In August 1997, GMO raised $20.0 million through the private placement of the
GMO Debentures. In the third quarter of 1997, GMO recorded $16.5 million of
proceeds attributable to the value of the debt and $3.5 million attributed to
the value of the conversion feature (recorded as an increase to stockholders'
equity). The debt was accreted to its $20.0 million face value by a charge to
interest expense of $3.5 million over the term of the initial 15 month
conversion period. The GMO Debentures provided that if the effective date of the
initial public offering of GZMO Stock did not occur before August 29, 1998, at
the holder's option, the GMO Debentures could be exchanged for the GGD
Debentures. Effective August 1998, all of the holders of the GMO Debentures
exercised their option to exchange their GMO Debentures, plus accrued interest
of $1.2 million, for the GGD Debentures. Approximately 3,029,000 GMO Designated
Shares were reserved in connection with this exchange, subject to adjustment
based on the fair market value of GZMO Stock on October 16, 1999. GMO recorded
$1.9 million and $1.0 million of interest expense related to the accretion of
this debt in 1998 and 1997, respectively. Genzyme General recorded $0.7 million
of interest expense related to the accretion of this debt in 1998.
MORTGAGE NOTES
The Company's remaining mortgage note matures December 2003 and is
collateralized by land and buildings with a net book value of $3.5 million at
December 31, 1998. This mortgage, which bears interest at 10.5%, is attributed
to Genzyme General
OPERATING LEASES
Total rent expense under operating leases was $16.3 million, $14.2 million and
$10.6 million in 1998, 1997 and 1996, respectively. Genzyme General leases
facilities and personal property under certain operating leases in excess of one
year.
FUTURE MINIMUM PAYMENTS DUE UNDER OPERATING LEASES (amounts in thousands):
<TABLE>
<CAPTION>
OPERATING
LEASES
- ------------------------------------------------------------------------
<S> <C>
1999........................................ $ 19,646
2000........................................ 18,549
2001........................................ 15,578
2002........................................ 13,611
2003........................................ 12,899
Thereafter.................................. 125,936
----------
Total minimum payments...................... $ 206,219
==========
</TABLE>
A sixty-five year lease commenced on June 1, 1992 between a wholly-owned
subsidiary of Genzyme and a third party lessor. Genzyme General recorded total
rent expense under this lease of $1,517,000, $1,290,000 and $886,000 in 1998,
1997 and 1996, respectively. The lease provides for escalation's every five
years based on the Consumer Price Index Escalation with a minimum escalation of
3% per year. Therefore, rent expense on a straight-line basis is $1,517,000 per
year.
GTR leases from Genzyme General a portion of a research and development
facility. GTR is obligated to pay Genzyme General $0.6 million per year for 3
years commencing on July 1, 1998. Total rental income for 1998 was $0.3 million.
28
<PAGE> 29
GENZYME GENERAL
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS - (CONTINUED)
(Information with respect to the three months ended March 31, 1999 and
March 31, 1998 is unaudited)
NOTE M. DIVISION EQUITY
The following presents the division equity of Genzyme General at December 31
for the periods presented (amounts in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period ................................ $ 745,895 $ 645,185 $ 659,106
Net income (loss) ............................................. 133,052 76,642 (10,687)
Allocation of tax benefits generated by GTR ................... 16,394 17,666 17,011
Allocation of tax benefits generated by GMO ................... 3,527 2,755 --
Allocation of tax benefits generated by GSP ................... 17,936 10,112 7,487
Issuance of common stock under stock plans .................... 74,360 35,963 18,581
Exercise of warrants .......................................... 289 855 106,164
Allocation of cash to GTR for GZTR Designated Shares .......... -- (14,892) (11,714)
Tax benefit from disqualified dispositions .................... 18,561 4,127 3,500
Allocation of cash to GMO for GZMO Designated Shares .......... (5,000) -- --
Allocation of cash to GSP ..................................... (41,975) (25,669) (283,178)
Conversion of GMO Debentures to GGD Debentures for
GZMO Designated Shares ...................................... (19,802) -- --
Conversion of note receivable due from GMO into
GZMO Designated Shares ...................................... (2,696) -- --
Loss on purchase of facility from GTR ......................... (711) -- --
Payment to GTR for research program ........................... (250) -- --
Shares issued in connection with acquisitions ................. -- -- 36,991
Allocation of acquired deferred tax asset in connection
with the acquisition of PharmaGenics ........................ -- 2,900 --
Issuance of common stock in connection with the
conversion of 6 3/4% Convertible Subordinated Notes .......... -- -- 101,400
Equity adjustments ............................................ 387 (9,749) 524
--------- --------- ---------
Balance at end of period....................................... $ 939,967 $ 745,895 $ 645,185
========= ========= =========
</TABLE>
At December 31, 1998 and 1997, 200,000,000 shares of GENZ Stock were authorized
for issuance and approximately 81,394,000 and 77,693,000 shares, respectively,
were issued and outstanding.
Included in division equity are the cumulative foreign currency translation
charges of $4.8 million and $12.4 million at December 31, 1998 and 1997,
respectively.
At December 31, 1998, approximately 14,888,000 shares of GENZ Stock were
reserved for issuance under the Company's 1990 Equity Incentive Plan, as
amended, 1997 Equity Incentive Plan, 1998 Director Stock Option Plan, and 1990
Employee Stock Purchase Plan, as amended, and upon the exercise of outstanding
warrants. At December 31, 1998, approximately 11,593,000 options to purchase
shares of GENZ Stock were outstanding.
Pursuant to the Charter, GZSP, GZMO and GZTR Designated Shares are authorized
shares of GZSP Stock, GZMO Stock and GZTR Stock, respectively, 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 GSP, GMO or GTR, respectively. GZSP,
GZMO and GZTR Designated Shares are not eligible to receive dividends and cannot
be voted by Genzyme. GZSP, GZMO and GZTR Designated Shares are created in
certain circumstances when cash or other assets are transferred from Genzyme
General to GSP, GMO or GTR.
In October 1996, the Genzyme Board approved the allocation of up to a maximum of
$20.0 million of cash from Genzyme General to GTR (the "GTR Equity Line") to
provide initial funding for GTR's joint venture with Diacrin. As of December 31,
1997, Genzyme had allocated a total of $7.0 million of cash from Genzyme General
to GTR under the GTR Equity Line and 721,455 GZTR Designated Shares had been
reserved for issuance.
In May 1998, the Genzyme Board increased the amount available under the GTR
Equity Line from $13.0 million to $50.0 million. Under the GTR Equity Line,
Genzyme Tissue Repair may draw down funds as needed each fiscal quarter in
exchange for GZTR Designated Shares. The rate of exchange will be determined by
dividing the amount drawn under the line of credit by the average market value
of one share of GZTR Stock during the 20 trading days prior to the date the
amount is drawn under the line of credit. As of December 31, 1998, GTR had not
yet drawn any funds from the equity line.
29
<PAGE> 30
GENZYME GENERAL
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS - (CONTINUED)
(Information with respect to the three months ended March 31, 1999 and
March 31, 1998 is unaudited)
In 1997, the Genzyme Board approved the allocation of up to $25.0 million in
cash from Genzyme General to GMO. The amount available was reduced to $5.0
million as a result of the issuance in August 1998 of $20.0 million in
debentures convertible into GZMO Stock, which were subsequently surrendered in
exchange for the GGD Debentures in 1998. GMO drew down the remaining $5.0
million available under this equity line in 1998 in exchange for approximately
714,000 GZMO Designated Shares.
In August 1998, the Genzyme Board approved the allocation of up to an additional
$30.0 million in cash to GMO in exchange for an increase in the number of GZMO
Designated Shares.
As of December 31, 1998, there were approximately 716,000 GZTR Designated Shares
reserved for issuance.
As of December 31, 1998, there were approximately 696,000 GZMO Designated
Shares reserved for issuance. During 1998, Genzyme distributed 8,717,000 GZMO
Designated Shares as a dividend to Genzyme General shareholders.
PREFERRED STOCK
Shares of preferred stock may be issued from time to time in one or more series.
The Genzyme Board may determine, in whole or in part, the preferences, voting
powers, qualifications, and special or relative rights or privileges of any such
series before the issuance of any such shares of that series. The Genzyme Board
shall determine the number of shares constituting each series of preferred stock
and each series shall have a distinguishing designation.
STOCK SPLIT
All share and per share amounts herein have been restated to reflect the 2-for-1
split of shares of GENZ Stock on July 25, 1996.
CREATION OF GZSP STOCK (UNAUDITED)
On June 28, 1999, Genzyme issued approximately 14.8 million shares of GZSP Stock
to Genzyme General stockholders of record on June 14, 1999 in a dividend
distribution of 0.17901 share of GZSP Stock for each share of GENZ Stock owned.
Cash in lieu of fractional shares was paid at $25.00 per share.
GZSP DESIGNATED SHARES
Pursuant to the Charter, GZSP Designated Shares are authorized shares of GZSP
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 GSP. GZSP Designated
Shares are not eligible to receive dividends and cannot be voted by Genzyme.
GZSP Designated Shares are created in certain circumstances when cash or other
assets are transferred from Genzyme General to GSP. The number of GZSP
Designated Shares will be decreased by: the number of shares of GZSP Stock
issued by Genzyme, the proceeds of which are allocated to Genzyme General; the
number of shares of GZSP Stock issued as a dividend to holders of GENZ Stock;
and the number of shares of GZSP Stock issued upon the conversion of convertible
securities, the proceeds of which are attributed to Genzyme General.
Approximately 1,130,123 GZSP Designated Shares are reserved for issuance upon
conversion of the GGD Notes. In addition, the number of GZSP Designated Shares
can be increased as a result of certain interdivision transactions.
If, as of June 30 of each year starting June 30, 2000, the number of GZSP
Designated Shares on such date (not including those reserved for issuance with
respect to Genzyme General convertible securities as a result of anti-dilution
adjustments required by the terms of such instruments by the Genzyme Board)
exceeds 10% of the number of shares of GZSP Stock then issued and outstanding
then substantially all GZSP Designated Shares will be distributed to holders of
record of GENZ Stock, subject to reservation of a number of such shares equal to
the sum of (a) the number of GZSP Designated Shares reserved for issuance upon
the exercise or conversion of Genzyme General convertible securities and (b) the
number of GZSP Designated Shares reserved by the Genzyme Board as of such date
for sale not later than six months after such date, the proceeds of which sale
will be allocated to Genzyme General.
GZMO DESIGNATED SHARES
Pursuant to the Charter, GZMO Designated Shares are authorized shares of GZMO
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 GMO. GZMO Designated
Shares are not eligible to receive dividends and cannot be voted by Genzyme.
GZMO Designated Shares are created in certain circumstances when cash or other
assets are transferred from Genzyme General to GMO. The Genzyme Board may issue
the GZMO Designated Shares as a stock dividend to the holders of GENZ Stock or
it may sell such shares in a public or private sale and allocate all of the
proceeds to Genzyme General. The number of GZMO Designated Shares will be
decreased by: the number of shares of GZMO Stock issued by Genzyme, the proceeds
of which are allocated to Genzyme General; the number of shares of GZMO Stock
issued as a dividend to holders of GENZ Stock; and the number of shares of GZMO
Stock issued upon the conversion of convertible securities, the proceeds of
which are attributed to Genzyme General. In addition, the number of GZMO
Designated Shares can be increased as a result of certain interdivision
transactions.
When Genzyme acquired PharmaGenics, the $2.5 million of debt outstanding under a
credit facility which Genzyme had made available to PharmaGenics to fund
PharmaGenics's documented operating costs became a liability allocated to GMO
(the "PGI Credit Facility"). In September 1998, the Genzyme Board approved the
exchange of the PGI Credit Facility to Genzyme General in the principal amount
of $2,450,000, plus accrued interest of $246,080, for approximately 386,000 GZMO
Designated Shares. The number of GZMO Designated Shares created as a result of
the exchange was based on the fair value of the GZMO Stock at the time ($7.00)
as determined by the Genzyme Board. The amount of the note and the accrued
interest was reclassified to division equity upon the exchange.
GMO EQUITY LINE OF CREDIT
In 1997, the Genzyme Board approved the allocation of up to $25.0 million in
cash from Genzyme General to GMO (the "GMO Equity Line"), subject to a
dollar-for-dollar reduction by the proceeds of outside financing received by
GMO. As a result of the issuance of the GMO Debentures in August 1997, the
amount available under the GMO Equity Line was reduced to $5.0 million. In
September 1998, GMO made a draw of the remaining $5.0 million available under
the GMO Equity Line, thus reducing the amount available under the GMO Equity
Line to zero. Approximately 714,000 GZMO Designated Shares were reserved for
issuance in connection with this draw.
In August 1998, the Genzyme Board approved the allocation of up to an additional
$30.0 million in cash to GMO in exchange for an increase in the number of GZMO
Designated Shares. As of March 31, 1998, GMO had not yet drawn any funds under
this arrangement.
DISTRIBUTION OF GZMO DESIGNATED SHARES
If, as of November 30, of each year starting November 30, 1999 the number of
GZMO Designated Shares on such date (not including those reserved for issuance
with respect to Genzyme General convertible securities as a result of
anti-dilution adjustments required by the terms of such instruments by the
Genzyme Board) exceeds 10% of the number of shares of GZMO Stock then issued
and outstanding, then substantially all GZMO Designated Shares will be
distributed to holders of record of GENZ Stock, subject to reservation of a
number of such shares equal to the sum of (a) the number of GZMO Designated
Shares reserved for issuance upon the exercise or conversion of Genzyme General
convertible securities and (b) the number of GZMO Designated Shares reserved by
the Genzyme Board as of such date for sale not later than six months after such
date, the proceeds of which sale will be allocated to Genzyme General.
In November 1998, Genzyme distributed approximately 8,717,000 shares of GZMO
Stock to holders of GENZ Stock and released from escrow approximately 3,929,000
shares of GZMO Stock held by the former PharmaGenics shareholders.
GZMO Designated Shares activity is summarized below:
<TABLE>
<CAPTION>
GZMO DESIGNATED
SHARES
---------------
<S> <C>
Established at merger with PharmaGenics 6,000,000
---------
Balance at December 31, 1997 6,000,000
GMO Debenture exchange 3,028,571
PharmaGenics credit facility exchange 385,972
Increase from equity line 714,286
Dividend distribution (8,717,485)
Warrants exercised (1,352)
---------
Outstanding at December 31, 1998 1,409,992
=========
</TABLE>
GTR EQUITY LINE OF CREDIT
In October 1996, the Genzyme Board approved the GTR Equity Line with an initial
allocation of up to $20.0 million in cash from Genzyme General to GTR to
provide initial funding for GTR's joint venture with Diacrin, of which $7.0
million of cash was allocated to GTR in 1997 in exchange for 721,455 GTR
Designated Shares.
In May 1998, the Genzyme Board increased the amount available under the GTR
Equity Line from $13.0 million to $50.0 million. In May 1999, the GTR Equity
Line was reduced to $25.0 million in connection with the Transfer (see Note J.,
"Investments", above). Under the GTR Equity Line, Genzyme Tissue Repair may draw
down funds as needed each fiscal quarter in exchange for GTR Designated Shares.
The rate of exchange will be determined by dividing the amount drawn under the
line of credit by the average market value of one share of GTR Stock during the
20 trading days prior to the date the amount is drawn under the line of credit.
As of March 31, 1999, GTR had drawn $5.0 million of the funds available under
the GTR Equity Line.
GZTR DESIGNATED SHARES
Pursuant to the Charter, GZTR Designated Shares are authorized shares of GZTR
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. GZTR Designated
Shares are not eligible to receive dividends and cannot be voted by Genzyme.
GZTR Designated Shares are created in certain circumstances when cash or other
assets are transferred from Genzyme General to GTR. The number of GZTR
Designated Shares will be decreased by: the number of shares of GZTR Stock
issued by Genzyme, the proceeds of which are allocated to Genzyme General; the
number of shares of GZTR Stock issued as a dividend to holders of GENZ Stock;
and the number of shares of GZTR Stock issued upon the conversion of convertible
securities, the proceeds of which are attributed to Genzyme General. In
addition, the number of GZTR Designated Shares can be increased as a result of
certain interdivision transactions.
Genzyme had the option to allocate to GTR, at $10.00 per GZTR Designated Share,
up to $30.0 million from Genzyme General (the "GTR Purchase Option") in
exchange for a maximum of 3,000,000 GZTR Designated Shares to be issued in
connection with the exercise of the GTR Purchase Option. In each of June 1996
and 1997, pursuant to the terms of the GTR Purchase Option, the Genzyme Board
elected to allocate $10.0 million in cash from Genzyme General to GTR in
exchange for 1,000,000 GZTR Designated Shares, which were reserved for issuance
at the sole discretion of the Genzyme Board for the benefit of the Genzyme
General stockholders. There was no such allocation in 1998. The GTR Purchase
Option has expired.
DISTRIBUTION OF GZTR DESIGNATED SHARES
If, as of May 31 of each year starting May 31, 1997, the number of GZTR
Designated Shares on such date (not including those reserved for issuance with
respect to Genzyme General convertible securities as a result of anti-dilution
adjustments required by the terms of such instruments by the Genzyme Board)
exceeds 10% of the number of shares of GZTR Stock then issued and outstanding,
then substantially all GZTR Designated Shares will be distributed to holders of
record of GENZ Stock, subject to reservation of a number of such shares equal to
the sum of (a) the number of GZTR Designated Shares reserved for issuance upon
the exercise or conversion of Genzyme General convertible securities and (b) the
number of GZTR Designated Shares reserved by the Genzyme Board as of such date
for sale not later than six months after such date, the proceeds of which sale
will be allocated to Genzyme General.
On June 30, 1997, the Genzyme Board declared a dividend of approximately
2,686,000 GZTR Designated Shares. Of these shares, 2,292,000 shares of GZTR
Stock, with a fair market value of $22.9 million, were issued to holders of GENZ
Stock and 394,000 shares of GZTR Stock were reserved for issuance upon the
exercise of Genzyme General stock options and warrants outstanding on June 11,
1997.
There was no distribution of GZTR Designated Shares in 1998.
GZTR Designated Shares activity is summarized below:
<TABLE>
<CAPTION>
GZTR DESIGNATED
SHARES
---------------
<S> <C>
Balance at December 31, 1995..... 1,286,908
Stock options exercised.......... (42,728)
Stock warrants exercised......... (426,984)
Convertible notes conversion..... (255,249)
Exercise of GTR Purchase Option.. 1,000,000
Increase from equity line........ 231,645
----------
Balance at December 31, 1996... 1,793,592
Stock options exercised.......... (103,729)
Stock warrants exercised......... (2,617)
Exercise of GTR Purchase Option.. 1,000,000
Increase from equity line........ 489,810
Dividend distribution............ (2,292,003)
----------
Balance at December 31, 1997... 885,053
Stock options exercised.......... (167,064)
Stock warrants exercised......... (1,721)
----------
Balance at December 31, 1998... 716,268
==========
</TABLE>
DIRECTORS' DEFERRED COMPENSATION PLAN
Genzyme's Directors' Deferred Compensation Plan allows each member of the
Genzyme Board who is not also an officer or employee of Genzyme to defer
receipt of all or a portion of the cash compensation payable to him or her as a
director of Genzyme and receive either cash or stock in the future.
Compensation may be deferred until the termination of services as a director
or, subject to certain restrictions, such other date as may be specified by the
director. All of the current directors of Genzyme, other than those directors
who are also officers or employees of Genzyme, are eligible to participate in
the plan and as of December 31, 1998, one of the directors has elected to
participate in the plan. Genzyme has reserved 50,000 shares of GENZ Stock,
50,000 shares of GZSP Stock, 50,000 shares of GZMO Stock and 100,000 shares of
GZTR Stock to cover distributions of shares credited to stock accounts under
the Directors' Deferred Compensation Plan (subject in each case to adjustments
for stock splits, stock dividends, and certain transactions affecting Genzyme's
capital stock). As of March 31, 1999 and December 31, 1998, no shares of GENZ
Stock, GZSP Stock, GZMO Stock or GZTR Stock credited to stock accounts under
the Directors' Deferred Compensation Plan have been distributed to
participants.
SHARES RESERVED FOR ISSUANCE UNDER THE EQUITY PLANS, DIRECTORS' STOCK OPTION
PLAN AND EMPLOYEE STOCK PURCHASE PLAN
At March 31, 1999, approximately 14,915,000 shares of GENZ Stock, 1,100,000
shares of GZSP Stock, 3,637,000 shares of GZMO Stock and 5,699,000 shares of
GZTR Stock were reserved for issuance under the Company's 1990 Equity Incentive
Plan, as amended, 1997 Equity Plan, 1998 Director Stock Option Plan, 1999
Employee Stock Purchase Plan, and upon the exercise of outstanding warrants.
STOCK OPTIONS
Pursuant to the 1990 Equity Incentive Plan, as amended, and the 1997 Equity
Plan, options may be granted to purchase an aggregate of 23,800,000 shares of
GENZ Stock, 500,000 shares of GZSP Stock, 3,500,000 shares of GZMO Stock and
5,300,000 shares of GZTR Stock. The plans allow the granting of stock options at
not less than fair market value at date of grant, and stock appreciation rights,
performance shares, restricted stock and stock units to employees and
consultants of the Company, each with a maximum term of ten years. In addition,
Genzyme has a 1998 Director Stock Option Plan pursuant to which nonstatutory
stock options up to a maximum of 340,000 shares of GENZ Stock, 100,000 shares of
GZSP Stock, 140,000 shares of GZMO Stock and 200,000 shares of GZSP Stock are
automatically granted at fair market value to members of the Genzyme Board upon
their election or reelection as directors. For each year of a director's term of
office, he or she receives (a) an option to purchase 4,000 shares of GENZ Stock,
and (b) options to purchase shares of GZSP Stock, GZMO Stock and GZTR Stock. All
options expire ten years after the initial grant date and vest over four years.
30
<PAGE> 31
GENZYME GENERAL
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS - (CONTINUED)
(Information with respect to the three months ended March 31, 1999 and
March 31, 1998 is unaudited)
Stock option activity is summarized below:
<TABLE>
<CAPTION>
WEIGHTED
SHARES AVERAGE
UNDER OPTION EXERCISE PRICE EXERCISABLE
------------ -------------- -----------
<S> <C> <C> <C>
GENZ STOCK:
Outstanding at December 31, 1995 12,172,666 17.79 5,138,502
Granted...................... 3,442,484 29.16
Exercised.................... (906,041) 15.70
Forfeited and canceled....... (643,626) 22.81
----------
Outstanding at December 31, 1996 14,065,483 20.48 6,505,835
Granted...................... 2,083,936 29.86
Exercised.................... (1,760,934) 16.25
Forfeited and canceled....... (1,041,218) 23.77
----------
Outstanding at December 31, 1997 13,347,267 22.22 6,982,224
Granted...................... 2,482,222 29.61
Exercised.................... (3,319,203) 20.11
Forfeited and canceled....... (917,556) 27.21
----------
Outstanding at December 31, 1998 11,592,730 24.00 5,579,267
==========
</TABLE>
The total exercise proceeds for all options outstanding at December 31, 1998 is
approximately $278,271,000 for GENZ Stock. Information regarding the range of
option prices as of December 31, 1998 is as follows:
GENZ STOCK:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER REMAINING WEIGHTED EXERCISABLE WEIGHTED
RANGE OF OUTSTANDING CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES AS OF 12/31/98 LIFE EXERCISE PRICE AS OF 12/31/98 EXERCISE PRICE
- ---------------- -------------- ----------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 4.82 - $15.14 2,526,171 4.10 $ 12.79 1,630,092 $ 11.72
15.19 - 24.88 2,452,083 5.12 20.48 1,978,770 20.24
25.00 - 28.00 3,146,767 8.27 27.44 590,030 26.76
28.06 - 30.63 2,875,941 8.04 30.37 1,300,498 30.35
30.65 - 47.88 591,768 9.15 37.19 79,877 33.81
- ---------------- -------------- ----------- -------------- -------------- --------------
$ 4.82 - $47.88 11,592,730 6.68 $ 24.00 5,579,267 $ 20.99
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
Genzyme's 1990 Employee Stock Purchase Plan, as amended, allows full-time
employees, as defined in the plan, to purchase the Company's stock at 85% of
fair market value. Under this plan, (i) 2,250,000 shares of GENZ Stock are
authorized for issuance, of which 388,048, 366,922 and 291,053 shares were
issued in 1998, 1997 and 1996, respectively, (ii) 1,450,000 shares of GZTR Stock
are authorized for issuance, of which 515,936, 280,819 and 325,300 shares were
issued in 1998, 1997 and 1996, respectively, (iii) 500,000 shares of GZMO Stock
are authorized for issuance, none of which have been issued.
STOCK COMPENSATION PLANS
The Company applies APB Opinion 25 and related interpretations in accounting for
its four stock-based compensation plans, the 1990 Equity Incentive Plan and the
1997 Equity Incentive Plan (both of which are stock option plans), the 1990
Employee Stock Purchase Plan, as amended, (a stock purchase plan), and the 1998
Director Stock Option Plan, and accordingly, no compensation expense has been
recognized for options granted and shares purchased under the provisions of
these plans for options granted to employees with an exercise price equal to
fair market value. 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
123, net income (loss) and income (loss) per share would have been as follows:
31
<PAGE> 32
GENZYME GENERAL
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS - (CONTINUED)
(Information with respect to the three months ended March 31, 1999 and
March 31, 1998 is unaudited)
<TABLE>
<CAPTION>
DECEMBER 31,
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996
-------- ----------- ---------
<S> <C> <C> <C>
GENZYME GENERAL:
Net income:
As reported.................................. $170,909 $107,175 $13,811
Pro forma.................................... $157,334 $ 95,168 $ 3,755
Basic income per share:
As reported.................................. $ 2.16 $ 1.40 $ 0.20
Pro forma.................................... $ 1.99 $ 1.24 $ 0.05
Diluted income per share:
As reported.................................. $ 2.06 $ 1.36 $ 0.19
Pro forma.................................... $ 1.83 $ 1.21 $ 0.05
</TABLE>
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, and additional awards are
anticipated in future years.
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model. In computing these pro forma amounts,
Genzyme General has assumed a risk-free interest rate equal to approximately
5.59%, 5.96% and 6.37%, expected volatility of 44%, 42% and 45%, zero dividend
yields and expected lives of four years for 1998, 1997 and 1996, respectively.
The average fair value of the Genzyme General options granted during 1998, 1997
and 1996 is estimated as $12.87, $12.21 and $11.98, respectively, on the date of
grant.
STOCK RIGHTS
Pursuant to the Company's shareholder rights plan, which was renewed in March
1999, each outstanding share of GENZ Stock also represents one preferred stock
purchase right (a "GENZ Stock Right"). Each GENZ Stock Right, when it becomes
exercisable, will entitle the registered holder to purchase from Genzyme one
one-hundredth of a share of Series A Junior Participating Preferred Stock at a
purchase price of $300.00, subject to adjustment.
WARRANTS
Genzyme sold three warrants (the "Front-End Warrant", the "NDA Warrant", and the
"Callable Warrant"), to purchase Genzyme common stock to Canadian Medical
Discoveries Fund ("CMDF") for an aggregate purchase price of $1.0 million
(Canadian). Each warrant is initially exercisable for up to 40,000 shares of
GENZ Stock and will be converted automatically upon the closing date of the
first underwritten public offering of GZMO Stock (the "Qualified Public
Offering") into warrants to purchase shares of GZMO Stock as follows:
The Front-End Warrant is exercisable immediately and will terminate upon the
earlier of the exercise of the Mandatory Purchase Right by CMDF or July 31,
2002. The exercise price of the Front-End Warrant is $30.18 per share of GENZ
Stock (120% of $25.15) and, upon conversion following the Qualified Public
Offering, will be equal to 120% of a defined conversion price per share of GZMO
Stock.
The NDA Warrant will be exercisable during the one-year period following the
filing of the first new drug application with the FDA for a product developed
through the collaboration and will terminate upon the earliest of the exercise
of the Mandatory Purchase Right by CMDF, the expiration of the Purchase Option
or July 31, 2007. The exercise price of the NDA Warrants is $30.18 per share of
GENZ Stock and, upon conversion following the Qualified Public Offering, will be
equal to 120% of a defined conversion price per share of GZMO Stock.
32
<PAGE> 33
GENZYME GENERAL
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS - (CONTINUED)
(Information with respect to the three months ended March 31, 1999 and
March 31, 1998 is unaudited)
The Callable Warrant will terminate upon the earliest of the exercise of the
Mandatory Purchase Right by CMDF, the exercise of the Purchase Option or July
31, 2005 and will be exercisable during the three-year period following the
expiration of the Purchase Option. The exercise price of the Callable Warrant
per share of GENZ Stock will be equal to the average of the closing sale prices
of GENZ Stock on the Nasdaq National Market for the 20 trading days ending on
the expiration date of the Purchase Option and, upon conversion following the
Qualified Public Offering, will be equal to the average of closing sale prices
of GZMO Stock on the Nasdaq National Market for the 20 trading days ending on
the expiration date of the Purchase Option.
In 1992 and 1995, Genzyme issued certain warrants which, when exercised between
December 16, 1994 and July 10, 1997, grant the holders two shares of GENZ Stock
and .0675 share of GZTR Stock (after giving effect to the 2-for-1 split of
shares of GENZ Stock in July 1996) for each warrant exercised. When exercised
after July 10, 1997, holders received two shares of GENZ Stock and .0975 shares
of GZTR Stock. These warrants were granted in exchange for the receipt of
options to purchase the callable common stock of Neozyme II and in connection
with Genzyme's purchase of the publicly-held shares of IG Laboratories, Inc.
("IG") in exchange for IG warrants.
Warrant activity related to GENZ Stock is summarized below:
<TABLE>
<CAPTION>
WARRANTS WARRANT PRICE
---------- -------------
<S> <C> <C>
Outstanding at December 31, 1995 5,597,241 16.01 - 42.67
---------
Exercised.................... (3,170,551) 16.01 - 38.25
Tendered..................... (2,385,686)
Expired...................... (5,685) 16.01 - 38.25
---------
Outstanding at December 31, 1996 35,319 16.01 - 44.20
Granted...................... 120,000 30.18
Exercised.................... (19,340) 44.20
---------
Outstanding at December 31, 1997 135,979 16.01 - 44.20
---------
Exercised.................... (13,019) 42.67 - 44.20
Expired...................... (2,960) 44.20
---------
Outstanding at December 31, 1998 120,000 30.18
=========
</TABLE>
33
<PAGE> 34
GENZYME GENERAL
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS - (CONTINUED)
(Information with respect to the three months ended March 31, 1999 and
March 31, 1998 is unaudited)
NOTE N. RESEARCH AND DEVELOPMENT AGREEMENTS
Genzyme allocates all research and development agreements with
unconsolidated affiliates to Genzyme General, GSP, GMO or GTR based on the
business to which the research relates.
Revenues from research and development agreements with related parties
include the following (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fees for research and development activities:
GTC......................................... $3,568 $8,041 $ 3,212
Neozyme II.................................. - - 19,799
------ ------ -------
$3,568 $8,041 $23,011
====== ====== =======
</TABLE>
The disclosures related to Neozyme II and Genzyme General's participation in
research contracts are included in Note J., "Investments - GTC, RenaGel LLC,
BioMarin/Genzyme LLC and Pharming/Genzyme LLC" above.
34
<PAGE> 35
GENZYME GENERAL
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS - (CONTINUED)
(Information with respect to the three months ended March 31, 1999 and
March 31, 1998 is unaudited)
NOTE O. COMMITMENTS AND CONTINGENCIES
From time to time Genzyme has been subject to legal proceedings and claims
arising in connection with its business. At March 31, 1999 and December 31,
1998, there were no asserted claims against Genzyme which, in the opinion of
management, if adversely decided would have a material adverse effect on Genzyme
General's financial position and results of operations.
NOTE P. INCOME TAXES
Income before income taxes and the related income tax expense (benefit) are as
follows (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic (1) ................ $204,182 $112,349 $ 7,535
Foreign ..................... 9,514 8,822 10,308
-------- -------- --------
Total ................... $213,696 $121,171 $ 17,843
======== ======== ========
Currently payable:
Federal .................... $ 69,567 $ 40,426 $ 42,609
State ...................... 9,354 4,286 7,589
Foreign .................... 4,016 2,971 3,616
-------- -------- --------
Total current ........... 82,937 47,683 53,814
Deferred:
Federal .................... (1,734) (3,713) (25,748)
State ...................... (829) (245) 464
-------- -------- --------
Total deferred .......... (2,563) (3,958) (25,284)
-------- -------- --------
Provision for income taxes... $ 80,374 $ 43,725 $ 28,530
======== ======== ========
</TABLE>
(1) Includes $106.4 million in charges for purchased research and development
and acquisition expenses in 1996.
Provisions for income taxes were at rates other than the U.S. federal
statutory tax rate for the following reasons (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Tax at U.S. statutory rate ................... 35.0% 35.0% 35.0%
Losses in less than 80%-owned
subsidiaries with no current tax benefit .... 0.8 0.8 0.7
State taxes, net ............................. 3.1 3.0 5.2
Foreign sales corporation .................... (1.5) (1.8) (1.8)
Nondeductible amortization ................... 0.8 1.4 1.3
Benefit of tax credits ....................... (1.0) (1.3) (2.3)
Other, net ................................... 0.5 (0.8) 4.8
Utilization of operating loss carryforwards .. 0.0 0.0 (2.2)
----- ----- -----
Effective tax rate before certain charges 37.7 36.3 40.7
Gross charge for purchased research and
development net of related tax benefits .... 0.0 0.0 119.2
----- ----- -----
37.7 36.3 159.9
Allocated tax benefits generated by
Genzyme Tissue Repair ....................... (7.7) (14.7) (95.3)
Allocated tax benefits generated by
Genzyme Molecular Oncology .................. (1.7) (2.2) 0.0
Allocated tax benefits generated by
Genzyme Surgical Products.................... (8.4) (8.4) (42.0)
----- ----- -----
Effective tax rate attributable to GENZ Stock 19.9% 11.0% 22.6%
===== ===== =====
</TABLE>
35
<PAGE> 36
GENZYME GENERAL
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS - (CONTINUED)
(Information with respect to the three months ended March 31, 1999 and
March 31, 1998 is unaudited)
At December 31 the components of net deferred tax assets were as follows
(amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
- -----------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............... $ 2,423 $ 3,078
Tax credits.................................... 3,714 5,091
Deferred gain.................................. 2,002 2,237
Intangible amortization........................ 38,271 35,442
Investments in unconsolidated subsidiaries..... 3,108 1,323
Realized and unrealized capital losses......... 8,822 15,670
Reserves and other............................. 35,798 18,858
Allocation of tax benefit from Genzyme
Tissue Repair.................................. 2,648 3,252
Allocation of tax benefit from Genzyme
Molecular Oncology............................. 15,621 15,515
-------- --------
Gross deferred tax asset..................... 112,407 100,466
Valuation allowance............................ (15,383) (13,597)
-------- --------
Net deferred tax asset....................... 97,024 86,869
Deferred tax liabilities:
Allocation of tax liability from Genzyme
Surgical Products............................ (2,788) (2,341)
Depreciable assets............................. (26,373) (20,939)
-------- --------
Net deferred tax asset....................... $ 67,863 $ 63,589
======== ========
</TABLE>
Due to uncertainty surrounding the realization of certain favorable tax
attributes primarily relating to capital losses related to the purchase of
in-process research and development, Genzyme General placed a valuation
allowance of $15.4 million and $13.6 million for December 31, 1998 and December
31, 1997, respectively, against otherwise recognizable deferred tax assets.
Realization of the net deferred tax assets is dependent on generating
sufficient taxable income prior to the expiration of loss carryforwards.
Although realization is not assured, management believes that it is more likely
than not that all of the net deferred tax assets will be realized. The amount
of the deferred tax asset considered realizable, however, could be reduced in
the near term if estimates of future taxable income during the carryforward
period are reduced.
At December 31, 1998 Genzyme General had U.S. net operating losses of $6.7
million and $8.6 million, respectively, for income tax purposes. At December 31,
1998 and 1997, Genzyme General had U.S. tax credit carryforwards of $3.7 million
and $5.1 million, respectively for income tax purposes. The net operating loss
carryforwards expire from 2003 to 2013. Utilization of tax net operating loss
carryforwards may be limited under Section 382 of the Internal Revenue Code of
1986, as amended (the "Code"). Tax credits of $3.7 million carry forward
indefinitely.
NOTE Q. BENEFIT PLANS
Genzyme has a domestic employee savings plan under Section 401(k) of the Code
covering substantially all employees of the Company with the exception of
employees of GSP who have a separate retirement savings plan. The plan allows
employees to make contributions up to a specified percentage of their
compensation, a portion of which are matched by the Company. Genzyme General
contributed $3.0 million, $1.1 million and $0.5 million to the 401(k) Plan in
1998, 1997 and 1996, respectively.
The Company has defined-benefit pension plans covering substantially all the
employees of GSP and certain of Genzyme's foreign subsidiaries. Pension expense
for Genzyme General for 1998, 1997 and 1996 was approximately $1.1 million, $1.1
million and $0.6 million, respectively. Pension costs are funded as accrued.
Actuarial and other disclosures regarding the plans are not presented because
they are not material.
36
<PAGE> 37
GENZYME GENERAL
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS - (CONTINUED)
(Information with respect to the three months ended March 31, 1999 and
March 31, 1998 is unaudited)
NOTE R. SEGMENT REPORTING
Genzyme General has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," replacing the
"industry segment" approach with the "management" approach. The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of Genzyme
General's reportable segments. SFAS No. 131 also requires disclosures about
products and services, geographic areas and major customers.
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):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE YEARS
ENDED MARCH 31, ENDED DECEMBER 31,
1999 1998 1998 1997 1996
--------------------------- -------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES:
Therapeutics ................................. $ 115,041 $ 93,522 $ 413,645 $ 332,712 $ 264,588
Diagnostic Products .......................... 14,692 16,717 65,683 66,288 65,789
Other ........................................ 20,457 18,604 85,846 86,927 107,163
Eliminations/Adjustments ..................... 576 1,053 4,145 10,441 23,188
----------- ----------- ----------- ----------- -----------
Total ...................................... $ 150,766 $ 129,896 $ 569,319 $ 496,368 $ 460,728
=========== =========== =========== =========== ===========
DEPRECIATION AND AMORTIZATION EXPENSE:
Therapeutics ................................. $ 10,862 $ 10,054 $ 1,700
Diagnostic Products .......................... 4,715 4,540 7,487
Other ........................................ 11,470 7,410 7,161
Eliminations/Adjustments ..................... 10,711 12,818 9,429
----------- ----------- -----------
Total ...................................... $ 37,758 $ 34,822 $ 25,777
=========== =========== ===========
EQUITY IN NET LOSS OF UNCONSOLIDATED AFFILIATES:
Therapeutics ................................. $ (12,480) $ (2,310) $ --
Diagnostic Products .......................... -- -- --
Other ........................................ (107) (71) (174)
Eliminations/Adjustments ..................... (7,152) (3,401) (3,482)
----------- ----------- -----------
Total ...................................... $ (19,739) $ (5,782) $ (3,656)
=========== =========== ===========
INCOME TAX (EXPENSE) BENEFIT:
Therapeutics ................................. $ (76,606) $ (61,389) $ (57,145)
Diagnostic Products .......................... (13,755) (1,409) (2,430)
Other ........................................ 2,134 8,658 621
Eliminations/Adjustments ..................... 7,853 10,415 30,424
----------- ----------- -----------
Total ...................................... $ (80,374) $ (43,725) $ (28,530)
=========== =========== ===========
NET INCOME:
Therapeutics ................................. $ 33,871 28,922 $ 120,832 $ 104,527 $ 82,232
Diagnostic Products(1) ....................... 1,129 84 21,694 2,400 3,499
Other ........................................ (1,780) (1,520) (3,367) (14,741) (895)
Eliminations/Adjustments ..................... 285 (2,351) (6,107) (15,544) (95,523)
----------- ----------- ----------- ----------- -----------
Total ...................................... $ 33,505 $ 25,135 $ 133,052 $ 76,642 $ (10,687)
=========== =========== =========== =========== ===========
SEGMENT ASSETS:
Therapeutics ................................. $ 326,305 $ 315,775
Diagnostic Products .......................... 49,430 54,132
Other ........................................ 94,930 92,605
Eliminations/Adjustments ..................... 939,726 497,978
----------- -----------
Total ...................................... $ 1,410,391 $ 960,490
=========== ===========
</TABLE>
(1) Includes a gain on sale of product line in 1998 totaling $31.2 million.
37
<PAGE> 38
GENZYME GENERAL
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS - (CONTINUED)
(Information with respect to the three months ended March 31, 1999 and
March 31, 1998 is unaudited)
The amounts in the category Other consist primarily of amounts derived in
Genzyme General's genetic testing and Pharmaceuticals business units. There are
no transactions between reportable segments. The difference between the
reportable segment's Net Income and Segment Assets and the Combined Net Income
and the Combined Total Assets for Genzyme General is included in the category
Eliminations/Adjustments. The amounts in Eliminations/Adjustments for the
category Net Income primarily consists of Genzyme General's interest income and
interest expense and certain other income and expense amounts not allocated to
the segments. Eliminations/Adjustments in the category Net Income for 1996
included a $106.5 million charge for in-process technology. Segment Assets for
reportable segments include the following: Accounts Receivable, Inventory,
certain Fixed Assets and certain Intangible Assets. Therefore, the amounts in
Elimination/Adjustments for Segment Assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
---------------------
<S> <C> <C>
Cash, cash equivalents, short and long term investments....... $556,097 $193,197
Intangibles, net.............................................. 41,556 26,488
Property, plant and equipment, net............................ 133,995 110,305
Investment in equity securities............................... 51,977 30,047
Other......................................................... 156,101 137,941
-------- --------
Total Eliminations/Adjustments............................ $939,726 $497,978
======== ========
</TABLE>
Genzyme General operates in the healthcare industry and primarily manufactures
and markets its products in two major geographic areas-the United States and
Europe. Genzyme General's principal manufacturing facilities are located in the
United States, United Kingdom, Switzerland and Germany. Genzyme General
purchases products from its British and Swiss subsidiaries for sale to customers
in the United States. Transfer prices from the foreign subsidiaries are intended
to allow Genzyme to produce profit margins commensurate with its sales and
marketing effort. Genzyme's Netherlands subsidiary is the primary European
distributor of Genzyme General's therapeutic products.
Certain information by geographic area follows (amounts in thousands):
<TABLE>
<CAPTION>
LONG-LIVED
REVENUES ASSETS
--------- ---------
<S> <C> <C>
1998
United States............................... $ 371,587 $ 755,023
Netherlands................................. 31,413 730
Other....................................... 166,319 56,517
--------- ---------
Total....................................... $ 569,319 $ 812,270
========= =========
1997
United States............................... $ 363,455 $ 506,085
Netherlands................................. 39,936 652
Other....................................... 92,977 53,546
--------- ---------
Total....................................... $ 496,368 $ 560,283
========= =========
1996
United States............................... $ 341,903
Netherlands................................. 56,685
Other....................................... 62,140
---------
Total....................................... $ 460,728
=========
</TABLE>
Genzyme General's results of operations are highly dependent upon the sales of
Cerezyme(R) enzyme and Ceredase(R) enzyme. For the years ended December 31,
1998, 1997 and 1996, sales of Cerezyme(R) enzyme and Ceredase(R) enzyme
represented 81%, 78% and 71% of total product sales. In 1998, 1997 and 1996,
Genzyme marketed Cerezyme(R) enzyme and Ceredase(R) enzyme directly to
physicians, hospitals and treatment centers, and sold products representing
approximately 14%, 22% and 13%, respectively, of net revenue to an unaffiliated
distributor. The credit risk associated with trade receivables is mitigated due
to the large number of customers and their broad dispersion over different
industries and geographic areas.
38
<PAGE> 39
GENZYME GENERAL
NOTES TO SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS - (CONTINUED)
(Information with respect to the three months ended March 31, 1999 and
March 31, 1998 is unaudited)
NOTE S. QUARTERLY RESULTS (UNAUDITED)
Summarized quarterly financial data (amounts in thousands, except per
share amounts) for the years ended December 31, 1998 and 1997 are displayed in
the following table.
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1998
Net sales................................ $128,843 $140,713 $141,021 $154,595
Gross profit........................... 89,089 98,860 101,304 117,635
Net income (1,2)....................... 34,056 41,086 53,752 42,015
Income per share:
Basic................................ 0.43 0.52 0.68 0.52
Diluted.............................. 0.42 0.50 0.64 0.49
1997
Net sales................................ $126,154 $142,245 $143,966 $ 71,509
Gross profit........................... 84,607 98,697 76,762 42,131
Net income (1,2)....................... 26,220 33,994 39,572 7,389
Income per share:
Basic................................ 0.35 0.45 0.52 0.10
Diluted.............................. 0.34 0.44 0.50 0.09
</TABLE>
- ------------
(1) Includes pre-tax charges in the third quarter of 1998 of $14.8 million
resulting from certain other charges (see Note C., "Other Charges" above)
and a pre-tax gain on the sale of the research products business assets of
$31.2 million, also recorded in the third quarter of 1998 (see Note D.,
"Sale of Research Products Business Assets" above).
(2) Includes pre-tax charges in the fourth quarter of 1997 of $21.8 million
related to certain other charges recorded in December 1997 (see Note C.,
"Other Charges" above).
NOTE T. SUBSEQUENT EVENTS (UNAUDITED)
In April 1999, Genzyme General received approximately $8.3 million ($8.0 million
in principal and $0.3 million in interest) in connection with certain notes
receivable that were previously fully reserved due to uncertainty surrounding
collection. Genzyme received these notes in partial consideration for the sale
of GDI in 1996. The $8.3 million will be recorded as a gain in the second
quarter of 1999.
On June 28, 1999, Genzyme distributed to holders of GENZ Stock of record as of
June 14, 1999, 0.17901 share of GZSP Stock for each share of GENZ Stock held.
39
<PAGE> 40
GENZYME GENERAL
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Genzyme Corporation:
In our opinion, the accompanying supplemental combined balance sheets and the
related supplemental combined statements of operations and cash flows present
fairly, in all material respects, the financial position of Genzyme General (as
described in Note A) at December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
In addition, in our opinion, the supplemental financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related supplemental combined financial
statements. These supplemental financial statements and supplemental financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these supplemental financial
statements and supplemental financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As more fully described in Note A to these supplemental financial statements,
Genzyme General is a division of Genzyme Corporation; accordingly, the
supplemental combined financial statements of Genzyme General should be read in
conjunction with the audited consolidated financial statements of Genzyme
Corporation and Subsidiaries. As more fully described in Note A to these
supplemental combined financial statements, on June 28, 1999 Genzyme distributed
to holders of Genzyme General common stock of record as of June 14, 1999
approximately 14.8 million shares of Genzyme Surgical Products Common Stock. The
accompanying supplemental combined financial statements give retroactive effect
to this distribution. These financial statements do not extend through the date
of distribution of the Genzyme Surgical Products Common Stock; however, they
will become the historical combined financial statements of Genzyme General
after financial statements covering the date of distribution are issued.
/s/ PricewaterhouseCoopers LLP
-------------------------------------
PricewaterhouseCoopers LLP
Boston, Massachusetts
June 28, 1999
40
<PAGE> 41
GENZYME GENERAL DIVISION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- --------------------------------------------------------------------------------------------------------------------
ADDITIONS
------------------------------
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December
31, 1998:
Allowance for
doubtful accounts .......... $ 8,415,700 $ 5,059,000 $ -- $ 3,561,600 $ 9,913,100
Inventory Reserve ........... $15,471,300 $18,178,000 $ -- $16,018,169 $17,631,131
Year ended December 31, 1997:
Allowance for
doubtful accounts ........... $11,967,900 $ 2,080,000 -- $ 5,632,200 $ 8,415,700
Inventory Reserve ........... $ 2,631,300 $15,101,000(1) -- $ 2,261,000 $15,471,300
Year ended December
31, 1996:
Allowance for
doubtful accounts ........... $ 7,833,800 $ 5,620,000 $1,508,000(3) $ 2,993,900(2) $11,967,900
Inventory Reserve ........... $ 3,082,200 $ 1,097,600 -- $ 1,548,500 $ 2,631,300
</TABLE>
- ------------
(1) Includes $13.4 million of strategic financial provisions (see Note C, "Other
Charges" to Genzyme General's Combined Financial Statements).
(2) Uncollectable accounts written off, net of recoveries.
(3) Reserve acquired in acquisition.
41
