<PAGE>
EXHIBIT 13.1
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
GENZYME CORPORATION AND SUBSIDIARIES
Consolidated Selected Financial Data........................ GCS-2
Management's Discussion and Analysis of Genzyme Corporation
and Subsidiaries' Financial Condition and Results of
Operations................................................ GCS-7
Consolidated Statements of Operations--For the Years Ended
December 31, 1999, 1998 and 1997.......................... GCS-32
Consolidated Balance Sheets--December 31, 1999 and 1998..... GCS-34
Consolidated Statements of Cash Flows--For the Years Ended
December 31, 1999, 1998 and 1997.......................... GCS-35
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997.............. GCS-37
Notes to Consolidated Financial Statements.................. GCS-40
Report of Independent Accountants........................... GCS-95
</TABLE>
GCS-1
<PAGE>
GENZYME CORPORATION CONSOLIDATED SELECTED FINANCIAL DATA
We have four series of common stock--Genzyme General Stock, Molecular
Oncology Stock, Surgical Products Stock and Tissue Repair Stock--which we refer
to as "tracking stock." Unlike typical common stock, each of our tracking stocks
is designed to track the financial performance of a specified subset of our
business operations and its allocated assets, rather than operations and assets
of our entire company. Each tracking stock is a common stock of Genzyme
Corporation, not of a division; each division is not a company or legal entity,
and therefore does not and cannot issue stock.
The chief mechanisms intended to cause each tracking stock to "track" the
financial performance of each division are provisions in our charter governing
dividends and distributions. Under these provisions, our charter:
- factors the assets and liabilities and income or losses attributable to a
division into the determination of the amount available to pay dividends
on the associated tracking stock; and
- requires us to exchange, redeem or distribute a dividend to the holders of
Molecular Oncology Stock, Surgical Products Stock, or Tissue Repair Stock
if all or substantially all of the assets allocated to those corresponding
divisions are sold to a third party.
To determine earnings per share, we allocate Genzyme's earnings to each
series of our common stock based on the earnings attributable to that series of
stock. The earnings attributable to each series of stock is defined in our
charter as the net income or loss of the corresponding division determined in
accordance with generally accepted accounting principles and as adjusted for tax
benefits allocated to or from the division in accordance with our management and
accounting policies. Our charter also requires that all income and expenses of
Genzyme be allocated among the divisions in a reasonable and consistent manner.
Our board of directors, however, retains considerable discretion in determining
the types, magnitudes and extent of allocations to each series of common stock
without shareholder approval.
Because the earnings allocated to each series of stock are based on the
income or losses attributable to each corresponding division, we include
financial statements and management's discussion and analysis of Genzyme
Corporation and of each division to aid investors in evaluating Genzyme's
performance and the performance of each of its divisions.
Income (loss) allocated to Genzyme General Stock and Surgical Products
Stock, and earnings per share of Genzyme General Stock, have been revised for
all periods presented as described in Note A. to our consolidated financial
statements under the caption "Net Income (Loss) Per Share--Revision."
GCS-2
<PAGE>
GENZYME CORPORATION CONSOLIDATED SELECTED FINANCIAL DATA (CONTINUED)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Net product sales....................... $683,482 $613,685 $529,927 $424,483 $304,373
Net service sales....................... 79,448 74,791 67,158 68,950 52,450
Revenues from research and development
contracts:
Related parties....................... 2,012 5,745 8,356 23,011 26,758
Other................................. 7,346 15,114 3,400 2,310 202
-------- -------- -------- -------- --------
Total revenues...................... 772,288 709,335 608,841 518,754 383,783
Operating costs and expenses:
Cost of products sold(1)................ 182,337 211,076 206,028 155,930 113,964
Cost of services sold................... 49,444 48,586 47,289 54,082 35,868
Selling, general and administrative..... 242,797 215,203 200,476 162,264 110,447
Research and development (including
research and development related to
contracts)............................ 150,516 119,005 89,558 80,849 68,845
Amortization of intangibles............. 24,674 24,334 17,245 8,849 4,647
Purchase of in-process research and
development(2)........................ 5,436 -- 7,000 130,639 14,216
Other................................... -- -- -- 1,465 --
-------- -------- -------- -------- --------
Total operating costs and expenses.... 655,204 618,204 567,596 594,078 347,987
-------- -------- -------- -------- --------
Operating income (loss)................... 117,084 91,131 41,245 (75,324) 35,796
Other income (expenses):
Equity in net loss of unconsolidated
affiliates............................ (42,696) (29,006) (12,258) (5,373) (1,810)
Gain on affiliate sale of stock(3)...... 6,683 2,369 -- 1,013 --
Minority interest....................... 3,674 4,285 -- -- 1,608
Gain on sale of investments in equity
securities............................ 1,963 3,391 -- 1,711 --
Gain on sale of product line(4)......... 8,018 31,202 -- -- --
Charge for impaired investments......... (5,712) (3,397) -- -- --
Other(5)................................ 14,527 -- (2,000) -- --
Investment income....................... 36,158 25,055 11,409 15,341 8,814
Interest expense........................ (21,771) (22,593) (12,667) (6,990) (1,109)
-------- -------- -------- -------- --------
Total other income (expenses)......... 844 11,306 (15,516) 5,702 7,503
-------- -------- -------- -------- --------
Income (loss) before income taxes......... 117,928 102,437 25,729 (69,622) 43,299
Provision for income taxes................ (46,947) (39,870) (12,100) (3,195) (21,649)
-------- -------- -------- -------- --------
Net income (loss)......................... $ 70,981 $ 62,567 $ 13,629 $(72,817) $ 21,650
======== ======== ======== ======== ========
</TABLE>
GCS-3
<PAGE>
GENZYME CORPORATION CONSOLIDATED SELECTED FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
NET INCOME (LOSS) PER SHARE:
ALLOCATED TO GENZYME GENERAL STOCK
(REVISED)(6,7,10):
Genzyme General net income (loss)................ $142,077 $133,052 $ 76,642 $(10,687) $ 40,368
Genzyme Surgical Products net loss............... (27,523) (49,856) (29,740) (44,313) (9,273)
Tax benefit allocated from Genzyme Molecular
Oncology....................................... 7,812 3,527 2,755 -- --
Tax benefit allocated from Genzyme Surgical
Products....................................... 16,128 17,936 10,112 7,487 3,728
Tax benefit allocated from Genzyme Tissue
Repair......................................... 10,866 16,394 17,666 17,011 8,857
-------- -------- -------- -------- --------
Net income (loss) allocated to Genzyme General
Stock.......................................... $149,360 $121,053 $ 77,435 $(30,502) $ 43,680
======== ======== ======== ======== ========
Net income (loss) per share of Genzyme General
Stock:
Basic.......................................... $ 1.80 $ 1.53 $ 1.01 $ (0.45) $ 0.79
======== ======== ======== ======== ========
Diluted........................................ $ 1.71 $ 1.48 $ 0.98 $ (0.45) $ 0.68
======== ======== ======== ======== ========
Weighted average shares outstanding:
Basic.......................................... 83,092 79,063 76,531 68,289 55,531
======== ======== ======== ======== ========
Diluted........................................ 93,228 85,822 78,925 68,289 63,967
======== ======== ======== ======== ========
ALLOCATED TO MOLECULAR ONCOLOGY STOCK(7,8):
Net loss......................................... $(28,832) $(19,107) $(19,578)
======== ======== ========
Net loss per share of Molecular Oncology
Stock--basic and diluted....................... $ (2.25) $ (3.81) $ (4.64)
======== ======== ========
Weighted average shares outstanding.............. 12,826 5,019 3,929
======== ======== ========
ALLOCATED TO SURGICAL PRODUCTS STOCK
(REVISED)(7,9,10):
Net loss......................................... $(20,514)
========
Net loss per share of Surgical Products
Stock--basic and diluted....................... $ (1.38)
========
Weighted average shares outstanding.............. 14,835
========
ALLOCATED TO TISSUE REPAIR STOCK(7):
Net loss......................................... $(30,040) $(40,386) $(45,984) $(42,315) $(22,030)
======== ======== ======== ======== ========
Net loss per share of Tissue Repair Stock--basic
and diluted.................................... $ (1.26) $ (1.99) $ (3.07) $ (3.38) $ (2.28)
======== ======== ======== ======== ========
Weighted average shares outstanding.............. 23,807 20,277 14,976 12,525 9,659
======== ======== ======== ======== ========
</TABLE>
CONSOLIDATED BALANCE SHEET DATA
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents, short- and long-term
investments................................ $ 652,990 $ 575,729 $ 246,341 $ 187,955 $326,236
Working capital.............................. 592,249 417,116 350,822 395,605 352,410
Total assets................................. 1,787,281 1,688,854 1,295,453 1,270,508 905,201
Long-term debt and convertible debt(11)...... 290,622 287,225 170,276 241,998 124,473
Stockholders' equity......................... 1,356,392 1,172,535 1,012,050 902,309 705,207
</TABLE>
GCS-4
<PAGE>
GENZYME CORPORATION CONSOLIDATED SELECTED FINANCIAL DATA (CONTINUED)
There were no cash dividends paid.
------------------------
(1) Cost of products sold for 1997 includes an $18.1 million charge in
connection with the discontinuance of our melatonin, bulk pharmaceuticals
and fine chemicals product lines. Cost of products sold for 1998 includes a
$14.8 million charge to write-down excess Ceredase-Registered Trademark-
enzyme inventory and a $10.4 million charge to write-down our Sepra products
inventory to net realizable value.
(2) Charges for in-process research and development were incurred in connection
with the following acquisitions:
- 1995--$14.2 million from the acquisition of a minority interest in IG
Laboratories, Inc.
- 1996--$106.4 million from the acquisition of Neozyme II Corporation and
$24.2 million from the acquisition of Deknatel Snowden Pencer, Inc.
- 1997--$7.0 million from the acquisition of PharmaGenics, Inc.
- 1999--$5.4 million from the acquisition of Peptimmune, Inc.
(3) Gain on affiliate sale of stock in 1999 represents the gain on our
investment in Genzyme Transgenics Corporation ("GTC") as a result of GTC's
various issuances of additional shares of its stock.
(4) Gain on sale of product line of $31.2 million in 1998 relates to the sale of
our research products business assets to Techne Corporation in July 1998.
Gain on sale of product line in 1999 consists of $7.5 million, representing
the payment of a note receivable that we received as partial consideration
for the sale of Genetic Design, Inc. to Laboratory Corporation of America in
1996.
(5) Other income in 1999 includes the receipt of a $14.4 million payment
associated with the termination of our agreement to acquire Cell Genesys,
Inc., net of acquisition related expenses.
(6) Until the distribution of Surgical Products Stock on June 28, 1999, Genzyme
Surgical Products' losses were included in the determination of income
allocated to Genzyme General Stock. Further, until the distribution of
Molecular Oncology Stock on June 18, 1997, Genzyme Molecular Oncology's
losses were included in the determination of income allocated to Genzyme
General Stock. If the shares of Surgical Products Stock initially issued on
June 28, 1999 were assumed to be outstanding since January 1, 1995, net
income allocated to Genzyme General Stock and weighted average shares
outstanding would have been as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net income allocated to Genzyme General
Stock.................................... $176,883 $170,909 $107,175 $ 13,811 $ 52,953
Weighted average shares outstanding:
Basic.................................... 83,092 79,063 76,531 68,289 55,531
Diluted.................................. 93,228 85,822 78,925 73,038 63,967
</TABLE>
(7) To determine earnings per share, we allocate Genzyme's earnings to each
series of our common stock based on the earnings attributable to that series
of stock. The earnings attributable to Genzyme General Stock is defined in
our charter as the net income or loss of Genzyme General determined in
accordance with generally accepted accounting principles and as adjusted for
tax benefits allocated to or from Genzyme General in accordance with our
management and accounting policies. Earnings attributable to Molecular
Oncology Stock, Surgical Products Stock and Tissue Repair Stock are defined
similarly and, as such, are based on the net income or loss of the
corresponding division.
GCS-5
<PAGE>
GENZYME CORPORATION CONSOLIDATED SELECTED FINANCIAL DATA (CONTINUED)
(8) We created Genzyme Molecular Oncology on June 18, 1997. Prior to this date,
the operations of Genzyme Molecular Oncology were included in the results of
Genzyme General. Net loss per share of Molecular Oncology Stock for 1997 is
calculated using the net loss allocated to Genzyme Molecular Oncology for
the period June 18, 1997 through December 31, 1997 and the weighted average
shares outstanding during the same period. Loss per share data is not
presented for Genzyme Molecular Oncology for the years ended December 31,
1995 and 1996, or for the period from January 1, 1997 to June 17, 1997, as
there were no shares of Molecular Oncology Stock outstanding.
(9) We created Genzyme Surgical Products on June 28, 1999. Prior to this date,
the operations of Genzyme Surgical Products were included in the operations
allocated to Genzyme General and, therefore, in the net income allocated to
Genzyme General Stock. Net loss per share of Surgical Products Stock for
1999 is calculated using the net loss allocated to Genzyme Surgical Products
for the period June 28, 1999 through December 31, 1999 and the weighted
average shares outstanding during the same period. Loss per share data is
not presented for Genzyme Surgical Products for the years ended
December 31, 1995, 1996, 1997 and 1998, as there were no shares of Surgical
Products Stock outstanding. If the shares of Surgical Products Stock
initially issued on June 28, 1999 were assumed to be outstanding since
January 1, 1995, net loss allocated to Surgical Products Stock and weighted
average shares outstanding would have been as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net loss allocated to Surgical Products
Stock...................................... $(48,037) $(49,856) $(29,740) $(44,313) $(9,273)
Weighted average shares outstanding--basic
and diluted................................ 14,800 14,800 14,800 14,800 14,800
</TABLE>
(10) The allocation of Genzyme's historical earnings has been revised to reflect
an allocation of Genzyme's earnings to each series of common stock actually
outstanding in periods prior to June 1999 and to each series of common
stock, including Surgical Products Stock, thereafter. See Note A. to the
consolidated financial statements.
(11) Long-term debt and convertible debt consists primarily of $218.0 million
and $118.0 million outstanding under a revolving credit facility in 1996 and
1997, respectively. Long-term debt and convertible debt in 1998 and 1999
consists primarily of $250.0 million in principal of 5 1/4% convertible
subordinated notes due June 2005.
GCS-6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF GENZYME CORPORATION AND SUBSIDIARIES'
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
This discussion contains forward-looking statements. These forward-looking
statements represent the expectations of our management as of the filing date of
this annual report. Actual results could differ materially from those
anticipated by the forward-looking statements due to the risks and uncertainties
described under the caption "Factors Affecting Future Operating Results" below.
You should consider carefully each of these risks and uncertainties in
evaluating our financial condition and results of operations.
We are a biotechnology company that develops innovative products and
services for significant unmet medical needs. We have four operating divisions:
- Genzyme General, which develops and markets:
- therapeutic products, with an expanding focus on products to treat
patients suffering from lysosomal storage disorders and other
specialty therapeutics;
- diagnostic products, with a focus on IN VITRO diagnostics; and
- other products and services, such as genetic testing services and
lipids and peptides for drug delivery.
- Genzyme Molecular Oncology, which is developing cancer products, with a
focus on therapeutic vaccines and angiogenesis inhibitors;
- Genzyme Surgical Products, which develops, manufactures and markets
surgical products for cardiovascular surgery and general surgery; and
- Genzyme Tissue Repair, which develops and markets biological products for
orthopedic injuries, such as cartilage damage, and severe burns.
In June 1997, we formed Genzyme Molecular Oncology by acquiring
PharmaGenics, Inc. and combining it with several of our ongoing programs in the
field of oncology.
In June 1999, we established Genzyme Surgical Products. The business of
Genzyme Surgical Products previously operated as a business unit of Genzyme
General. The discussion that follows reflects the results of operations as if
Genzyme Surgical Products had existed as a separate division of Genzyme for all
periods presented.
The greater segregation of assets, liabilities and earnings (losses)
resulting from the creation of Genzyme Molecular Oncology and Genzyme Surgical
Products is a trend that we do not expect to continue. As discussed below,
Genzyme Surgical Products and Genzyme Tissue Repair will be combined into
Genzyme Biosurgery upon the completion of the Biomatrix acquisition, reducing
the segregation of assets among our divisions and reducing the series of common
stock outstanding. As market or competitive conditions warrant, we may create
new series of tracking stock or change our earnings allocation methodology.
However, at the present time, we have no plans to do so.
We prepare the financial statements of Genzyme in accordance with generally
accepted accounting principles. We present financial information and accounting
policies specific to Genzyme in the accompanying consolidated financial
statements. Note A., "Summary of Significant Accounting Policies," to our
accompanying consolidated financial statements contains our accounting policies.
We have four series of common stock--Genzyme General Stock, Molecular
Oncology Stock, Surgical Products Stock and Tissue Repair Stock--which we refer
to as "tracking stock." Unlike typical common stock, each of our tracking stocks
is designed to track the financial performance of a specific subset of our
GCS-7
<PAGE>
business operations and its allocated assets, rather than operations and assets
of our entire company. The chief mechanisms intended to cause each tracking
stock to "track" the financial performance of each division are provisions in
our charter governing dividends and distributions. Under these provisions, our
charter:
- factors the assets and liabilities and income or losses attributable to a
division into the determination of the amount available to pay dividends
on the associated tracking stock; and
- requires us to exchange, redeem or distribute a dividend to the holders of
Molecular Oncology Stock, Surgical Products Stock, or Tissue Repair Stock
if all or substantially all of the assets allocated to those corresponding
divisions are sold to a third party (a dividend or redemption payment must
equal in value the net after-tax proceeds from the sale; an exchange must
be for Genzyme General Stock at a 10% premium to the exchanged stock's
average market price following the announcement of the sale.
To determine earnings per share, we allocate Genzyme's earnings to each
series of our common stock based on the earnings attributable to that series of
stock. The earnings attributable to each series of stock is defined in our
charter as the net income or loss of the corresponding division determined in
accordance with generally accepted accounting principles and as adjusted for tax
benefits allocated to or from the division in accordance with our management and
accounting policies. Our charter also requires that all income and expenses of
Genzyme be allocated among the divisions in a reasonable and consistent manner.
However, subject to fiduciary duties, our board of directors can, at its
discretion, change the methods of allocating earnings to each series of common
stock. We intend to allocate earnings using our current methods for the
foreseeable future. See "Earnings Allocations" below.
Because the earnings allocated to each series of stock are based on the
income or losses attributable to each corresponding division, we include
financial statements and management's discussion and analysis of Genzyme
Corporation and of each division to aid investors in evaluating Genzyme's
performance and the performance of each of its divisions.
While each tracking stock is designed to reflect a division's performance,
it is common stock of Genzyme Corporation and not of a division; each division
is not a company or legal entity, and therefore does not and cannot issue stock.
Consequently, holders of a series of tracking stock have no specific rights to
assets allocated to the corresponding division. Genzyme Corporation continues to
hold title to all of the assets allocated to each division and is responsible
for all of its liabilities, regardless of what we deem for financial statement
presentation purposes as allocated to any division. Holders of each tracking
stock, as common stockholders, are therefore subject to the risks of investing
in the businesses, assets and liabilities of Genzyme as a whole. For instance,
the assets allocated to each division are subject to company-wide claims of
creditors, product liability plaintiffs and stockholder litigation. Also, in the
event of a Genzyme liquidation, insolvency or similar event, holders of each
tracking stock would only have the rights of common stockholders in the combined
assets of Genzyme.
We provide separate financial statements for each of our divisions as well
as consolidated financial statements that include the consolidated results of
each of our divisions and our corporate operations taken as a whole. You should
read this discussion and analysis of our financial position and results of
operations in conjunction with those consolidated financial statements and
related notes, which are included in this annual report.
In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon
completion of the acquisition, we will form a new operating division, and the
assets allocated to Genzyme Surgical Products and Genzyme Tissue Repair will be
re-allocated to that new division. See "Subsequent Event" below.
GCS-8
<PAGE>
RESULTS OF OPERATIONS
The following discussion summarizes the key factors our management believes
are necessary for an understanding of our consolidated financial statements.
The components of our consolidated statements of operations are described in
the following table:
<TABLE>
<CAPTION>
99/98 98/97
INCREASE/(DECREASE) INCREASE/(DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ------------------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C>
Total revenues................ $772,288 $709,335 $608,841 9% 17%
Cost of products and service
sold........................ 231,781 259,662 253,317 (11)% 3%
Selling, general and
administrative.............. 242,797 215,203 200,476 13% 7%
Research and development
(including research and
development related to
contracts).................. 150,516 119,005 89,558 26% 33%
Amortization of intangibles... 24,674 24,334 17,245 1% 41%
Purchase of in-process
research and development.... 5,436 -- 7,000 N/A N/A
-------- -------- --------
Total operating costs and
expenses.................... 655,204 618,204 567,596 6% 9%
-------- -------- --------
Operating income.............. 117,084 91,131 41,245 28% 121%
Other income (expenses),
net......................... 844 11,306 (15,516) (93)% 173%
-------- -------- --------
Income before income taxes.... 117,928 102,437 25,729 15% 298%
Provision for income taxes.... (46,947) (39,870) (12,100) 18% 230%
-------- -------- --------
Net income.................... $ 70,981 $ 62,567 $ 13,629 13% 359%
======== ======== ========
</TABLE>
REVENUES
<TABLE>
<CAPTION>
99/98 98/97
INCREASE/(DECREASE) INCREASE/(DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ------------------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C>
Product revenue............... $683,482 $613,685 $529,927 11% 16%
Service revenue............... 79,448 74,791 67,158 6% 11%
-------- -------- --------
Total product and service
revenue..................... 762,930 688,476 597,085 11% 15%
Research and development
revenue..................... 9,358 20,859 11,756 (55)% 77%
-------- -------- --------
Total revenues................ $772,288 $709,335 $608,841 9% 17%
======== ======== ========
</TABLE>
GCS-9
<PAGE>
PRODUCT REVENUE
We derive product revenue from sales by Genzyme General of therapeutic,
diagnostic and other products, including Cerezyme-Registered Trademark- enzyme
and Ceredase-Registered Trademark- enzyme, and sales by Genzyme Surgical
Products of cardiovascular, general surgery and other products, including Sepra
Film-Registered Trademark- bioresorbable membrane.
<TABLE>
<CAPTION>
99/98 98/97
INCREASE/(DECREASE) INCREASE/(DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ------------------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C>
Genzyme General:
Therapeutics................ $488,705 $413,645 $332,712 18% 24%
Diagnostic products......... 57,971 65,683 66,288 (12)% (1)%
Other....................... 24,825 30,399 30,092 (18)% 1%
Genzyme Surgical Products:
Cardiovascular surgery
products.................. 77,966 74,545 79,560 5% (6)%
General surgery products.... 25,192 20,249 14,813 24% 37%
Other....................... 8,823 9,164 6,462 (4)% 42%
-------- -------- --------
Total product revenues........ $683,482 $613,685 $529,927 11% 16%
======== ======== ========
</TABLE>
1999 AS COMPARED TO 1998
Our increase in product revenue was largely due to:
- increased sales of Cerezyme-Registered Trademark- enzyme, which is a
therapy for the treatment of Gaucher disease; and
- increased sales of Sepra Film-Registered Trademark- bioresorbable membrane
and instruments for minimally invasive cardiac surgery.
The increase in sales of Cerezyme-Registered Trademark- enzyme in 1999 was
attributable to our identification of new Gaucher disease patients throughout
the world. We also sell Ceredase-Registered Trademark- enzyme for the treatment
of Gaucher disease, but we have successfully converted virtually all Gaucher
disease patients to a treatment regimen using Cerezyme-Registered Trademark-
enzyme. Our operations are highly dependent on sales of
Cerezyme-Registered Trademark- enzyme and a reduction in revenue from sale of
this product would adversely affect our results of operations. Revenue from
Cerezyme-Registered Trademark- enzyme would be impacted negatively if
competitors developed alternative treatments for Gaucher disease and the
alternative products gained commercial acceptance. We are aware of companies
that have initiated efforts to develop competitive products and other companies
may do so in the future. Information on the growth of sales of
Cerezyme-Registered Trademark- enzyme and Ceredase-Registered Trademark- enzyme
in 1999 and their relationship to our total product revenues for each year is
provided in the table below:
<TABLE>
<CAPTION>
99/98
INCREASE/(DECREASE)
1999 1998 % CHANGE
-------- -------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C>
Sales of Cerezyme-Registered Trademark- enzyme and
Ceredase-Registered Trademark- enzyme.............. $478,538 $411,060 16%
% of total product revenue........................... 70% 67%
</TABLE>
Sales of Sepra Film-Registered Trademark- bioresorbable membrane, which is
used to limit the incidence and severity of postoperative adhesions, increased
43% to $13.3 million in 1999 as compared to $9.3 million in 1998.
Cardiovascular surgery products include chest drainage and fluid management
systems, surgical closures, biomaterials, and instruments for conventional and
minimally invasive cardiac surgery. The
GCS-10
<PAGE>
increase in cardiovascular surgery product revenues in 1999 was primarily
attributable to increased sales of instruments for minimally invasive cardiac
surgery.
The increases in product revenue were partially offset by a decrease in
diagnostic products revenue for 1999 as compared to 1998, which reflects the
sale of the research products business to Techne Corporation in July 1998 and
immunochemistry product line to an operating unit of Sybron Laboratory Products
Corporation in July 1999. Diagnostic products revenue includes royalties on
product sales by Techne's biotechnology group.
1998 AS COMPARED TO 1997
Our increase in product revenue primarily due to:
- increased sales of Cerezyme-Registered Trademark- enzyme; and
- an 88% increase in sales of Sepra Film-Registered Trademark- bioresorbable
membrane from $4.9 million in 1997 to $9.3 million in 1998, primarily as a
result of increased market acceptance of the product.
The increase in product revenue for 1998 was partially offset by decreased
cardiovascular surgery product revenues as a result of a decrease in sales of
fluid management products, which were $39.8 million in 1998, compared to
$42.3 million in 1997. The decrease in fluid management product sales was due to
the termination of a group-purchasing contract in 1997, the impact of which was
realized in 1998.
For both 1998 and 1997, our product revenue consisted mainly of sales of
Cerezyme-Registered Trademark- enzyme and Ceredase-Registered Trademark- enzyme
as indicated in the table below:
<TABLE>
<CAPTION>
98/97
INCREASE/(DECREASE)
1998 1997 % CHANGE
-------- -------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C>
Sales of Cerezyme-Registered Trademark- enzyme and
Ceredase-Registered Trademark- enzyme.............. $411,060 $332,712 24%
% of total product revenue........................... 60% 54%
</TABLE>
SERVICE REVENUE
We derive service revenue from four principal sources:
- genetic testing services performed by Genzyme General;
- Genzyme Tissue Repair's Carticel-Registered Trademark- chondrocytes for
the treatment of cartilage damage;
- Genzyme Tissue Repair's Epicel-TM- skin grafts for the treatment of severe
burns; and
- genomics services using Genzyme Molecular Oncology's SAGE-TM- gene
expression technology.
<TABLE>
<CAPTION>
99/98 98/97
INCREASE/(DECREASE) INCREASE/(DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ------------------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C>
Genzyme General............... $ 57,223 $ 55,445 $ 55,835 3% (1)%
Genzyme Molecular Oncology.... 1,920 2,229 467 (14)% 377%
Genzyme Tissue Repair......... 20,305 17,117 10,856 19% 58%
-------- -------- --------
Total service revenue......... $ 79,448 $ 74,791 $ 67,158 6% 11%
======== ======== ========
</TABLE>
GCS-11
<PAGE>
1999 AS COMPARED TO 1998
Our service revenue increased during 1999, as compared to 1998, as a result
of increases in the provision of genetic testing services as well as increased
sales of Carticel-Registered Trademark- chondrocytes and Epicel-TM- skin grafts.
The increase in sales of Carticel-Registered Trademark- chondrocytes was a
result of continued increases in the numbers of patients treated and surgeons
trained as well as an increase in the number of insurance reimbursement
approvals. Sales of genomics services decreased during this period as a result
of a decline in the provision of genomics services using Genzyme Molecular
Oncology's SAGE-TM- gene expression technology.
1998 AS COMPARED TO 1997
Our service revenue during 1998 increased from 1997 primarily as a result of
increased sales of Carticel-Registered Trademark- chondrocytes and Epicel-TM-
skin grafts. Service revenues for genetic testing in 1998 were level with 1997.
The growth in sales of Carticel-Registered Trademark- chondrocytes is primarily
attributable to increased acceptance by orthopedic surgeons and insurance
companies, most notably following the issuance by the U.S. Food and Drug
Administration (FDA) of a biologics license to Genzyme Tissue Repair for
Carticel-Registered Trademark- chondrocytes. The increase in sales of Epicel-TM-
skin grafts was due to penetration of Epicel-TM- skin grafts into the
catastrophic burn market. The increased market share resulted from increased
surgeon awareness and from product improvements designed to ease the surgical
procedure.
INTERNATIONAL PRODUCT AND SERVICE REVENUE
A substantial portion of our revenue was generated outside of the United
States, as described in the following table. Most of this revenue was
attributable to sales of Cerezyme-Registered Trademark- enzyme. The following
table shows international product and service revenue:
<TABLE>
<CAPTION>
99/98 98/97
INCREASE/(DECREASE) INCREASE/(DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ------------------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C>
Total international product
and service revenue......... $311,080 $281,744 $220,592 10% 28%
======== ======== ========
% of total product and service
revenue..................... 41% 41% 37%
</TABLE>
MARGINS
<TABLE>
<CAPTION>
99/98 98/97
INCREASE/(DECREASE) INCREASE/(DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ------------------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C>
Product margin................ $501,145 $402,609 $323,899 24% 24%
% of product revenue........ 73% 66% 61%
Service margin................ 30,004 26,205 19,869 14% 32%
% of service revenue........ 38% 35% 30%
Total gross margin............ 531,149 428,814 343,768 24% 25%
% of total product and
service revenues.......... 70% 62% 58%
</TABLE>
We provide a broad range of healthcare products and services. As a result,
our gross margin varies significantly based on the category of product or
service. Sales of therapeutic products, including Cerezyme-Registered Trademark-
enzyme, result in higher margins than sales of surgical or diagnostic products.
GCS-12
<PAGE>
During 1998, we recorded a $25.2 million charge to cost of products sold.
The components of this charge were:
- a $14.8 million charge related to the operations of Genzyme General to
write down excess inventory used to make Ceredase-Registered Trademark-
enzyme. We took this charge following our determination that, based on the
status of our efforts to convert Gaucher disease patients to a treatment
regimen using Cerezyme-Registered Trademark- enzyme, our existing supply
of Ceredase-Registered Trademark- enzyme was sufficient to meet estimated
patient needs.
- a $10.4 million charge related to the operations of Genzyme Surgical
Products to write down our inventory of Sepra products to net realizable
value. The Sepra products are our line of products and product candidates
designed to limit post-operative adhesions. During the third quarter of
1998, we revised our forecasted sales of Sepra products and, in accordance
with our policy, analyzed the Sepra products inventory to determine
whether the carrying value exceeded the net realizable value. The revised
forecast showed slower sales growth as well as higher manufacturing and
sales and marketing costs than originally expected. In addition, our
inventory on-hand had a relatively high cost per unit because production
was significantly less than originally planned. As a result, in the third
quarter of 1998, we recorded a charge to cost of products sold to write
down our Sepra products inventory to net realizable value.
Without the effect of this charge, our product margin for 1998 would have
been 70% and our total gross margin during that period would have been 66%.
During 1997, we recorded a charge of $5.5 million to cost of products sold
allocated to Genzyme Surgical Products relating to the manufacture of
Sepracoat-TM- coating solution. We took this charge after an advisory panel of
the FDA recommended against granting market approval for this product in 1997.
This product is sold outside the United States.
Without the effect of this charge, our product margin for 1997 would have
been 62% and our total gross margin during that period still would have been
58%.
Excluding the charges described above, the increases in product margin and
total gross margin during both periods were a result of increased efficiency and
process improvements in manufacturing as well as increased sales of
Cerezyme-Registered Trademark- enzyme.
Our service margin also increased during both periods. These increases were
attributable to:
- an increase in sales of DNA and cancer testing services;
- increased sales of Carticel-Registered Trademark- chondrocytes; and
- a reduction in labor, materials and production costs for
Carticel-Registered Trademark- chondrocytes and Epicel-TM- skin grafts.
OPERATING EXPENSES
1999 AS COMPARED TO 1998
The increase in selling, general and administrative expense in 1999 as
compared to 1998 was related to:
- increased expenditures to support the increased sales of
Cerezyme-Registered Trademark- enzyme;
- costs associated with the market introduction of
Thyrogen-Registered Trademark- hormone in January 1999;
- increased staffing to support the growth in several of Genzyme General's
product lines;
GCS-13
<PAGE>
- a $3.0 million increase to the reserve for doubtful accounts in Genzyme
General's genetic testing business as a result of a comprehensive review
of contract receivable and self-pay receivables during 1999; and
- an increase in professional service fees and higher fringe benefit
expenses and costs in connection with the creation of Genzyme Surgical
Products as a separate division of Genzyme.
The increase in selling, general and administrative expense in 1999 as
compared to 1998 was partially offset by the following:
- reduced legal costs in 1999 associated with our prosecution and
maintenance of Genzyme Molecular Oncology's intellectual property
portfolio; and
- a one-time charge taken in 1998 to write off costs incurred in connection
with a public offering of Molecular Oncology Stock that was not completed.
The increase in research and development expense in 1999 as compared to 1998
was a result of:
- increased costs for the program to develop transgenic recombinant human
antithrombin III, which is conducted through our consolidated joint
venture, ATIII LLC, discussed in "--Minority Interest" below;
- increased spending on Genzyme General's program to develop Fabrazyme-TM-
enzyme for the treatment of Fabry disease;
- increased spending on Genzyme General's cell and gene therapy programs;
- the initiation of a clinical trial for Genzyme Molecular Oncology's
melanoma tumor vaccine product;
- the increase in the number of research personnel and related expenses
required to support the continued development of Genzyme Molecular
Oncology's cancer vaccine and angiogenesis inhibitor programs;
- increased spending for Genzyme Surgical Products' cell and gene therapy
programs and the initiation of several clinical trials for its products;
- increased spending on the development programs for Genzyme Surgical
Products' surgical instruments and devices;
- a $2 million milestone payment made by Genzyme Surgical Products to a
collaborator in June 1999.
The increase in research and development expense in 1999 as compare to 1998
was partially offset by the following:
- Genzyme Tissue Repair's termination of its TGF-beta and other research and
development programs; and
- a $1.7 million charge taken by Genzyme Surgical Products in the third
quarter of 1998 to write off certain costs related to equipment that it
used to manufacture the Sepra products.
In the fourth quarter of 1998, Genzyme General began amortizing a milestone
payment that it made to GelTex Pharmaceuticals, Inc. upon FDA approval of
Renagel-Registered Trademark- capsules. As a result, amortization of intangibles
increased slightly during 1999 as compared to 1998.
In 1999, we acquired Peptimmune, Inc., a privately-held company whose lead
development program was a preclincal research stage program focused on a
treatment for pemphigus vulgaris, a rare genetic disease. Because the technology
acquired had narrow utility and no application to our ongoing programs, we
considered it to have no alternative future use. As a result, we allocated
$5.4 million of the purchase price to in-process technology. We recorded this
amount as a one-time charge to operations in 1999. We
GCS-14
<PAGE>
will record our expenses related to the development of the acquired technology
as research and development expense until the time at which it reaches
technological feasibility. Given the inherent risk in developing early-stage
biotechnology products, we may never demonstrate the feasibility of that
technology. See "--Factors Affecting Future Operating Results" below. In
addition, given the history of consolidation in the biotechnology industry, we
expect that we will complete additional acquisitions in the future. Some of
these acquisitions will result in a further investment by us in in-process
technology.
1998 AS COMPARED TO 1997
The increase in selling, general and administrative expense in 1998 as
compared to 1997 was related to:
- increased sales and marketing costs related to the product launch of
Thyrogen-Registered Trademark- hormone;
- increased expenditures to support the increased sales of
Cerezyme-Registered Trademark- enzyme;
- increased administrative support needed to support the growth of Genzyme
Molecular Oncology; and
- a one-time charge taken in the third quarter of 1998 to write off costs
incurred in connection with a public offering of Molecular Oncology Stock
that was not completed.
The increase in selling, general and administrative expense in 1998 as
compared to 1997 was partially offset by the following:
- a one time charge of $1.9 million in 1997 related to the manufacture and
sale of Sepracoat-TM- coating solution; and
- efforts within Genzyme Tissue Repair to streamline operations.
The increase in research and development expense in 1998 as compared to 1997
was attributable to the following:
- $12.0 million in additional costs resulting from the consolidation of the
results of ATIII LLC, for which there were no comparable amounts in 1997;
- an increase in research personnel and related expenses to support Genzyme
Molecular Oncology's SAGE-TM-, gene therapy and small molecule programs;
- higher expenditures in Genzyme Surgical Products' cardiovascular gene and
cell therapy scientific research and additional clinical trials initiated
for the Sepra products; and
- a $1.7 million charge taken by Genzyme Surgical Products in the third
quarter of 1998 to write off certain costs related to equipment that it
used to manufacture the Sepra products.
GCS-15
<PAGE>
OTHER INCOME AND EXPENSES
<TABLE>
<CAPTION>
99/98 98/97
INCREASE/(DECREASE) INCREASE/(DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ------------------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C>
Equity in net loss of
unconsolidated affiliates... $(42,696) $(29,006) $(12,258) 47% 137%
Gain on affiliate sale of
stock....................... 6,683 2,369 -- 182% N/A
Minority interest............. 3,674 4,285 -- (14)% N/A
Gain on sale of investments in
equity securities........... 1,963 3,391 -- (42)% N/A
Gain on sale of product
line........................ 8,018 31,202 -- (74)% N/A
Charge for impaired
investments................. (5,712) (3,397) -- 68% N/A
Other......................... 14,527 -- (2,000) N/A N/A
Investment income............. 36,158 25,055 11,409 44% 120%
Interest expense.............. (21,771) (22,593) (12,667) (4)% 78%
-------- -------- --------
Total other income (expense),
net......................... $ 844 $ 11,306 $(15,516) (93)% 171%
======== ======== ========
</TABLE>
EQUITY IN NET LOSS OF UNCONSOLIDATED AFFILIATES
At December 31, 1999, we owned approximately 33% of the common stock of
Genzyme Transgenics Corporation, which we refer to as GTC. We record in net loss
of unconsolidated affiliates our portion of its results. We also record the
results of the following joint ventures in net loss of unconsolidated
affiliates:
<TABLE>
<CAPTION>
JOINT VENTURE PARTNER(S) EFFECTIVE DATE PRODUCT/INDICATION GENZYME DIVISION
------------- ---------- -------------- ------------------ ----------------
<S> <C> <C> <C> <C>
RenaGel LLC GelTex Pharmaceuticals, June 1997 Renagel-Registered Trademark- Genzyme General
Inc. capsules reduction of serum
phosphorus in patients with
end-stage renal disease
BioMarin/ Genzyme LLC BioMarin Pharmaceutical September 1998 Aldurazyme-TM- enzyme for the Genzyme General
Inc. treatment of
mucopolysaccharidosis-I
Pharming/ Genzyme LLC Pharming Group, N.V. October 1998 Human alpha-glucosidase for the Genzyme General
treatment of Pompe disease
Diacrin/Genzyme LLC Diacrin, Inc. October 1996 Products using porcine fetal cells Genzyme Tissue
for the treatment of Parkinson's Repair (until May
and Huntington's diseases 1999); Genzyme
General (after May
1999)
StressGen/ Genzyme StressGen July 1997 Stress gene therapies for the Genzyme Molecular
LLC(1) Biotechnologies Corp.; treatment of cancer Oncology
Canadian Medical
Discoveries Fund Inc.
(until October 1999)
</TABLE>
------------------------------
(1) StressGen/Genzyme LLC was dissolved in December 1999.
Our equity in net loss of unconsolidated affiliates increased as a result
of:
- increased losses from our joint ventures with GelTex, BioMarin, Pharming
and Diacrin in both periods; and
GCS-16
<PAGE>
- a $1.0 million charge incurred in connection with our repurchase of
one-half of the Canadian Medical Discoveries Fund's interest in
StressGen/Genzyme LLC in October 1999.
These increases were offset in part by decreased losses from GTC for both
periods.
GAIN ON AFFILIATE SALE OF STOCK
GTC, an unconsolidated affiliate, periodically issues additional shares of
its common stock. As described in Note A to our consolidated financial
statements, it is our policy to record gains on the issuance of stock by our
subsidiaries and affiliates. Accordingly, we recorded a $6.7 million gain in
1999 and a $2.4 million gain in 1998. The issuance of additional shares by GTC
in 1999 reduced our ownership interest in GTC from 40% to 33%. The issuance of
additional shares by GTC in 1998 reduced our ownership interest in GTC from 43%
to 40%.
MINORITY INTEREST
In 1998, we formed ATIII LLC, a joint venture with GTC for the development
and commercialization of transgenic recombinant human antithrombin III. We are
funding 70% of the first $33.0 million in development costs, excluding facility
costs, under this program and 50% of all development costs thereafter. We will
pay 50% of all new facility costs to be incurred by ATIII LLC. All profits of
ATIII LLC will be split equally; losses are allocated based on the amount of
funding provided by each venturer. Because our combined direct and indirect
interest in ATIII LLC is in excess of 50%, we consolidate the results of ATIII
LLC and record GTC's portion of the ATIII LLC's losses as minority interest.
ATIII LLC had losses of $12.2 million and $12.0 million in 1999 and 1998,
respectively, of which GTC's portion was $3.7 million and $4.3 million,
respectively.
GAIN ON SALE OF INVESTMENTS IN EQUITY SECURITIES
We recorded gains of $2.0 million in January 1999 and $3.4 million in
December 1998 upon our sales of shares of Techne Corporation common stock that
we received when we sold our research products business to Techne.
GAIN ON SALE OF PRODUCT LINE
In July 1999, we recorded a gain of $0.5 million in connection with the sale
of our immunochemistry product lines to an operating unit of Sybron Laboratory
Products Corporation.
In June 1999, we recorded a gain of $7.5 million representing the payment of
a note receivable that we received as partial consideration for the sale of
Genetic Design, Inc. in 1996. We had previously fully reserved the amount of
this note because we considered the repayment of the note to be uncertain.
In July 1998, we recorded a gain of $31.2 million in connection with the
sale of our research products business to Techne.
CHARGE FOR IMPAIRED INVESTMENTS
We recorded a $5.7 million charge in 1999 in connection with our investments
in the common stock of Pharming Group N.V. and IntegraMed America, Inc., and a
$3.4 million charge in 1998 in connection with our investment in the common
stock of Celtrix Pharmaceuticals, Inc. because we considered the decline in the
value of those investments to be other than temporary.
In connection with these assessments, we concluded that substantial evidence
existed that the value of the investments would recover to at least our cost.
This included continued positive progress in the issuers' scientific programs,
ongoing activity in our collaborations with the issuers, and a lack of any
substantial company-specific adverse events causing the declines in value.
However, given the significance and
GCS-17
<PAGE>
duration of the declines as of the end of the applicable quarter, we concluded
that it was unclear over what period such price recoveries would take place and
that, accordingly, the positive evidence suggesting that the investments would
recover to at least our purchase price was not sufficient to overcome the
presumption that the current market price was the best indicator of the value
each of these investments.
OTHER
In December 1999, we recorded a net gain of $14.4 million upon receipt of a
payment associated with the termination of our agreement to acquire Cell
Genesys, Inc.
INVESTMENT INCOME
Our investment income for both periods increased because our cash balances
were higher. The increase in cash balances was attributable to our issuance in
May 1998 of $250.0 million in principal amount of 5 1/4% convertible
subordinated notes and increased cash generated from operations.
INTEREST EXPENSE
Our interest expense increased in both periods primarily as a result of the
issuance of the 5 1/4% convertible subordinated notes. The increase in both
periods was partially offset due to Genzyme Tissue Repair completing the
accretion of the conversion feature of the 6% convertible subordinated note in
the second quarter of 1998. During 1998, the holder of this note converted
$0.6 million of principal into shares of Tissue Repair Stock. During 1999, the
holder of this note converted the remaining principal amount of $12.4 million
into shares of Tissue Repair Stock.
TAX PROVISION
<TABLE>
<CAPTION>
99/98 98/97
INCREASE/(DECREASE) INCREASE/(DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ------------------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C>
Provision for income taxes.... $(46,947) $(39,870) $(12,100) 18% 230%
Net tax rate.................. 40% 39% 47%
</TABLE>
Our tax rates for all periods vary from the U.S. statutory tax rate as a
result of our:
- provision for state income taxes;
- use of a foreign sales corporation;
- nondeductible amortization of intangibles;
- use of tax credits; and
- share of losses of unconsolidated affiliates.
EARNINGS ALLOCATIONS
Genzyme allocates its earnings to each of our series of common stock based
on the earnings attributable to that series of stock. The earnings attributable
to each series of stock is defined in our charter as the net income or loss of
the corresponding division determined in accordance with generally accepted
accounting principles and as adjusted for tax benefits allocated to or from the
division in
GCS-18
<PAGE>
accordance with our management and accounting policies. The earnings allocated
to each series of common stock are indicated in the table below (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Earnings allocated to:
Genzyme General Stock..................................... $149,630 $121,053 $ 77,435
Molecular Oncology Stock.................................. (28,832) (19,107) (19,578)
Surgical Products Stock................................... (20,514) -- --
Tissue Repair Stock....................................... (30,040) (40,386) (45,984)
</TABLE>
In connection with the creation of Genzyme Surgical Products as a separate
division and the distribution of Surgical Products Stock on June 28, 1999, we
modified the way that we allocate income and losses to our series of stock.
Through June 27, 1999, the operations of Genzyme Surgical Products were
included in Genzyme General, and the losses of Genzyme Surgical Products were
allocated to Genzyme General Stock. Since June 28, 1999, the losses of Genzyme
Surgical Products were no longer included in the determination of income
allocated to Genzyme General Stock. This change in the methodology of allocating
income or losses has resulted in an increase in the income allocated to Genzyme
General Stock that is not due to operational changes or new business. Subsequent
to the creation of Genzyme Surgical Products, pursuant to the Company's
management and accounting policies, tax benefits generated by Genzyme Surgical
Products continued to be allocated to Genzyme General Stock.
From January 1, 1999 through June 27, 1999, the net loss of Genzyme Surgical
Products of $27.5 million was allocated to Genzyme General Stock. From June 28,
1999 through December 31, 1999, the net loss of Genzyme Surgical Products of
$20.5 million was allocated to Surgical Products Stock and excluded from income
allocated to Genzyme General Stock. As a result of this change in allocation
methodology, income allocated to Genzyme General Stock in 1999 was $20.5 million
(or 16%) higher than what would have been allocated had Genzyme Surgical
Products remained a part of Genzyme General.
If the shares of Surgical Products Stock initially issued on June 28, 1999
were assumed to be outstanding since January 1, 1997, net income allocated to
Genzyme General Stock, net loss allocated to Surgical Products Stock and
weighted average shares outstanding would have been as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Genzyme General:
Net income allocated to Genzyme General Stock............. $176,883 $170,909 $107,175
Weighted average shares outstanding:
Basic................................................... 83,092 79,063 76,531
Diluted................................................. 93,228 85,822 78,925
Genzyme Surgical Products:
Net loss allocated to Surgical Products Stock............. $(48,037) $(49,856) $(29,740)
Weighted average shares outstanding--basic and diluted 14,800 14,800 14,800
</TABLE>
As noted above, the tax benefits associated with the losses of Genzyme
Surgical Products for the period from June 28, 1999 to December 31, 1999, which
amounted to $6.9 million, continued to be allocated to Genzyme General Stock.
Our management and accounting policies provide that, if as of the end of any
fiscal quarter, a division can not use any projected annual tax benefit
attributable to it to offset or reduce its current or deferred income tax
expense, we may allocate the tax benefit to other divisions in proportion to
their taxable income without any compensating payments or allocation to the
division
GCS-19
<PAGE>
generating the benefit. Tax benefits allocated to Genzyme General, which are
included in earnings attributable to Genzyme General Stock, are as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Tax benefits allocated from:
Genzyme Molecular Oncology................................ $ 7,812 $ 3,527 $ 2,755
Genzyme Surgical Products................................. 16,128 17,936 10,112
Genzyme Tissue Repair..................................... 10,866 16,394 17,666
-------- -------- --------
Total................................................... $ 34,806 $ 37,857 $ 30,533
======== ======== ========
</TABLE>
These tax benefits represent 23%, 31% and 39% of earnings allocated to
Genzyme General Stock in 1999, 1998 and 1997, respectively. The amount of tax
benefits allocated to Genzyme General fluctuate based on the results of Genzyme
Molecular Oncology, Genzyme Surgical Products and Genzyme Tissue Repair. If the
losses of those divisions decline, as they are expected to, then the tax
benefits allocated to Genzyme General will also decline.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, we had cash, cash-equivalents, and short- and
long-term investments of $653.0 million, an increase of $77.3 million from
December 31, 1998.
We generated $204.0 million in cash from our operations in 1999.
Our investing activities used $182.2 million in cash in 1999. These
activities generated:
- $11.1 million from the sale of Techne common stock;
- $8.4 million from the payment of a note issued in connection with our sale
of Genetic Design;
- $5.0 million from the sale of our immunochemistry product lines; and
- $0.9 million from the distribution of cash from StressGen/Genzyme LLC upon
the joint venture's dissolution.
These activities used:
- $70.6 million for net purchases of investments;
- $57.7 million to fund capital expenditures;
- $40.0 million to fund our investments in joint ventures;
- $6.5 million to fund our acquisition of Peptimmune;
- $10.0 million to make a milestone payment to GelTex upon the first
anniversary of FDA approval of Renagel-Registered Trademark- capsules;
- $6.6 million to purchase shares of GTC's preferred stock;
- $10.0 million to purchase shares of BioMarin common stock;
- $3.4 million to purchase shares of Genovo, Inc. common stock; and
- $4.0 million to purchase shares of Focal Inc. common stock.
In 1999, we received $60.0 million in cash from employee stock plans and
borrowed $5.0 million under a bank credit facility. In 1999, we used
$85.1 million in cash to repay debt and capital lease obligations.
In 1999, we refinanced our $225 million revolving credit facility with a
$50.0 million revolving credit facility that matures in November 2000 and a
$100.0 million revolving credit facility that matures in
GCS-20
<PAGE>
November 2002. At December 31, 1999, $23.0 million was outstanding under the
credit facility, of this amount, we have allocated $18.0 million to Genzyme
Tissue Repair and $5.0 million to Genzyme Molecular Oncology. Amounts borrowed
under this revolving credit facility bear interest at a floating rate based upon
an applicable margin above either the prime rate announced by Fleet National
Bank or the London InterBank Offered Rate. We must repay all borrowings under
this facility no later than November 12, 2002.
We believe that our available cash, investments and cash flow from
operations will be sufficient to fund our planned operations and capital
requirements for the foreseeable future. Although we currently have substantial
cash resources and positive cash flow, we intend to use substantial portions of
our available cash for:
- product development and marketing;
- expanding facilities;
- working capital; and
- strategic business initiatives.
Our cash reserves will be further reduced to pay principal and interest on
the following debt:
- $250.0 million in principal under our 5 1/4% convertible subordinated
notes due June 2005, which are convertible into Genzyme General Stock,
Molecular Oncology Stock and Surgical Products Stock;
- $23.0 million under a revolving credit facility with a group of commercial
banks due November 12, 2002. Of this amount, we have allocated
$18.0 million to Genzyme Tissue Repair and $5.0 million to Genzyme
Molecular Oncology; and
- $21.2 million in principal under our 5% convertible subordinated
debentures due August 2003, which are convertible into Genzyme General
Stock.
If we use cash to pay or redeem this debt, including the interest due on it,
our cash reserves will be diminished.
In addition, if we exercise our option to purchase the limited partnership
interests in Genzyme Development Partners, L.P. and use cash to pay all or a
portion of the purchase price, our cash resources will be diminished. See Note
M., "Research and Development Contracts," to the accompanying consolidated
financial statements. We currently intend to provide approximately $6.0 million
of funding to GDP for the Sepra programs through 2000, based on the 2000 budget
for the programs. Future funding commitments for the Sepra development programs
will be evaluated on an annual basis.
In March 2000, we entered into an agreement to acquire Biomatrix, Inc. The
consideration for the proposed acquisition consists of shares of a new series of
our common stock and up to approximately $245 million in cash, allocated at the
option of Biomatrix stockholders. To the extent we use cash to complete this
acquisition, our cash reserves will be diminished.
To satisfy these and other commitments, we may have to obtain additional
financing. We cannot guarantee that we will be able to obtain any additional
financing, extend any existing financing arrangement, or obtain either on
favorable terms.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133, as
amended by SFAS 137, is effective for our fiscal year beginning January 1, 2001.
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that we recognize all
derivative instruments as either assets or liabilities on our
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balance sheets and measure those instruments at fair value. We are currently
assessing the effects of adopting SFAS 133 and have not yet made a determination
of the impact SFAS 133 will have on our consolidated financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB 101") which summarizes the staff's
view in applying generally accepted accounting principles to selected revenue
recognition issues. SAB 101 will be effective beginning October 1, 2000. We are
currently assessing the impact of SAB 101 on our revenue recognition policy.
EURO--THE NEW EUROPEAN CURRENCY
On January 1, 1999, eleven of the fifteen member countries of the European
Union established fixed conversion rates between their existing sovereign
currencies and the Euro and adopted the Euro as their common legal currency. The
Euro trades on currency exchanges and is available for non-cash transactions.
These participating countries now issue sovereign debt exclusively in Euros, and
have redenominated their outstanding sovereign debt. These countries no longer
control their own monetary policies by directing independent interest rates for
their legacy currencies. Instead, the authority to direct monetary policy,
including money supply and official interest rates for the Euro, is exercised by
the new European Central Bank.
The legacy currencies of these 11 countries are scheduled to remain legal
tender in those countries as denominations of the Euro until January 1, 2002.
Until that date, public and private parties may pay for goods and services using
either the Euro or the participating country's legacy currency on a "no
compulsion, no prohibition" basis.
We have formed committees to address the business implications of the Euro
conversion, communicate information about the conversion throughout the
organization, create global coordination among functional areas and address
specific accounting, treasury and tax issues relating to the Euro. Our
management believes that the Euro conversion will not affect any of our
outstanding foreign exchange forward contracts, or any other material commercial
contracts. Similarly, our management does not foresee any increased currency
exchange rate risk as a result of the Euro conversion.
We are assessing whether there are any long term competitive implications of
the Euro conversion. While no material risks have been identified to date,
individual European governments may pressure us to have consistent European
pricing, and individual customers and distributors in Europe may choose to begin
purchasing products in the country where the Euro price is lowest.
Because the Internal Revenue Service has not yet issued final regulations
regarding the Euro, no assessment can be made as to the tax consequences of the
conversion at this time. If the temporary regulations currently in place are
adopted in their entirety, we believe that there will be no material tax
consequences of the conversion.
Because our existing accounting and finance software is currently able to
use Euro-based accounts, we believe that the cost of upgrading software and
other information systems for the conversion will be immaterial.
YEAR 2000
Many computer systems and other equipment with embedded chips or processors
experience problems handling dates beyond the year 1999. As a result, older
programs may experience operating difficulties that cause date-sensitive
transaction errors unless they are modified or upgraded to adequately address
the problem.
GCS-22
<PAGE>
We conducted a Year 2000 compliance program intended to identify and
minimize our exposure to Year 2000 problems. The compliance program was a
coordinated effort conducted by each of our divisions, business units and
departments using our own MIS personnel. The program involved four phases:
- conducting an inventory of our Year 2000 issues;
- prioritizing identified systems, programs and equipment based on
materiality to our operations;
- assessing Year 2000 compliance; and
- resolving Year 2000 issues through upgrades, replacements or repairs.
As of the date of this annual report, we have not experienced any material
adverse effects on our business, results of operations or financial condition as
a result of the Year 2000 issue.
In 1999, we also conducted a survey of third parties that we consider
critical to our business about their Year 2000 readiness. Based on the results
of this survey, we believe that our critical suppliers and distributors have
successfully transitioned into the year 2000 and we are not presently aware of
any third party Year 2000 problems that could have a significant impact on our
business.
We will continue to monitor our operations and the operations of third
parties critical to our operations for potential Year 2000 problems. However, we
do not anticipate that we will discover any future Year 2000 issues that will
have a material effect on our business, results of operations or financial
condition.
As of March 23, 2000, total costs incurred in connection with our Year 2000
compliance program were approximately $1.2 million and were funded through
operations.
MARKET RISK
We are exposed to potential loss from exposure to market risks represented
principally by changes in interest rates, foreign exchange rates, and equity
prices. At December 31, 1999 we held various derivative contracts in the form of
foreign exchange forwards. The derivatives contain no leverage or option
features. We also held a number of other financial instruments, including
investments in marketable securities, and had balances outstanding under several
debt securities.
INTEREST RATE RISK
We are exposed to potential loss due to changes in interest rates. The
principal interest rate exposure is to changes in domestic interest rates.
Investments with interest rate risk include short-term deposits with financial
institutions, and short-term and long-term investments in marketable securities.
Debt with interest rate risk includes fixed rate convertible debt and borrowings
under a credit facility.
To estimate the potential loss due to changes in interest rates we performed
a sensitivity analysis for a one-day horizon. In order to estimate the potential
loss, we used an adverse change in interest rates of 100 basis points across the
yield curve at year-end. We used the following assumptions in preparing the
sensitivity analysis:
- convertibles that are "in-the-money" at year end are considered equity
securities and are excluded;
- convertibles that are "out-of-the-money" at year end are treated as fixed
rate debt securities and we assumed we will repay the principal amount in
full at maturity and we ignored the exercise of embedded equity option;
and
- financial instruments contain no other call or leverage features material
to our analysis.
On this basis, we estimate the potential loss in fair value from changes in
interest rates to be $3.1 million, virtually all of which is attributable to
Genzyme General.
GCS-23
<PAGE>
The estimate of potential loss does not include a separate determination of
potential losses due to changes in credit spreads. Our investments are
investment grade securities and deposits are with investment grade financial
institutions. We believe that the realization of losses due to changes in credit
spreads is unlikely. The potential loss estimated above on all market risk
sensitive instruments reflects a fair value loss on debt offset by a fair value
loss on assets. We expect to hold our debt to maturity or conversion, whichever
is sooner. Therefore, the realization of the potential loss on debt obligations
is unlikely.
FOREIGN EXCHANGE RISK
As a result of our worldwide operations, we face exposure to adverse
movements in foreign currency exchange rates, primarily to the Euro and its
component currencies, British pounds and Japanese yen. These exposures are
reflected in market risk sensitive instruments, including foreign currency
receivables and payables and foreign exchange forward contracts. During 1999,
our risk management strategy for foreign exchange exposure periodically included
the use of forward contracts. As of December 31, 1999, we estimate the potential
loss in fair value of the forward contracts due to a 10% change in exchange
rates to be $2.1 million, virtually all of which is attributable to Genzyme
General.
EQUITY PRICE RISK
We hold investments in a limited number of domestic and European equity
securities, substantially all of which are allocated to Genzyme General. We
estimate the potential loss in fair value due to a 10% decrease in equity prices
of each security held at year-end to be $8.9 million. This estimate assumes no
change in foreign exchange rates from year-end spot rates. The increase in
potential equity risk is largely explained by the fact that the size of our
portfolio has increased from a market value of $51 million to $96 million.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The future operating results of Genzyme Corporation and its subsidiaries
could differ materially from the results described above due to the following
risks and uncertainties, which relate to us generally and affect all of our
operating divisions.
A REDUCTION IN REVENUES FROM SALES OF PRODUCTS THAT TREAT GAUCHER DISEASE WOULD
HAVE AN ADVERSE EFFECT ON OUR BUSINESS.
We generate a majority of our product revenues from sales of
enzyme-replacement products for patients with Gaucher disease. We entered this
market in 1991 with Ceredase-Registered Trademark- enzyme. Because production of
Ceredase-Registered Trademark- enzyme was subject to supply constraints, we
developed Cerezyme-Registered Trademark- enzyme, a recombinant form of the
enzyme. Recombinant technology uses specially engineered cells to produce
enzymes, or other substances, by inserting into the cells of one organism the
genetic material of a different species. In the case of
Cerezyme-Registered Trademark- enzyme, Chinese hamster ovary cells are
engineered to produce human alpha glucocerebrosidase. We stopped producing
Ceredase-Registered Trademark- enzyme, except for small quantities, during 1998,
after substantially all the patients who previously used
Ceredase-Registered Trademark- enzyme converted to
Cerezyme-Registered Trademark- enzyme. Sales of Ceredase-Registered Trademark-
enzyme and Cerezyme-Registered Trademark- enzyme totaled $478.5 million for the
year ended December 31, 1999, representing approximately 70% of our product
revenues for that year.
Because our business is highly dependent on Cerezyme-Registered Trademark-
enzyme, a reduction in revenue from sales of this product would have an adverse
effect on our operations and may cause the value of our securities to decline
substantially. Revenues from Cerezyme-Registered Trademark- enzyme would be
impacted negatively if competitors develop alternative treatments for Gaucher
disease and these alternative products gained commercial acceptance. Some
companies have initiated efforts to develop competitive products, and other
companies may do so in the future. Cerezyme-Registered Trademark- enzyme has
orphan drug status, providing it with market exclusivity in the U.S. until
May 2001. We also have patents protecting its manufacturing method until 2010
and its
GCS-24
<PAGE>
composition until 2013. We cannot predict the effect that the expiration of
orphan drug status and market exclusivity will have on sales of
Cerezyme-Registered Trademark- enzyme after May 2001.
GOVERNMENT REGULATION IMPOSES SIGNIFICANT COSTS AND RESTRICTIONS ON THE
DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCTS AND SERVICES.
Our ability to successfully satisfy regulatory requirements will
significantly determine our future success. We cannot guarantee that any
required regulatory approvals will be granted or that they will be granted on a
timely basis. The production and sale of healthcare products and provision of
health care services are highly regulated. In particular, the U.S. Food and Drug
Administration (FDA) and comparable agencies in foreign countries must approve
human therapeutic and diagnostic products before they are marketed. This
approval process can involve lengthy and detailed laboratory and clinical
testing, sampling activities and other costly and time-consuming procedures.
This regulation may delay the time at which a product or service first can be
sold, limit how a product or service may be used, or adversely impact third
party reimbursement. In addition, therapies that have received, or in the future
receive, regulatory approval for commercial sale may still face subsequent
regulatory difficulties. The FDA and comparable foreign regulatory agencies, for
example, may require postmarketing clinical trials. In addition, a marketed
therapy, its manufacturer and the manufacturer's facilities are subject to
continual review and periodic inspections by regulatory agencies. The discovery
of previously unknown problems with a therapy, manufacturer or facility can
result in restrictions on the therapy or manufacturer, including withdrawal of
the therapy from the market. The failure to comply with applicable regulatory
approval requirements can result in, among other things:
- warning letters;
- fines and other civil penalties;
- suspended regulatory approvals;
- refusal to approve pending applications or supplements to approved
applications;
- suspension of product sales in the U.S. and/or exports from the U.S.;
- product recalls; and
- seizure of products.
LEGISLATIVE CHANGES MAY ADVERSELY IMPACT OUR BUSINESS.
Some of our products, including Cerezyme-Registered Trademark- enzyme, have
been designated as orphan drugs under the Orphan Drug Act. The Orphan Drug Act
provides incentives to manufacturers to develop and market drugs for rare
diseases, generally by entitling the first developer that receives FDA marketing
approval for an orphan drug to a seven-year exclusive marketing period in the
U.S. for that product. Legislation periodically has been introduced in recent
years to change the Orphan Drug Act to shorten the period of automatic market
exclusivity and to allow marketing rights to simultaneous developers of the
drug. We cannot be sure whether the Orphan Drug Act will be amended, or if
amended, what effect the changes may have on us.
We have also received orphan drug designation for some of our products that
are still in development, including Fabrazyme-TM- enzyme for the treatment of
Fabry disease. We are aware of other companies developing products for the
treatment of Fabry disease. If any of those companies receive FDA approval for
their Fabry disease therapy before we receive FDA approval for Fabrazyme-TM-
enzyme, the Orphan Drug Act will preclude us from selling Fabrazyme-TM- enzyme
in the U.S. for up to seven years.
GCS-25
<PAGE>
In addition, healthcare reform is an area of significant government focus.
Any reform measures, if adopted, could adversely affect:
- the pricing of therapeutic products in the U.S. or internationally; and
- the amount of reimbursement available from governmental agencies or other
third party payers.
BECAUSE THE DEVELOPMENT OF OUR PRODUCTS INVOLVES A LENGTHY AND COMPLEX PROCESS,
IT IS UNCERTAIN WHETHER WE WILL BE ABLE TO COMMERCIALIZE ANY OF OUR PRODUCTS
CURRENTLY IN DEVELOPMENT.
Before we can commercialize our development-stage products, we will need to:
- conduct substantial research and development;
- undertake preclinical and clinical testing; and
- pursue regulatory approvals.
This process involves a high degree of risk and takes several years. Our
product development efforts may fail for many reasons, including:
- the product fails in preclinical studies;
- clinical trials may not support the safety or effectiveness of the
product; or
- we fail to obtain the required regulatory approvals.
We cannot guarantee that we will successfully develop any particular
product.
ANY MARKETABLE PRODUCTS THAT WE DEVELOP MAY NOT BE COMMERCIALLY SUCCESSFUL.
The commercial success of any marketable product that we develop will depend
on many factors, including:
- regulation by the FDA and other government authorities;
- market acceptance by doctors and hospital administrators;
- the effectiveness of our sales force;
- the effectiveness of our production and marketing capabilities;
- the success of competitive products; and
- the availability of third party reimbursement.
We cannot guarantee that any product we successfully develop will be
commercially successful.
WE MAY REQUIRE SIGNIFICANT ADDITIONAL FINANCING WHICH MAY NOT BE AVAILABLE ON
FAVORABLE TERMS, IF AT ALL.
As of December 31, 1999, we had approximately $653.0 million in cash, cash
equivalents and short-and long-term investments, excluding investments in equity
securities.
Although we currently have substantial cash resources and positive cash
flow, we intend to use substantial portions of our available cash for:
- product development and marketing;
- expanding facilities;
- working capital; and
- strategic business initiatives.
GCS-26
<PAGE>
We will further reduce available cash reserves to pay principal and interest
on the following debt:
- In May 1998, we issued $250.0 million in convertible notes, the entire
principal amount of which is allocated to Genzyme General. These
convertible notes bear interest at an annual rate of 5.25% and mature on
June 1, 2005. However, the holders of these notes may exchange principal
on the notes for shares of Genzyme General Stock, Molecular Oncology
Stock, and Surgical Products Stock.
- As of December 31, 1999, we owed approximately $23.0 million under a
revolving credit facility with a group of commercial banks. Of this
amount, we have allocated $18.0 million to Genzyme Tissue Repair and
$5.0 million to Genzyme Molecular Oncology. Amounts borrowed under this
revolving credit facility bear interest at a floating rate based upon an
applicable margin above either the prime rate announced by Fleet National
Bank or the London InterBank Offered Rate. We must repay all borrowings
under this facility no later than November 12, 2002.
- In August 1998, we issued $21.2 million in convertible debentures, the
entire principal amount of which is allocated to Genzyme General. These
convertible debentures bear interest at an annual rate of 5% and mature on
August 29, 2003, but the holders of these convertible debentures may
exchange principal, and under some circumstances interest, on the
convertible debentures for shares of Genzyme General Stock.
If we use cash to pay or redeem this debt, including the principal and
interest due on it, our cash reserves will be diminished.
In March 2000, we entered into an agreement to acquire Biomatrix, Inc. The
consideration for the proposed acquisition consists of shares of a new series of
our common stock and up to approximately $245 million in cash. To the extent we
use cash to complete this acquisition, our cash reserves will be diminished.
To satisfy these and other commitments, we may have to obtain additional
financing. We cannot guarantee that we will be able to obtain any additional
financing, extend any existing financing arrangement, or obtain either on
favorable terms.
WE MAY FAIL TO PROTECT ADEQUATELY OUR PROPRIETARY TECHNOLOGY, WHICH WOULD ALLOW
COMPETITORS TO TAKE ADVANTAGE OF OUR RESEARCH AND DEVELOPMENT EFFORTS.
Our long-term success largely depends on our ability to obtain and maintain
patent and other proprietary right protection for our technology and products.
If we fail to obtain or maintain these protections, we may not be able to
prevent third parties from using our proprietary rights.
Patents based on our currently pending or our future patent applications may
not issue. In addition, our issued patents may not contain claims sufficiently
broad to protect us against third parties with similar technologies or products,
or provide us with any competitive advantage. Further, our patents, our
collaborators' patents, and those patents for which we have license rights may
be challenged, narrowed, invalidated or circumvented.
The U.S. Patent and Trademark Office and the courts have not established a
consistent policy regarding the breadth of claims allowed in biotechnology
patents. The allowance of broader claims may increase the incidence and cost of
patent interference proceedings and the risk of infringement litigation. On the
other hand, the allowance of narrower claims may limit the value of our
proprietary rights. Any policies that are adopted may result in changes in or
interpretations of the patent laws that adversely affect our patent position.
We also rely upon trade secrets, proprietary know-how, and continuing
technological innovation to remain competitive. We have taken measures to
protect our trade secrets and know-how, including the use of confidentiality
agreements with our employees, consultants and corporate collaborators. It is
possible
GCS-27
<PAGE>
that these agreements may be breached and that any remedies for a breach will
not make us whole. We also cannot guarantee that other parties will not
independently develop our know-how or otherwise obtain access to our technology.
WE MAY BE REQUIRED TO LICENSE TECHNOLOGY FROM COMPETITORS IN ORDER TO DEVELOP
AND COMMERCIALIZE SOME OF OUR PRODUCTS AND SERVICES, AND IT IS UNCERTAIN WHETHER
THESE LICENSES WILL BE AVAILABLE.
Third party patent rights and pending patent applications filed by third
parties, if issued, may cover some of the products that we or our strategic
collaborators are developing or testing. As a result, we or a strategic
collaborator may be required to obtain licenses from the holders of these
patents in order to use, manufacture or sell these products and services, and
payments under these licenses may reduce the profitability of the products.
Furthermore, we cannot be sure that these licenses would be available to us on
acceptable terms or at all. If these licenses are not available, our or our
strategic collaborators' ability to commercialize these products and services
may be impaired.
WE MAY INCUR SUBSTANTIAL COSTS AS A RESULT OF LITIGATION OR OTHER PROCEEDINGS
RELATING TO PATENT AND OTHER INTELLECTUAL PROPERTY RIGHTS.
If we or one of our strategic collaborators initiate litigation to enforce
our patent or license rights, or are required to defend these rights in response
to third party claims, it could consume a substantial portion of our resources.
We cannot guarantee that we or our strategic collaborator would prevail in such
litigation. If we do not prevail, we or our strategic collaborators may be
required to:
- pay monetary damages;
- stop commercial activities relating to the affected products or services;
or
- obtain a license in order to continue manufacturing or marketing the
affected products or services.
If we are required to pay damages or if commercial activities are disrupted,
our business or financial position may be negatively impacted. In addition, if
we or our strategic collaborators are required to obtain a license, we cannot
guarantee that one would be made available to us or made available on acceptable
terms or at all.
WE MAY BE LIABLE FOR PRODUCT LIABILITY CLAIMS NOT COVERED BY INSURANCE.
Individuals who use our products or services may bring product liability
claims against us. While we have taken, and continue to take, what we believe
are appropriate precautions, we cannot guarantee that we will avoid significant
liability exposure. We have only limited amounts of product liability insurance,
and we cannot be sure that this insurance will provide sufficient coverage
against any product liability claims. If we attempt to obtain additional
insurance in the future, we may not be able to do so on acceptable terms, and
any additional insurance we do obtain may not provide adequate coverage against
any asserted claims. In addition, regardless of merit or eventual outcome,
product liability claims may result in:
- diversion of management time and attention;
- expenditure of large amounts of cash on legal fees, expenses and payment
of damages;
- decreased demand for our products and services; and
- injury to our reputation.
OUR COMPETITORS IN THE BIOTECHNOLOGY AND PHARMACEUTICAL INDUSTRIES MAY HAVE
SUPERIOR PRODUCTS, MANUFACTURING CAPABILITIES OR MARKETING EXPERTISE.
The human health care products and services industry is extremely
competitive. Our competitors include major pharmaceutical companies and other
biotechnology companies. Some of these competitors
GCS-28
<PAGE>
may have more extensive research and development, marketing and production
capabilities. Some competitors also may have greater financial resources than
us. Our future success will depend on our ability to develop and market
effectively our products against those of our competitors.
IF WE ARE UNABLE TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGES, OUR PRODUCTS OR
SERVICES MAY BECOME OBSOLETE.
The field of biotechnology is characterized by significant and rapid
technological change. Although we attempt to expand our technological
capabilities in order to remain competitive, research and discoveries by others
may make our products or services obsolete. For example, some of our competitors
may develop a product to treat Gaucher disease that is more effective or less
expensive than Cerezyme-Registered Trademark- enzyme.
IF WE FAIL TO OBTAIN ADEQUATE LEVELS OF REIMBURSEMENT FOR OUR PRODUCTS FROM
THIRD PARTY PAYERS, THE COMMERCIAL POTENTIAL OF OUR PRODUCTS WILL BE
SIGNIFICANTLY LIMITED.
A substantial portion of our revenue comes from payments by third party
payers, including government health administration authorities and private
health insurers. Third party payers may not reimburse patients for newly
approved health care products. Increasingly, third party payers are attempting
to contain healthcare costs by:
- challenging the prices charged for healthcare products and services;
- limiting both coverage and the amount of reimbursement for new therapeutic
products;
- denying or limiting coverage for products that are approved by the FDA,
but are considered experimental or investigational by third party payers;
and
- refusing, in some cases, to provide coverage when an approved product is
used for disease indications in a way that has not received FDA marketing
approval.
Government and other third party payers may not provide adequate insurance
coverage or reimbursement for our products and services, which could impair our
financial results.
In addition, Congress occasionally has discussed implementing broad-based
measures to contain healthcare costs. It is possible that Congress will enact
legislation specifically designed to contain healthcare costs. We cannot predict
the effect that legislation of this type would have on our business.
CHANGES IN THE ECONOMIC, POLITICAL, LEGAL AND BUSINESS ENVIRONMENTS IN THE
FOREIGN COUNTRIES IN WHICH WE DO BUSINESS COULD CAUSE OUR INTERNATIONAL SALES
AND OPERATIONS, WHICH ACCOUNT FOR A SIGNIFICANT PERCENTAGE OF OUR CONSOLIDATED
NET SALES, TO BE LIMITED OR DISRUPTED.
Our international operations accounted for 41% of our consolidated revenues
in 1999 and 1998, and we expect that international sales will continue to
account for a significant percentage of our revenues for the foreseeable future.
In addition, we have direct investments in a number of subsidiaries outside of
the U.S., primarily in Europe and Japan. Our international sales and operations
could be limited or disrupted, and the value of our direct investments may be
adversely affected, by any of the following:
- fluctuations in currency exchange rates;
- the imposition of government controls;
- less favorable intellectual property or other applicable laws;
- the inability to obtain any necessary foreign regulatory approvals of
products in a timely manner;
- import and export license requirements;
- political instability;
- trade restrictions;
- changes in tariffs;
GCS-29
<PAGE>
- difficulties in staffing and managing international operations; and
- longer payment cycles.
A significant portion of our business is conducted in currencies other than
the U.S. dollar, which is our reporting currency. We recognize foreign currency
gains or losses arising from our operations in the period incurred. As a result,
currency fluctuations among the U.S. dollar and the currencies in which we do
business have caused foreign currency transaction gains and losses in the past
and will likely do so in the future. We cannot predict the effects of exchange
rate fluctuations upon our future operating results because of the number of
currencies involved, the variability of currency exposures and the potential
volatility of currency exchange rates.
SEVERAL ANTI-TAKEOVER PROVISIONS MAY DEPRIVE OUR STOCKHOLDERS OF THE OPPORTUNITY
TO RECEIVE A PREMIUM FOR THEIR SHARES UPON A CHANGE IN CONTROL.
Provisions of Massachusetts law and our charter, by-laws and shareholder
rights plan could delay or prevent a change in control of Genzyme or a change in
our management.
Our tracking stock structure may also deprive our stockholders of the
opportunity to receive a premium for their shares upon a change in control
because, in order to obtain control of a particular division, an acquiror would
have to obtain control of the entire corporation.
In addition, our board of directors may, in their sole discretion:
- exchange shares of Molecular Oncology Stock, Surgical Products Stock or
Tissue Repair Stock for Genzyme General Stock at a 30% premium over the
market value of the exchanged shares; and
- issue shares of undesignated preferred stock from time to time in one or
more series.
Either of these board actions could increase the cost of an acquisition of
Genzyme and thus discourage a takeover attempt.
SUBSEQUENT EVENTS
GENZYME TRANSGENICS
In February 2000, we recorded a gain of $20.3 million relating to a public
offering of 3.5 million common shares by our unconsolidated affiliate, Genzyme
Transgenics Corporation ("GTC"). The public offering resulted in net proceeds to
GTC of $75.2 million (after the exercise of the underwriters' overallotment
option). As a result of the issuance of additional shares by GTC, our ownership
interest in GTC decreased from 33% to 28%.
ACQUISITION OF BIOMATRIX, INC. AND FORMATION OF GENZYME BIOSURGERY
In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon
the effectiveness of our Registration Statement on Form S-4 and completion of
the merger, we will form a new operating division called Genzyme Biosurgery and
create a new series of common stock that is intended to reflect its value and
track its performance. We refer to this stock as "Biosurgery Stock." In
connection with the merger, and upon Genzyme shareholder approval, the assets
and liabilities allocated to Genzyme Surgical Products and Genzyme Tissue Repair
will be re-allocated to Genzyme Biosurgery and shares of Surgical Products Stock
and Tissue Repair Stock will be exchanged for Biosurgery Stock. We will account
for the acquisition of Biomatrix as a purchase.
Biomatrix stockholders will receive $37.00 in cash, one share of Biosurgery
Stock or a combination of cash and stock for each share of Biomatrix common
stock they hold. The merger agreement provides that we will pay cash for up to
28.38% of the outstanding shares of Biomatrix common stock that receive merger
consideration, or up to approximately $245.0 million.
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Holders of Surgical Products Stock will receive 0.6060 share of Biosurgery
Stock in exchange for each share of Surgical Products Stock they hold and
holders of Tissue Repair Stock will receive 0.3352 share of Biosurgery Stock in
exchange for each share of Tissue Repair Stock they hold.
For more information about the merger and the merger consideration, we
encourage you to carefully read our Registration Statement on Form S-4 (File No.
333-34972) filed with the SEC on April 18, 2000 and as amended from time to
time.
The acquisition is subject to:
- approval by Biomatrix's shareholders;
- approval by our shareholders, including separate approvals by the holders
of shares of Surgical Products Stock and Tissue Repair Stock; and
- other customary closing conditions.
REGISTRATION STATEMENT
In March 2000, we filed a prospectus with the SEC covering the offering of
3,000,000 shares of Molecular Oncology Stock (plus 450,000 shares issuable upon
exercise of the underwriters' over-allotment option). The proceeds of the
offering were to be used by Genzyme Molecular Oncology to fund research,
pre-clinical and clinical development programs, to repay existing indebtedness,
and for working capital and general corporate purposes.
GCS-31
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GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues:
Net product sales......................................... $683,482 $613,685 $529,927
Net service sales......................................... 79,448 74,791 67,158
Revenue from research and development contracts:
Related parties......................................... 2,012 5,745 8,356
Other................................................... 7,346 15,114 3,400
-------- -------- --------
Total revenues........................................ 772,288 709,335 608,841
Operating costs and expenses:
Cost of products sold..................................... 182,337 211,076 206,028
Cost of services sold..................................... 49,444 48,586 47,289
Selling, general and administrative....................... 242,797 215,203 200,476
Research and development (including research and
development related to contracts)....................... 150,516 119,005 89,558
Amortization of intangibles............................... 24,674 24,334 17,245
Purchase of in-process research and development........... 5,436 -- 7,000
-------- -------- --------
Total operating costs and expenses.................... 655,204 618,204 567,596
-------- -------- --------
Operating income............................................ 117,084 91,131 41,245
Other income (expenses):
Equity in net loss of unconsolidated affiliates........... (42,696) (29,006) (12,258)
Gain on affiliate sale of stock........................... 6,683 2,369 --
Gain on sale of investments in equity securities.......... 1,963 3,391 --
Minority interest......................................... 3,674 4,285 --
Gain on sale of product line.............................. 8,018 31,202 --
Charge for impaired investments........................... (5,712) (3,397) --
Other..................................................... 14,527 -- (2,000)
Investment income......................................... 36,158 25,055 11,409
Interest expense.......................................... (21,771) (22,593) (12,667)
-------- -------- --------
Total other income (expenses)......................... 844 11,306 (15,516)
-------- -------- --------
Income before income taxes.................................. 117,928 102,437 25,729
Provision for income taxes.................................. (46,947) (39,870) (12,100)
-------- -------- --------
Net income.................................................. $ 70,981 $ 62,567 $ 13,629
======== ======== ========
Comprehensive income, net of tax:
Net income................................................ $ 70,981 $ 62,567 $ 13,629
-------- -------- --------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments................ (14,883) 7,681 (11,704)
-------- -------- --------
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising during the period... 24,946 (6,043) 817
Reclassification adjustment for losses included in net
income.............................................. 2,092 2,100 --
-------- -------- --------
Unrealized gains (losses) on securities, net........ 27,038 (3,943) 817
-------- -------- --------
Other comprehensive income (loss)......................... 12,155 3,738 (10,887)
-------- -------- --------
Comprehensive income...................................... $ 83,136 $ 66,305 $ 2,742
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
GCS-32
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
NET INCOME (LOSS) PER SHARE:
ALLOCATED TO GENZYME GENERAL STOCK (REVISED--SEE NOTE A):
Genzyme General net income................................ $142,077 $133,052 $ 76,642
Genzyme Surgical Products net loss........................ (27,523) (49,856) (29,740)
Tax benefit allocated from Genzyme Molecular Oncology..... 7,812 3,527 2,755
Tax benefit allocated from Genzyme Surgical Products...... 16,128 17,936 10,112
Tax benefit allocated from Genzyme Tissue Repair.......... 10,866 16,394 17,666
-------- -------- --------
Net income allocated to Genzyme General Stock............. $149,360 $121,053 $ 77,435
======== ======== ========
Net income per share of Genzyme General Stock:
Basic................................................... $ 1.80 $ 1.53 $ 1.01
======== ======== ========
Diluted................................................. $ 1.71 $ 1.48 $ 0.98
======== ======== ========
Weighted average shares outstanding:
Basic................................................... 83,092 79,063 76,531
======== ======== ========
Diluted................................................. 93,228 85,822 78,925
======== ======== ========
ALLOCATED TO MOLECULAR ONCOLOGY STOCK (SEE NOTE A):
Net loss.................................................. $(28,832) $(19,107) $(19,578)
======== ======== ========
Net loss per share of Molecular Oncology Stock--basic and
diluted ................................................ $ (2.25) $ (3.81) $ (4.64)
======== ======== ========
Weighted average shares outstanding....................... 12,826 5,019 3,929
======== ======== ========
ALLOCATED TO SURGICAL PRODUCTS STOCK (REVISED--SEE NOTE A):
Net loss.................................................. $(20,514)
========
Net loss per share of Surgical Products Stock--basic and
diluted................................................. $ (1.38)
========
Weighted average shares outstanding....................... 14,835
========
ALLOCATED TO TISSUE REPAIR STOCK:
Net loss.................................................. $(30,040) $(40,386) $(45,984)
======== ======== ========
Net loss per share of Tissue Repair Stock--basic and
diluted................................................. $ (1.26) $ (1.99) $ (3.07)
======== ======== ========
Weighted average shares outstanding....................... 23,807 20,277 14,976
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
GCS-33
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 130,156 $ 118,612
Short-term investments.................................... 255,846 175,453
Accounts receivable, net.................................. 166,803 163,042
Inventories............................................... 117,269 109,833
Prepaid expenses and other current assets................. 18,918 31,467
Deferred tax assets--current.............................. 41,195 39,725
---------- ----------
Total current assets.................................... 730,187 638,132
Property, plant and equipment, net........................ 383,181 382,619
Long-term investments..................................... 266,988 281,664
Intangibles, net.......................................... 253,153 279,516
Deferred tax assets--noncurrent........................... 18,631 24,277
Investments in equity securities.......................... 97,859 51,977
Other noncurrent assets................................... 37,283 30,669
---------- ----------
Total assets............................................ $1,787,282 $1,688,854
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 27,853 $ 27,604
Accrued expenses.......................................... 73,359 72,370
Payable to joint venture.................................. -- 1,181
Income taxes payable...................................... 27,946 16,543
Deferred revenue.......................................... 3,700 2,731
Current portion of long-term debt and capital lease
obligations............................................. 5,080 100,568
---------- ----------
Total current liabilities............................... 137,938 220,997
Noncurrent liabilities:
Long-term debt.............................................. 18,000 3,087
Convertible notes and debentures............................ 272,622 284,138
Other noncurrent liabilities................................ 2,330 8,078
---------- ----------
Total liabilities....................................... 430,890 516,300
Commitments and contingencies (See Notes)
Stockholders' equity:
Preferred Stock, $0.01 par value, 10,000,000 shares
authorized; no shares issued and outstanding............ -- --
Preferred Stock, Series A Junior Participating, $0.01
par value, 2,000,000 shares authorized; no shares
issued and outstanding................................. -- --
Preferred Stock, Series B Junior Participating, $0.01
par value, 400,000 shares authorized; no shares issued
and outstanding........................................ -- --
Preferred Stock, Series C Junior Participating, $0.01
par value, 400,000 shares authorized; no shares issued
and outstanding........................................ -- --
Preferred Stock, Series D Junior Participating, $0.01
par value, 600,000 shares authorized; no shares issued
and outstanding........................................ -- --
Common Stock $0.01 par value, 390,000,000 shares
authorized; 141,000,483 issued and outstanding:
Genzyme General Stock, $0.01 par value, 200,000,000
shares authorized; 84,351,662 shares issued and
84,245,304 shares outstanding at December 31, 1999 and
81,517,446 shares issued and 81,411,088 shares
outstanding at December 31, 1998....................... 842 814
Molecular Oncology Stock, $0.01 par value, 40,000,000
shares authorized; 13,421,018 shares issued and
outstanding at December 31, 1999 and 12,648,295 shares
issued and outstanding at December 31, 1998............ 134 126
Surgical Products Stock, $0.01 par value, 60,000,000
shares authorized; 14,835,161 shares issued and
outstanding at December 31,1999........................ 148 --
Tissue Repair Stock, $0.01 par value, 40,000,000 shares
authorized; 28,503,728 shares issued and 28,498,729
shares outstanding at December 31, 1999 and 20,925,809
shares issued and 20,920,810 shares outstanding at
December 31, 1998...................................... 285 209
Treasury common stock, at cost:
Genzyme General Stock, 106,358 shares at both December 31,
1999 and 1998........................................... (901) (901)
Additional paid-in capital--Genzyme General Stock........... 635,996 958,827
Additional paid-in capital--Molecular Oncology Stock........ 67,672 63,427
Additional paid-in capital--Surgical Products Stock......... 376,123 --
Additional paid-in capital--Tissue Repair Stock............. 217,103 174,198
Retained earnings (accumulated deficit)..................... 57,202 (13,779)
Accumulated other comprehensive income (loss)............... 1,788 (10,367)
---------- ----------
Total stockholders' equity.................................. 1,356,392 1,172,554
---------- ----------
Total liabilities and stockholders' equity.................. $1,787,282 $1,688,854
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
GCS-34
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 70,981 $ 62,567 $ 13,629
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and amortization............................. 70,651 58,869 50,964
Loss on disposal of fixed assets.......................... 1,008 108 1,258
Non-cash compensation expense............................. 68 8,740 3,160
Equity in loss of unconsolidated affiliates............... 42,696 29,006 12,258
Accrued interest/amortization of marketable securities.... (493) (6,923) (900)
Provisions for bad debts and inventory.................... 18,599 11,990 14,580
Accretion of debt conversion feature...................... -- 3,025 2,028
Gain on affiliate sale of stock........................... (6,683) (2,369) --
Minority interest in net loss of subsidiary............... (3,674) (4,285) --
Gain on sale of product line.............................. (8,018) (31,202) --
Gain on sale of investments in equity securities.......... (1,963) (3,391) --
Charge for impaired investments........................... 5,712 3,397 --
Deferred income tax benefit............................... (6,061) (5,669) (5,061)
Charge for in-process research and development............ 5,436 -- 7,000
Other..................................................... 626 26 528
Increase (decrease) in cash from working capital:
Accounts receivable..................................... (18,682) (46,215) (11,076)
Inventories............................................. (15,258) 27,907 (29,299)
Prepaid expenses and other assets....................... 12,215 (11,987) (10,062)
Accounts payable, accrued expenses, income taxes payable
and deferred revenue.................................. 36,851 17,509 (9,333)
--------- --------- ---------
Net cash provided by operating activities............. 204,011 111,103 39,674
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments.................................... (509,177) (441,487) (147,897)
Sales and maturities of investments......................... 438,530 136,605 81,185
Proceeds from sale of investments in equity securities...... 11,090 9,564 --
Acquisitions of property, plant and equipment............... (57,724) (39,467) (29,309)
Sale of property, plant and equipment....................... 188 1,262 852
Proceeds from sale of product line.......................... 5,000 24,760 --
Acquisitions, net of acquired cash and assumed
liabilities............................................... (6,500) (9,949) 9
Purchase of technology rights............................... (11,400) (15,100) --
Purchase of investments in equity securities................ (17,700) (25,783) (13,993)
Investments in unconsolidated affiliates.................... (46,621) (21,974) --
Loans to affiliates......................................... -- (1,000) (4,601)
Proceeds from notes receivable.............................. 8,360 -- --
Repayment of loans by affiliates............................ -- 3,019 --
Final distribution from joint venture....................... 881 -- --
Other....................................................... 2,859 (5,592) (1,419)
--------- --------- ---------
Net cash used in investing activities................. (182,214) (385,142) (115,173)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
GCS-35
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock...................... 59,986 76,860 156,036
Proceeds from issuance of debt.............................. 5,000 250,000 32,127
Payments of debt............................................ (85,081) (38,833) (101,115)
Bank overdraft.............................................. 9,625 -- --
Other....................................................... 2,289 1,884 --
-------- -------- --------
Net cash (used in) provided by financing activities... (8,181) 289,911 87,048
Effect of exchange rate changes on cash..................... (2,072) 334 (2,275)
-------- -------- --------
Increase in cash and cash equivalents....................... 11,544 16,206 9,274
Cash and cash equivalents at beginning of period............ 118,612 102,406 93,132
-------- -------- --------
Cash and cash equivalents at end of period.................. $130,156 $118,612 $102,406
======== ======== ========
Supplemental disclosures of cash flows:
Cash paid during the year for:
Interest.................................................. $ 20,151 $ 17,385 $ 9,811
Income taxes.............................................. $ 30,992 $ 24,463 $ 18,887
Supplemental disclosures of non-cash transactions:
Other gains and charges--Note B.
Dispositions of assets--Note C.
Acquisitions--Note D.
Investment in unconsolidated affiliate--Note I.
Conversion of 5% convertible subordinated note--Note K.
Conversion of 6% convertible subordinated debentures into 5%
convertible subordinated debentures--Note K.
Warrant exercise--Note L.
Distributions of Genzyme Molecular Oncology, Genzyme
Surgical Products and Genzyme Tissue Repair designated
shares--Note L.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
GCS-36
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SHARES IN THOUSANDS DOLLARS IN THOUSANDS
------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCKS:
GENZYME GENERAL STOCK:
Balance at beginning of year........................ 81,395 77,693 75,537 $ 814 $ 777 $ 755
Issuance of Genzyme General Stock under stock
plans............................................. 2,850 3,695 2,117 28 37 22
Exercise of warrants................................ -- 7 39 -- -- --
------ ------ ------ ----- ----- -----
Balance at end of year.............................. 84,245 81,395 77,693 $ 842 $ 814 $ 777
====== ====== ====== ===== ===== =====
MOLECULAR ONCOLOGY STOCK:
Balance at beginning of year........................ 12,648 3,929 -- $ 126 $ 39 $ --
Issuance of Molecular Oncology Stock under stock
plans............................................. 129 1 -- 2 -- --
Exercise of warrants................................ -- 1 -- -- -- --
Issuance of Genzyme Molecular Oncology designated
shares............................................ 27 8,717 -- -- 87 --
Issuance of Molecular Oncology Stock in connection
with the purchase of joint venture interest....... 617 -- -- 6 -- --
Issuance of Molecular Oncology Stock in connection
with the acquisition of PharmaGenics.............. -- -- 3,929 -- -- 39
------ ------ ------ ----- ----- -----
Balance at end of year.............................. 13,421 12,648 3,929 $ 134 $ 126 $ 39
====== ====== ====== ===== ===== =====
SURGICAL PRODUCTS STOCK:
Balance at beginning of year........................ -- -- -- $ -- $ -- $ --
Initial distribution of Genzyme Surgical Products
designated shares................................. 14,792 -- -- 148 -- --
Issuance of Surgical Products Stock under stock
plans............................................. 43 -- -- -- --
------ ------ ------ ----- ----- -----
Balance at end of year.............................. 14,835 -- -- $ 148 $ -- $ --
====== ====== ====== ===== ===== =====
TISSUE REPAIR STOCK:
Balance at beginning of year........................ 20,921 19,941 13,162 $ 209 $ 199 $ 132
Issuance of Tissue Repair Stock under stock plans... 320 756 487 3 8 4
Issuance of Genzyme Tissue Repair designated
shares............................................ -- 2,292 -- -- 23
Shares issued in public offering.................... -- -- 4,000 -- -- 40
Issuance of Tissue Repair Stock in connection with
conversion of 6% convertible note................. 7,258 224 -- 73 2 --
------ ------ ------ ----- ----- -----
Balance at end of year.............................. 28,499 20,921 19,941 $ 285 $ 209 $ 199
====== ====== ====== ===== ===== =====
TREASURY COMMON STOCK (AT COST):
GENZYME GENERAL STOCK:
Balance at beginning of year........................ (106) (106) (106) $(901) $(901) $(890)
Purchases........................................... -- -- -- -- -- (11)
------ ------ ------ ----- ----- -----
Balance at end of year.............................. (106) (106) (106) $(901) $(901) $(901)
====== ====== ====== ===== ===== =====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
GCS-37
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
ADDITIONAL PAID-IN CAPITAL:
GENZYME GENERAL STOCK:
Balance at beginning of year............................ $958,827 $895,347 $871,020
Issuance of Genzyme General Stock under stock plans..... 59,587 74,323 35,888
Exercise of warrants.................................... -- 289 855
Allocation to Genzyme Tissue Repair for Genzyme Tissue
Repair designated shares.............................. (4,937) -- (14,892)
Tax benefit from disqualified dispositions.............. 24,238 18,561 4,127
Allocation of cash to Genzyme Molecular Oncology for
Genzyme Molecular Oncology designated shares.......... -- (5,000) (2,886)
Allocation to Genzyme Surgical Products................. (376,271) -- --
Exchange of 6% debentures convertible into shares of
Molecular Oncology Stock for 5% debentures convertible
into shares of Genzyme General Stock.................. -- (19,802) --
Conversion of note receivable from Genzyme Molecular
Oncology into Genzyme Molecular Oncology designated
shares................................................ -- (2,696) --
Transfer of interest in joint venture from Genzyme
Tissue Repair......................................... (25,000) -- --
Loss on purchase of facility from Genzyme Tissue
Repair................................................ -- (711) --
Payment to Genzyme Tissue Repair for research program... (100) (250) --
Stock compensation expense.............................. 58 48 1,218
Purchase of treasury stock.............................. -- -- 10
Other................................................... (406) (1,282) 7
-------- -------- --------
Balance at end of year.................................. $635,996 $958,827 $895,347
======== ======== ========
MOLECULAR ONCOLOGY STOCK:
Balance at beginning of year............................ $ 63,427 $ 34,517 $ --
Issuance of Molecular Oncology Stock under stock
plans................................................. 306 7 --
Issuance of Molecular Oncology Stock in connection with
declared dividend of Genzyme Molecular Oncology
designated shares..................................... -- (87) --
Conversion of note payable to Genzyme General into
Genzyme Molecular Oncology designated shares.......... -- 2,696 --
Issuance of Molecular Oncology Stock in connection with
the acquisition of PharmaGenics....................... -- -- 27,330
Sale of warrants........................................ -- -- 724
Value of debt conversion feature........................ -- -- 3,529
Exchange of 6% debentures convertible into shares of
Molecular Oncology Stock for 5% debentures convertible
into shares of Genzyme General Stock.................. -- 19,802 --
Allocation from Genzyme General for Genzyme Molecular
Oncology designated shares............................ -- 5,000 2,886
Shares issued upon purchase of joint venture interest... 3,929 -- --
Stock compensation expense (unearned compensation),
net................................................... 10 113 (116)
Other................................................... -- 1,379 164
-------- -------- --------
Balance at end of year.................................. $ 67,672 $ 63,427 $ 34,517
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
GCS-38
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
SURGICAL PRODUCTS STOCK:
Balance at beginning of year.............................. $ -- $ -- $ --
Allocation from Genzyme General........................... 376,271 -- --
Initial distribution of Genzyme Surgical Products
designated shares....................................... (148) -- --
-------- -------- --------
Balance at end of year.................................... $376,123 $ -- $ --
======== ======== ========
TISSUE REPAIR STOCK:
Balance at beginning of year.............................. $174,198 $170,430 $122,385
Issuance of Tissue Repair Stock under stock plans......... 458 2,101 2,434
Issuance of Genzyme Tissue Repair designated shares....... -- -- (23)
Issuance of Tissue Repair Stock in public offering........ -- -- 28,997
Issuance of Tissue Repair Stock in connection with
conversion of 6% convertible note....................... 12,410 598 --
Value of debt conversion feature.......................... -- -- 1,524
Gain on transfer of interest in joint venture to Genzyme
General................................................. 25,000 -- --
Gain on transfer of facility.............................. -- 711 --
Payment from Genzyme General for research program......... 100 250 --
Allocation from Genzyme General for Genzyme Tissue Repair
designated shares....................................... 4,937 -- 14,892
Stock compensation expense (unearned compensation), net... -- 108 221
-------- -------- --------
Balance at end of year.................................... $217,103 $174,198 $170,430
======== ======== ========
RETAINED EARNINGS (ACCUMULATED DEFICIT):
Balance at beginning of year.............................. $(13,779) $(76,346) $(89,975)
Net income................................................ 70,981 62,567 13,629
-------- -------- --------
Balance at end of year.................................... $ 57,202 $(13,779) $(76,346)
======== ======== ========
ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF TAX:
Balance at beginning of year.............................. $(10,367) $(12,005) $ (1,118)
Foreign currency translation adjustments.................. (14,883) 7,681 (11,704)
Unrealized gains (losses) on investments.................. 27,038 (6,043) 817
-------- -------- --------
Accumulated other comprehensive income (loss)............. $ 1,788 $(10,367) $(12,005)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
GCS-39
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
We are a biotechnology company that develops innovative products and
services for significant unmet medical needs. We have four operating divisions:
- Genzyme General, which develops and markets:
- therapeutic products, with an expanding focus on products to treat
patients suffering from lysosomal storage disorders and other specialty
therapeutics;
- diagnostic products, with a focus on IN VITRO diagnostics; and
- other products and services, such as genetic testing and lipids and
peptides for drug delivery.
- Genzyme Molecular Oncology, which is developing cancer products, with a
focus on therapeutic vaccines and angiogenesis inhibitors;
- Genzyme Surgical Products, which develops, manufactures and markets
surgical products for cardiovascular surgery and general surgery; and
- Genzyme Tissue Repair, which develops and markets biological products for
orthopedic injuries, such as cartilage damage, and severe burns.
We currently have four designated series of common stock designed to reflect
the value and track the performance of one of our divisions. We refer to our
series of common stock as follows:
- Genzyme General Division Common Stock = "Genzyme General Stock;"
- Genzyme Molecular Oncology Division Common Stock = "Molecular Oncology
Stock;"
- Genzyme Surgical Products Division Common Stock = "Surgical Products
Stock;" and
- Genzyme Tissue Repair Division Common Stock = "Tissue Repair Stock."
In June 1999, we created the Genzyme Surgical Products division. The
business of Genzyme Surgical Products previously operated as a business unit of
Genzyme General. Upon the creation of Genzyme Surgical Products, we transferred
$150.0 million in cash, cash equivalents and investments, and certain other
assets, from Genzyme General to Genzyme Surgical Products. In exchange,
14.8 million shares of Surgical Products Stock were distributed as a dividend to
holders of Genzyme General Stock.
BASIS OF PRESENTATION
Our consolidated financial statements for each period include the balance
sheets, results of operations and cash flows of each of our divisions and
corporate operations taken as a whole. We eliminate all significant intracompany
items and transactions in consolidation. We have reclassified certain 1998 and
1997 data to conform with our 1999 presentation.
TRACKING STOCKS
We have four series of common stock--Genzyme General Stock, Molecular
Oncology Stock, Surgical Products Stock and Tissue Repair Stock--which we refer
to as "tracking stock." Unlike typical common stock, each of our tracking stocks
is designed to track the financial performance of a specific subset of our
business operations and its allocated assets, rather than operations and assets
of our entire company. The
GCS-40
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
chief mechanisms intended to cause each tracking stock to "track" the financial
performance of each division are provisions in our charter governing dividends
and distributions. Under these provisions, our charter:
- factors the assets and liabilities and income or losses attributable to a
division into the determination of the amount available to pay dividends
on the associated tracking stock; and
- requires us to exchange, redeem or distribute a dividend to the holders of
Molecular Oncology Stock, Surgical Products Stock, or Tissue Repair Stock
if all or substantially all of the assets allocated to those corresponding
divisions are sold to a third party (a dividend or redemption payment must
equal in value the net after-tax proceeds from the sale; an exchange must
be for Genzyme General Stock at a 10% premium to the exchanged stock's
average market price following the announcement of the sale).
To determine earnings per share, we allocate Genzyme's earnings to each
series of our common stock based on the earnings attributable to that series of
stock. The earnings attributable to each series of stock is defined in our
charter as the net income or loss of the corresponding division determined in
accordance with generally accepted accounting principles and as adjusted for tax
benefits allocated to or from the division in accordance with our management and
accounting policies. Our charter also requires that all income and expenses of
Genzyme be allocated among the divisions in a reasonable and consistent manner.
However, subject to its fiduciary duties, our board of directors can, at its
discretion, change the methods of allocating earnings to each series of common
stock. We intend to allocate earnings using our current methods for the
foreseeable future.
Because the earnings allocated to each series of stock are based on the
income or losses attributable to each corresponding division, we include
financial statements and management's discussion and analysis of Genzyme
Corporation and of each division to aid investors in evaluating Genzyme's
performance and the performance of each of its divisions.
While each tracking stock is designed to reflect each division's
performance, it is common stock of Genzyme Corporation and not of a division;
each division is not a company or legal entity, and therefore does not and
cannot issue stock. Consequently, holders of each tracking stock have no
specific rights to assets allocated to each division. Genzyme Corporation
continues to hold title to all of the assets allocated to the corresponding
division and is responsible for all of its liabilities, regardless of what it
deems for financial statement presentation purposes as allocated to any
division. Holders of each tracking stock, as common stockholders, are therefore
subject to the risks of investing in the businesses, assets and liabilities of
Genzyme as a whole. For instance, the assets allocated to each division are
subject to company-wide claims of creditors, product liability plaintiffs and
stockholder litigation. Also, in the event of a Genzyme liquidation, insolvency
or similar event, holders of each tracking stock would only have the rights of
common stockholders in the combined assets of Genzyme.
ALLOCATION POLICY
Our charter sets forth what operations and assets are initially allocated to
each division and states that going forward the division will also include all
business, products or programs, developed by or acquired for the division, as
determined by our board of directors. We then manage and account for
transactions between our divisions and with third parties, and any resulting
re-allocations of assets and liabilities, by applying consistently across
divisions a detailed set of policies established by our board of directors. We
GCS-41
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
publicly disclose our divisional management and accounting policies, which
appear in Exhibit 99.1 to this Annual Report on Form 10-K. Our charter requires
that all assets and liabilities of Genzyme be allocated among the divisions. Our
board of directors, however, retains considerable discretion in determining the
types, magnitudes and extent of allocations to each series of common stock
without shareholder approval.
Our allocations to our divisions are based on one of the following
methodologies:
- Specific identification--assets that are dedicated to the production of
goods of a division or which solely benefit a division are allocated to
that division. Liabilities incurred as a result of the performance of
services for the benefit of a division or in connection with the expenses
incurred which directly benefit a division are allocated to the division.
Such specifically identified assets and liabilities include cash,
investments, accounts receivable, inventories, property and equipment,
intangible assets, accounts payable, accrued expenses and deferred
revenue. Revenues from the licensing of a division's products or services
to third parties and the related costs are allocated to a division;
- Actual usage--expenses are charged to the division for whose benefit such
expenses are incurred. Research and development, sales and marketing and
direct general and administrative services are charged to the divisions
for which the service is performed on a cost basis. Such charges are
generally based on direct labor hours;
- Proportionate usage--costs incurred which benefit more than one division
are allocated based on management's estimate of the proportionate benefit
each division receives. Such costs include facilities, legal, finance,
human resources, executive and investor relations; or
- Board directed--programs and products, both internally developed and
acquired, are allocated to divisions by the board of directors. The board
also allocates long-term debt and strategic investments.
PRINCIPLES OF CONSOLIDATION
We use the equity method to account for investments in entities in which we
have a substantial ownership interest (20% to 50%), or in which we participate
in policy decisions. Our consolidated net income includes our share of the
earnings of these entities. We report at fair value investments in entities in
which our ownership interest is less than 20%.
DIVIDEND POLICY
We have never paid a cash dividend on shares of our stock. We currently
intend to retain our earnings to finance future growth and do not anticipate
paying any cash dividends on our stock in the foreseeable future.
USE OF ESTIMATES
Under generally accepted accounting principles, we are required to make
certain estimates and assumptions that affect reported amounts of assets,
liabilities, revenues, expenses, and disclosure of contingent assets and
liabilities in our financial statements. Our actual results could differ from
these estimates.
GCS-42
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCIAL INSTRUMENTS
A number of financial instruments subject us to significant credit risk,
including cash and cash equivalents, current and non-current investments, and
accounts receivable. We generally invest our cash in investment-grade securities
to mitigate risk.
CASH AND CASH EQUIVALENTS
We value our cash and cash equivalents at cost plus accrued interest, which
we believe approximates their market value. Our cash equivalents consist
principally of money market funds and municipal notes with initial maturities of
three months or less.
INVESTMENTS
We classify our investments with remaining maturities of twelve months or
less as short-term investments. We classify our investments with remaining
maturities of greater than twelve months as long-term investments.
We classify our investments in debt securities as either held-to-maturity or
available-for-sale based on facts and circumstances present at the time we
purchase the securities. We report available-for-sale investments at fair value
as of each balance sheet date and include any unrealized holding gains and
losses (the adjustment to fair value) in stockholders' equity. If any adjustment
to fair value reflects a decline in the value of the investment, we consider all
available evidence to evaluate the extent to which the decline is "other than
temporary" and mark the investment to market through a charge to our statement
of operations. As of each balance sheet date presented, we classified all of our
investments in debt securities as available-for-sale.
We classify all of our equity investments as available-for-sale. If our
investment is in a publicly traded security, we calculate fair value based on
market quotations. Investments in equity securities for which fair value is not
readily determinable are carried at cost.
INVENTORIES
We value inventories at cost or, if lower, fair value. We determine cost
using the first-in, first-out method.
We analyze our inventory levels quarterly and establish reserves against:
- inventory that has become obsolete;
- inventory that has a cost basis in excess of its expected net realizable
value; and
- inventory in excess of expected requirements.
We utilize inventory reserves in accordance with the guidance contained in
the Securities and Exchange Commission's Staff Accounting Bulletin No. 100.
Accordingly, inventory reserves that are established to write down inventory to
net realizable value are released as the related inventory is sold. Reserves for
excess inventory quantities are released as the related inventory is disposed of
or, if there is an unanticipated increase in the demand for the product, when
the inventory is sold. Inventory with a life in excess of its shelf life is
disposed of and the related costs are written off.
GCS-43
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
We record property, plant and equipment at cost. When we dispose of these
assets, we remove the related cost and accumulated depreciation and amortization
from the related accounts on our balance sheet and include any resulting gain or
loss in our statement of operations.
We generally compute depreciation using the straight-line method over the
estimated useful lives of the assets. We compute useful lives as follows:
- plant and equipment--three to ten years
- furniture and fixtures--five to seven years
- buildings--20 to 40 years
We depreciate certain specialized manufacturing equipment and facilities
allocated to Genzyme General over their remaining useful lives using the
units-of-production method. We evaluate the remaining life and recoverability of
this equipment periodically based on the appropriate facts and circumstances.
We amortize leasehold improvements over their useful life or, if shorter,
the term of the applicable lease.
For products we expect to be commercialized, we capitalize, to
construction-in-progress, the costs we incur in validating the manufacturing
process. We begin this capitalization when we consider the product to have
demonstrated technological feasibility and end this capitalization when the
asset is substantially complete and ready for its intended use. These
capitalized costs include incremental labor and direct material, and incremental
fixed overhead and interest. We generally depreciate these costs using the
units-of-production method.
INTANGIBLES
Our intangible assets consist of:
- goodwill;
- covenants not to compete;
- customer lists; and
- patents, trademarks, trade names and other technology rights.
We amortize intangible assets using the straight-line method over useful
lives of three to 40 years.
We evaluate the recoverability of our intangible and other long-lived assets
when the facts and circumstances suggest that these assets may be impaired. When
we conduct such an evaluation we consider several factors including operating
results, business plans, economic projections, strategic plans and market
emphasis. Our evaluations also compare expected cumulative, undiscounted
operating incomes or cash flows of these assets with the net book values of the
related intangible assets. We charge unrealizable intangible and long-lived
asset values to operations if our evaluations indicate that the value of these
assets are impaired.
GCS-44
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TRANSLATION OF FOREIGN CURRENCIES
We translate the financial statements of our foreign subsidiaries from local
currency into U.S. dollars using:
- the current exchange rate at each balance sheet date for assets and
liabilities; and
- the average exchange rate prevailing during each period for revenues and
expenses.
We consider the local currency for all of our foreign subsidiaries to be the
functional currency for that subsidiary. As a result, we included translation
adjustments for these subsidiaries in stockholders' equity. We also record as a
charge or credit to stockholders' equity exchange gains and losses on
intercompany balances that are of a long-term investment nature. Our
stockholders' equity includes cumulative foreign currency adjustments of
$19.7 million at December 31, 1999 and $4.8 million at December 31, 1998.
Our gains and losses on all other foreign currency transactions are included
in our results of operations. We recorded a net gain of $0.1 million in 1999, a
net gain of $0.3 million in 1998 and a net loss of $0.3 million in 1997.
FOREIGN CURRENCY HEDGING
We periodically enter into forward contracts to reduce our foreign currency
exchange risk. On each balance sheet date, we revalue these contracts using the
exchange rates that are then in effect. We include in net income all gains and
losses resulting from these revaluations, although these amounts are not
material to our financial statements. We had $6.0 million outstanding in foreign
currency forward contracts at December 31, 1999. These forward contracts, which
were denominated in Euros, had a fair value of $0.7 million. We allocated these
contracts to Genzyme General. We had no forward contracts at December 31, 1998.
INTEREST RATE HEDGE AGREEMENTS
We use interest rate hedge agreements to mitigate the interest rate risks
and costs that are inherent in our debt portfolio. We enter into these
agreements primarily to change the fixed/variable interest rate mix of the
portfolio, which reduces our exposure to movements in interest rates. We do not
hold or issue derivative financial instruments for trading purposes. We
recognize in income any differential that we may receive or pay under contracts
designated as hedges. This recognition occurs over the life of the applicable
contract as an adjustment to interest expense. We estimate the fair value of
interest rate hedge agreements based on the amount it would cost to terminate
the agreements.
REVENUE RECOGNITION
We recognize revenue from product sales when we ship the product and title
has passed, net of any applicable third party contractual allowances and
rebates. We recognize revenue from service sales when we have finished providing
the service or when we have achieved an applicable milestone. We recognize
revenue from research and development contracts over the term of the applicable
contract and as we incur costs related to that contract. Up-front license fees
and milestone payments are recognized as revenue only if there are no remaining
performance obligations and the fees are non-refundable.
GCS-45
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
We receive royalties related to the manufacture, sale or use of our products
or technologies under license arrangements with third parties. For those
arrangements where royalties are reasonably estimable, we recognize revenue
based on estimates of royalties earned during the applicable period and adjust
for differences between the estimated and actual royalties in the following
quarter. Historically, these adjustments have not been material. For those
arrangements where royalties are not reasonably estimable, we recognize revenue
upon receipt of licensee royalty statements.
RESEARCH AND DEVELOPMENT
We expense research and development costs in the period incurred. We also
expense the cost of purchased technology in the period of purchase if we believe
that the technology has not demonstrated technological feasibility and that it
does not have an alternative future use.
ISSUANCE OF STOCK BY A SUBSIDIARY OR AN AFFILIATE
We include gains on the issuance of stock by our subsidiaries and affiliates
in net income unless that 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, we account for the change
in our equity ownership of that subsidiary or affiliate as an equity
transaction.
INCOME TAXES
We use the asset and liability method of accounting for deferred income
taxes. Our 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.
We file a consolidated return and allocate income taxes to each division
based upon the financial statement income, taxable income, credits and other
amounts properly allocable to each division under generally accepted accounting
principles as if it were a separate taxpayer. We assess the realizability of our
deferred tax assets at the division level. As a result, our consolidated tax
provision may not equal the sum of the divisions' tax provisions.
We have not provided for possible U.S. taxes on the undistributed earnings
of foreign subsidiaries. We do not believe it is practicable to determine the
tax liability associated with the repatriation of our foreign earnings because
it is our policy to indefinitely reinvest these earnings in non-U.S. operations.
At December 31, 1999, these undistributed foreign earnings totaled approximately
$6.0 million.
NET INCOME (LOSS) PER SHARE
We calculate earnings per share for each series of stock using the two-class
method. To calculate basic earnings per share for each series of stock, we
divide the earnings allocated to each series of stock by the weighted average
number of outstanding shares of that series of stock during the applicable
period. When we calculate diluted earnings per share, we also include in the
denominator all potentially dilutive securities outstanding during the
applicable period. We allocate Genzyme's earnings to each series of our common
stock based on the earnings attributable to that series of stock. The earnings
attributable to Genzyme General Stock, as defined in our charter, is equal to
the net income or loss of Genzyme General determined in accordance with
generally accepted accounting principles and as adjusted for tax benefits
allocated to or from Genzyme General in accordance with our management and
accounting policies.
GCS-46
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings attributable to Molecular Oncology Stock, Surgical Products Stock and
Tissue Repair Stock are defined similarly and, as such, are based on the net
income or loss of the corresponding division as adjusted for the allocation of
tax benefits.
We calculate the income tax provision of each division as if such division
were a separate taxpayer which includes assessing realizability of deferred tax
assets at the division level. Our management and accounting policies provide
that, if as of the end of any fiscal quarter, a division can not use any
projected annual tax benefit attributable to it to offset or reduce its current
or deferred income tax expense, we may allocate the tax benefit to other
divisions in proportion to their taxable income without compensating payment or
allocation to the division generating the benefit. The tax benefits allocated to
Genzyme General, which are included in earnings attributable to Genzyme General
Stock, were:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- ----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Tax benefits allocated from:
Genzyme Molecular Oncology....................... $ 7,812 $ 3,527 $ 2,755
Genzyme Surgical Products........................ 16,128 17,936 10,112
Genzyme Tissue Repair............................ 10,866 16,394 17,666
------- ------- -------
Total............................................ $34,806 $37,857 $30,533
======= ======= =======
</TABLE>
In future periods, Genzyme Molecular Oncology, Genzyme Surgical Products or
Genzyme Tissue Repair may recognize deferred tax assets in the calculation of
their respective tax provisions determined on a separate division basis in
accordance with generally accepted accounting principles. However, to the extent
the benefit of those deferred tax assets has been previously allocated to
Genzyme General in accordance with the management and accounting policies, such
benefit will be reflected as a reduction of net income to determine net income
attributable to Molecular Oncology Stock, Surgical Products Stock or Tissue
Repair Stock. As of December 31, 1999, the total tax benefits previously
allocated to Genzyme General were (in thousands):
<TABLE>
<S> <C>
Genzyme Molecular Oncology.................................. $17,048
Genzyme Surgical Products................................... 58,106
Genzyme Tissue Repair....................................... 82,590
</TABLE>
REVISION
We had previously reported income (loss) allocated to Genzyme General Stock
and Surgical Products Stock, and earnings per share of Genzyme General Stock, as
adjusted to retroactively reflect the changes in earnings allocations resulting
from the June 1999 creation and distribution of Surgical Products Stock. The
allocation of Genzyme's historical earnings has been revised to reflect an
allocation of Genzyme's earnings to each series of common stock outstanding in
periods prior to June 1999 and to each series of common stock, including
Surgical Products Stock, thereafter. The impact of these revisions for the years
ended December 31, 1999, 1998 and 1997 are as follows:
GCS-47
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
GENZYME GENERAL:
PREVIOUSLY REPORTED (PRO FORMA INFORMATION PREVIOUSLY
REPORTED AS HISTORICAL):
Net income allocated to Genzyme General Stock........... $176,883 $170,909 $107,175
======== ======== ========
Net income per share of Genzyme General Stock:
Basic................................................. $ 2.13 $ 2.16 $ 1.40
======== ======== ========
Diluted............................................... $ 2.00 $ 2.06 $ 1.36
======== ======== ========
AS REVISED:
Net income allocated to Genzyme General Stock........... $149,360 $121,053 $ 77,435
======== ======== ========
Net income per share of Genzyme General Stock:
Basic................................................. $ 1.80 $ 1.53 $ 1.01
======== ======== ========
Diluted............................................... $ 1.71 $ 1.48 $ 0.98
======== ======== ========
GENZYME SURGICAL PRODUCTS:
PREVIOUSLY REPORTED (PRO FORMA INFORMATION PREVIOUSLY
REPORTED AS HISTORICAL):
Net loss allocated to Surgical Products Stock........... $(48,037) $(49,856) $(29,740)
======== ======== ========
AS REVISED:
Net loss allocated to Surgical Products Stock........... $(20,514)
========
Net loss per share of Surgical Products Stock--basic and
diluted............................................... $ (1.38)
========
Weighted average shares outstanding..................... 14,835
========
</TABLE>
If the shares of Surgical Products Stock initially issued on June 28, 1999
were assumed to be outstanding since January 1, 1997, net income allocated to
Genzyme General Stock, net loss allocated to Surgical Products Stock and
weighted average shares outstanding would have been as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
GENZYME GENERAL:
Net income allocated to Genzyme General Stock............. $176,883 $170,909 $107,175
Weighted average shares outstanding:
Basic................................................... 83,092 79,063 76,531
Diluted................................................. 93,228 85,822 78,925
GENZYME SURGICAL PRODUCTS:
Net loss allocated to Surgical Products Stock............. $(48,037) $(49,856) $(29,740)
Weighted average shares outstanding--basic and diluted.... 14,800 14,800 14,800
</TABLE>
GCS-48
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GENZYME GENERAL STOCK (REVISED):
The following table sets forth our computation of basic and diluted earnings
per share of Genzyme General Stock:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
Genzyme General net income............................ $142,077 $133,052 $ 76,642
Genzyme Surgical Products net loss.................... (27,523) (49,856) (29,740)
Tax benefit allocated from Genzyme Molecular
Oncology............................................ 7,812 3,527 2,755
Tax benefit allocated from Genzyme Surgical
Products............................................ 16,128 17,936 10,112
Tax benefit allocated from Genzyme Tissue Repair...... 10,866 16,394 17,666
-------- -------- --------
Net income allocated to Genzyme General
Stock--basic........................................ 149,360 121,053 77,435
Effect of dilutive securities (net of tax):
5 1/4% convertible subordinated notes(1):
Interest expense.................................. 8,375 4,911 --
Amortization of purchasers' discount and offering
costs(2)........................................ 597 348 --
5% convertible subordinated debentures(3):
Interest expense.................................. 676 258 --
Amortization of debt offering costs(4)............ 113 434 --
-------- -------- --------
Net income allocated to Genzyme General
Stock--diluted...................................... $159,121 $127,004 $ 77,435
======== ======== ========
Shares used in net income per common share--basic..... 83,092 79,063 76,531
Effect of dilutive securities:
Employee and director stock options............... 3,173 2,661 2,387
Warrants.......................................... 20 10 7
5 1/4% convertible subordinated notes(1).......... 6,313 3,874 --
5% convertible subordinated debentures(3)......... 630 214 --
-------- -------- --------
Dilutive potential common shares(5)................. 10,136 6,759 2,394
-------- -------- --------
Shares used in net income per common
share--diluted(5)................................... 93,228 85,822 78,925
======== ======== ========
Net income per share of Genzyme General Stock:
Basic............................................... $ 1.80 $ 1.53 $ 1.01
======== ======== ========
Diluted(5).......................................... $ 1.71 $ 1.48 $ 0.98
======== ======== ========
</TABLE>
------------------------
(1) We issued these notes in May 1998.
(2) We are amortizing the purchasers' discount and offering costs of
approximately $7.0 million over the term of these notes, which mature in
June 2005.
(3) We issued these debentures in August 1998.
(4) We are amortizing the offering costs of approximately $0.9 million over the
term of these debentures, which mature in August 2003.
GCS-49
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(5) We did not include the securities described in the following table in the
computation of Genzyme General's diluted earnings per share for each period
because these securities had an exercise price greater than the average
market price of Genzyme General Stock:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Shares of Genzyme General Stock issuable for options*....... 2,094 2,827 5,921
Shares of Genzyme General Stock issuable for warrants....... 26 40 40
----- ----- -----
Total shares with exercise prices greater than the average
market price of Genzyme General Stock during the period... 2,120 2,867 5,961
===== ===== =====
</TABLE>
------------------------
*These options had exercise price ranges of $48.06--$62.33 in 1999,
$28.67--$47.88 in 1998, and $23.59--$38.00 in 1997.
MOLECULAR ONCOLOGY STOCK:
We created Genzyme Molecular Oncology on June 18, 1997. Prior to this date,
the operations of Genzyme Molecular Oncology were included in the results of
Genzyme General. Net loss per share of Molecular Oncology Stock for 1997 is
calculated using the net loss allocated to Genzyme Molecular Oncology for the
period June 18, 1997 through December 31, 1997 and the weighted average shares
outstanding during the same period. Loss per share data is not presented for
Genzyme Molecular Oncology for the years ended December 31, 1995 and 1996, or
for the period from January 1, 1997 to June 17, 1997, as there were no shares of
Molecular Oncology Stock outstanding.
In accounting for the acquisition of PharmaGenics, Genzyme Molecular
Oncology recorded a valuation allowance against a $2.9 million tax asset related
to acquired net operating losses due to the application of the Company's policy
of accounting for income taxes at the divisional level as if each division were
a separate taxpayer. As a result, Genzyme Molecular Oncology recorded an
additional $2.9 million of goodwill that was not recorded at the consolidated
level. The amortization of this goodwill increases the loss of Genzyme Molecular
Oncology and, therefore, the loss allocated to Molecular Oncology Stock. This
additional amortization amounted to approximately $1.0 million in 1999 and 1998
and $0.5 million in 1997.
For all periods presented, basic and diluted net loss per share of Molecular
Oncology Stock are the same. We did not include the securities described in the
following table in the computation of Molecular
GCS-50
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Oncology Stock diluted net loss per share for each period because these
securities would have an anti-dilutive effect due to the net loss allocated to
Molecular Oncology Stock.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997 (2)
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Shares of Molecular Oncology Stock issuable for
options............................................. 1,809 1,158 826
Warrants to purchase Molecular Oncology Stock......... 10 10 10
Genzyme Molecular Oncology designated shares issuable
upon conversion of 5 1/4% convertible subordinated
notes allocated to Genzyme General(1)............... 682 682 --
Genzyme Molecular Oncology designated shares(1)....... 1,006 728 6,000
----- ----- -----
Total shares excluded from the calculation of diluted
net loss per share of Molecular Oncology Stock...... 3,507 2,578 6,836
===== ===== =====
</TABLE>
------------------------
(1) Genzyme Molecular Oncology designated shares are shares of Molecular
Oncology Stock that are not issued and outstanding, but which our board of
directors may issue, sell or distribute without allocating the proceeds to
Genzyme Molecular Oncology. As of December 31, 1999, there were 1,688,237
Genzyme Molecular Oncology designated shares, assuming that a public
offering of Molecular Oncology Stock is not completed prior to June 18,
2000. If such an offering is completed prior to that date, the number of
Genzyme Molecular Oncology designated shares reserved for issuance in
connection with a draw under an interdivisional financing arrangement in
1998 will decrease based on a formula set forth in our charter.
(2) For the period from June 17, 1997 through December 31, 1997.
SURGICAL PRODUCTS STOCK (REVISED):
We created Genzyme Surgical Products on June 28, 1999. Prior to this date,
the operations of Genzyme Surgical Products were included in the operations
allocated to Genzyme General and, therefore, in the net income allocated to
Genyzme General Stock. Net loss per share data of Surgical Products Stock is
calculated using the net loss allocated to Genzyme Surgical Products for the
period June 28, 1999 through December 31, 1999 and weighted average shares
outstanding during the same period. Loss per share data is not presented for
Surgical Products Stock for the years ended December 31, 1998 and 1997 as there
were no shares of Surgical Products Stock outstanding. If the shares of Surgical
Products Stock initially issued on June 28, 1999 were assumed to be outstanding
since January 1, 1997, net loss allocated to Surgical Products Stock and
weighted average shares outstanding would have been as follows:
<TABLE>
<CAPTION>
FOR THE YEARS DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Net loss allocated to Surgical Products
Stock........................................ $(48,037) $(49,856) $(29,740)
Weighted average shares outstanding--basic and
diluted...................................... 14,800 14,800 14,800
</TABLE>
GCS-51
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Basic and diluted net loss per share of Surgical Products Stock is the same.
We did not include the securities described in the following table in the
computation of Surgical Products Stock diluted net loss per share for each
period because these securities would have an anti-dilutive effect due to the
net loss allocated to Surgical Products Stock.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999(2)
----------------------
(AMOUNTS IN THOUSANDS)
<S> <C>
Shares of Surgical Products Stock issuable for
options............................................... 2,991
Genzyme Surgical Products designated shares issuable
upon conversion of 5 1/4% convertible subordinated
notes allocated to Genzyme General(1)................. 1,130
-----
Total shares excluded from the calculation of diluted
net loss per share of Surgical Products Stock......... 4,121
=====
</TABLE>
------------------------
(1) Genzyme Surgical Products designated shares are shares of Surgical Products
Stock that are not issued and outstanding, but which our board of directors
may issue, sell or distribute without allocating the proceeds to Genzyme
Surgical Products.
(2) For the period from June 28, 1999 through December 31, 1999.
TISSUE REPAIR STOCK:
For all periods presented, basic and diluted net loss per share of Tissue
Repair Stock is the same. We did not include the securities described in the
following table in the computation of Tissue Repair Stock diluted net loss per
share for each period because these securities would have an anti-dilutive
effect due to the net loss allocated to Tissue Repair Stock.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Shares of Tissue Repair Stock issuable for options.......... 4,176 3,398 2,777
Genzyme Tissue Repair designated shares(1).................. 2,238 716 885
Shares of Tissue Repair Stock issuable upon conversion of 5%
convertible subordinated note............................. -- 7,810 1,772
----- ------ -----
Total shares excluded from the calculation of diluted net
loss per share of Tissue Repair Stock..................... 6,414 11,924 5,434
===== ====== =====
</TABLE>
------------------------
(1) Genzyme Tissue Repair designated shares are shares of Tissue Repair Stock
that are not issued and outstanding, but which our board of directors may
issue, sell or distribute without allocating the proceeds to Genzyme Tissue
Repair.
GCS-52
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
As of January 1, 1998, we adopted SFAS 130, "Reporting Comprehensive
Income," which establishes standards for reporting comprehensive income, which
consists of net income and all changes in equity from non-shareholder sources.
ACCOUNTING FOR STOCK BASED COMPENSATION
As permitted under SFAS 123, we include pro forma net income and pro forma
earnings per share information (calculated using the fair value based method)
under the heading "Compensation Expense" in Note L., "Stockholders' Equity," to
these consolidated financial statements.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133, as
amended by SFAS 137, is effective for our fiscal year beginning January 1, 2001.
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that we recognize all
derivative instruments as either assets or liabilities on our balance sheets and
measure those instruments at fair value. We are currently assessing the effects
of adopting SFAS 133 and have not yet made a determination of the impact SFAS
133 will have on our consolidated financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB 101") which summarizes the staff's
view in applying generally accepted accounting principles to selected revenue
recognition issues. SAB 101 will be effective beginning October 1, 2000. We are
currently assessing the impact of SAB 101 on our revenue recognition policy.
UNCERTAINTIES
We are subject to risks and uncertainties common to companies in the
biotechnology industry. These risks and uncertainties may affect our future
results, and include:
- our ability to successfully complete preclinical and clinical development
of our products and services;
- our ability to manufacture sufficient amounts of our products for
development and commercialization activities;
- our ability to obtain timely regulatory approval of our products and
services;
- our ability to obtain and maintain adequate patent and other proprietary
rights protection of our products and services;
- the content and timing of decisions made by the FDA and other regulatory
agencies regarding our products and services;
- the accuracy of our estimates of the size and characteristics of the
markets to be addressed by our products and services;
- market acceptance of our products and services;
GCS-53
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- our ability to obtain reimbursement for our products and services by third
party payers;
- our ability to establish and maintain licenses, strategic collaborations
and distribution arrangements;
- the continued funding of our joint ventures; and
- the accuracy of our information regarding the products and resources of
our competitors and potential competitors.
NOTE B. OTHER GAINS AND CHARGES
During the fourth quarter of 1999, we recorded a net gain of $14.4 million
upon receipt of a payment associated with the termination of our agreement to
acquire Cell Genesys, Inc. We recorded this gain as other income in our
statement of operations and allocated it to Genzyme General.
During the third quarter of 1998, we recorded a $25.2 million charge to cost
of products sold. The components of this charge are:
- a $14.8 million charge related to the operations of Genzyme General to
write down excess inventory used to make Ceredase-Registered Trademark-
enzyme. We took this charge following our determination that, based on the
status of our efforts to convert Gaucher disease patients to a treatment
regimen using Cerezyme-Registered Trademark- enzyme, our existing supply
of Ceredase-Registered Trademark- enzyme was sufficient to meet estimated
patient needs.
- a $10.4 million charge related to the operations of Genzyme Surgical
Products to write down our inventory of Sepra products to net realizable
value. The Sepra products are our line of products and product candidates
designed to limit post-operative adhesions. During the third quarter of
1998, we revised our forecasted sales of Sepra products and, in accordance
with our policy, analyzed the Sepra products inventory to determine
whether the carrying value exceeded the net realizable value. The revised
forecast showed slower sales growth as well as higher manufacturing and
sales and marketing costs than originally expected. In addition, our
inventory on-hand had a relatively high cost per unit because production
was significantly less than originally planned. As a result, in the third
quarter of 1998, we recorded a charge to cost of products sold to write
down our Sepra products inventory to net realizable value.
We also recorded $29.1 million in other charges in the fourth quarter of
1997. The components of these charges are:
- an $18.1 million charge to cost of products sold to write down excess
inventory in our melatonin, bulk pharmaceuticals and fine chemical product
lines. We took this charge, which was allocated to Genzyme General, after
we discontinued these product lines.
- a $5.5 million charge to cost of products sold and a $3.5 million charge
to selling, general and administrative expense relating to the manufacture
and sale of Sepracoat-TM- coating solution. We took these charges, which
were allocated to Genzyme Surgical Products, after an FDA advisory panel
recommended against granting marketing approval for the product.
- a $2.0 million charge to other expense relating to our uncertainty in
collecting a note receivable that we issued when we sold Genetic
Design, Inc. This charge was allocated to Genzyme General.
GCS-54
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C. DISPOSITIONS OF ASSETS
SYBRON LABORATORY PRODUCTS
In July 1999, we sold the assets of our immunochemistry product line to an
operating unit of Sybron Laboratory Products Corp. for $5.0 million in cash. We
recorded a gain of $0.5 million in connection with the sale of this product
line. The immunochemistry product line had been allocated to Genzyme General.
LABORATORY CORPORATION OF AMERICA
In 1996, we sold Genetic Design to Laboratory Corporation of America. A
portion of the purchase price was a note for which we previously had fully
reserved because of uncertainty regarding collection. In April 1999, we received
an $8.4 million payment on that note and recorded a $7.5 million gain in
connection with that payment. Genetic Design had been allocated to Genzyme
General.
TECHNE
In July 1998, we sold the assets of our research products business to Techne
Corporation in exchange for:
- $24.8 million in cash;
- approximately 987,000 shares of Techne common stock; and
- royalties on product sales by Techne's biotechnology group through
June 2003.
We will record royalty income as it is earned. In 1998, we recorded a
$31.2 million gain in connection with the sale of this business and an
additional $3.4 million gain upon the sale of a portion of our investment in
Techne common stock. We recorded these gains as gain on sale of equity
investments. In 1999, we recorded a gain of $2.0 million upon the sale of our
remaining shares of Techne common stock. The research products business had been
allocated to Genzyme General.
NOTE D. ACQUISITIONS
PEPTIMMUNE
In July 1999, we acquired Peptimmune, Inc., a privately-held company whose
lead development program focuses on a treatment for pemphigus vulgaris. We
allocated this acquisition to Genzyme General and accounted for it as a
purchase. We allocated the aggregate purchase price of $6.5 million and assumed
liabilities of $0.3 million to the tangible and intangible assets we acquired
from Peptimmune based on their respective fair values (amounts in thousands):
<TABLE>
<S> <C>
Property, plant & equipment................................. $ 128
Deferred tax asset.......................................... 1,229
In-process technology....................................... 5,436
------
Total..................................................... $6,793
======
</TABLE>
The $5.4 million allocated to in-process research and development represents
the value we assigned to Peptimmune's programs that were still in the
development stage and for which there was no alternative future use. We recorded
this amount as a charge to operations.
GCS-55
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D. ACQUISITIONS (CONTINUED)
PHARMAGENICS
In June 1997, we acquired PharmaGenics, Inc., a company engaged in the
research and development of products for the treatment of cancer and other
diseases. We accounted for this acquisition, which was allocated to Genzyme
Molecular Oncology, as a purchase. We allocated the aggregate purchase price of
$27.5 million, plus acquisition costs of $2.5 million and assumed liabilities of
$4.9 million, to the tangible and intangible assets we acquired from
PharmaGenics based on their respective fair values (amounts in thousands):
<TABLE>
<S> <C>
Equipment................................................... $ 208
Other assets................................................ 50
Completed technology (to be amortized over 3 years)......... 20,000
Goodwill (to be amortized over 3 years)..................... 12,293
Deferred tax asset.......................................... 2,900
Deferred tax liability (to be amortized over 3 years)....... (7,600)
In-process technology....................................... 7,000
-------
Total..................................................... $34,851
=======
</TABLE>
In 1998, we made an adjustment of $0.5 million in the amount of liabilities
we assumed.
The $7.0 million allocated to in-process research and development represents
the value we assigned to PharmaGenics' programs that were still in the
development stage and for which there was no alternative future use. We assigned
values to all of PharmaGenics' programs (both complete and in-process) by
selecting the maximum anticipated value of these programs and comparing them to
the values of comparable technologies. In 1997, we recorded a one-time charge to
operations for the amount of the purchase price allocated to in-process
technology.
The deferred tax liability of $7.6 million results from the temporary
difference between the book and tax basis of the completed technology computed
at a 38.0% incremental tax rate.
NOTE E. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
We periodically enter into interest rate swap contracts to reduce borrowing
costs by effectively modifying the interest rate under our debt instruments. We
generally enter into these contracts concurrently with the issuance of the debt
they are intended to modify. The notional amount, interest payment and maturity
dates of these contracts generally match the principal, interest payment and
maturity dates of the related debt. As a result, any market risk or opportunity
associated with a swap contract is fully offset by the opposite market impact on
the related debt. We record payments that we make or receive under these
contracts as interest expense.
We had no outstanding interest rate hedge agreements at December 31, 1999.
At December 31, 1998, we had one open interest rate hedge agreement for which
the fair value was $1.3 million in favor of the bank.
NOTE F. ACCOUNTS RECEIVABLE AND INTANGIBLE ASSETS
Our trade receivables primarily represent amounts due from distributors,
healthcare service providers, and companies and institutions engaged in
research, development or production of pharmaceutical and
GCS-56
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F. ACCOUNTS RECEIVABLE AND INTANGIBLE ASSETS (CONTINUED)
biopharmaceutical products. We perform credit evaluations of our customers on an
ongoing basis and generally do not require collateral. We state accounts
receivable at fair value after reflecting an allowance for doubtful accounts.
This allowance was $19.3 million at December 31, 1999 and $13.9 million at
December 31, 1998.
The following table contains information on Genzyme Corporation's intangible
assets for the periods presented:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
ESTIMATED ESTIMATED
USEFUL USEFUL
DECEMBER 31, LIFE DECEMBER 31, LIFE
1999 (YEARS) 1998 (YEARS)
------------ --------- ------------ ---------
(AMOUNTS IN THOUSANDS, EXCEPT USEFUL LIFE DATA)
<S> <C> <C> <C> <C>
Tradenames....................................... $ 45,878 40 $ 45,878 40
Goodwill......................................... 210,728 29 221,693 28
License fees..................................... 25,982 15 25,490 15
Customer lists................................... 8,324 10 12,369 10
Completed technology............................. 20,000 3 20,000 3
Non-compete agreements........................... 6,000 5 6,910 5
Patents.......................................... 16,279 12 16,204 12
Other............................................ 5,145 4 311 5
-------- --------
338,336 348,855
Less accumulated amortization.................... (85,183) (69,339)
-------- --------
Intangible assets, net........................... $253,153 $279,516
======== ========
</TABLE>
NOTE G. INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Raw materials........................................... $ 39,958 $ 41,328
Work-in-process......................................... 44,559 27,474
Finished products....................................... 32,752 41,031
-------- --------
Total................................................. $117,269 $109,833
======== ========
</TABLE>
GCS-57
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Plant and equipment..................................... $246,068 $257,706
Land and buildings...................................... 188,892 156,067
Leasehold improvements.................................. 93,159 71,425
Furniture and fixtures.................................. 17,374 17,619
Construction-in-progress................................ 28,371 30,805
-------- --------
573,864 533,622
Less accumulated depreciation........................... (190,683) (151,003)
-------- --------
Property, plant and equipment, net...................... $383,181 $382,619
======== ========
</TABLE>
Our depreciation expense was $40.7 million in 1999, $39.2 million in 1998,
and $33.5 million in 1997.
We attribute our fixed assets among our operating divisions based on use.
We have capitalized approximately $39.4 million, which represents the costs
we have incurred in validating the manufacturing process for products which have
reached technological feasibility. We have capitalized the following amounts of
interest costs incurred in financing the construction of our manufacturing
facilities:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C>
$ 1.0
million..... $0.7 million $0.5 million
</TABLE>
Our estimated cost of completion for assets under construction as of
December 31, 1999 is $39.4 million.
GCS-58
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I. INVESTMENTS
MARKETABLE SECURITIES
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1999 1998
----------------------- -----------------------
COST MARKET VALUE COST MARKET VALUE
-------- ------------ -------- ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash equivalents(1):
Corporate notes............................... $ 51,038 $ 51,023 $ 8,131 $ 8,129
Money market fund............................. 26,527 26,527 70,805 70,805
-------- -------- -------- --------
$ 77,565 $ 77,550 $ 78,936 $ 78,934
======== ======== ======== ========
Short-term:
Corporate notes............................... $252,711 $251,779 $175,002 $175,453
Federal....................................... 4,065 4,067 -- --
-------- -------- -------- --------
$256,776 $255,846 $175,002 $175,453
======== ======== ======== ========
Long-term:
Corporate notes............................... $175,080 $172,387 $226,002 $226,259
Federal....................................... 4,081 4,026 33,412 33,581
U.S. Treasury notes........................... 90,904 90,575 21,323 21,824
-------- -------- -------- --------
$270,065 $266,988 $280,737 $281,664
======== ======== ======== ========
Investments in equity securities.............. $ 63,983 $ 97,859 $ 62,244 $ 51,977
======== ======== ======== ========
</TABLE>
------------------------
(1) Cash equivalents are included as part of cash and cash equivalents on our
balance sheet.
We attribute marketable securities among our operating divisions.
REALIZED AND UNREALIZED GAINS AND LOSSES ON MARKETABLE SECURITIES AND EQUITY
INVESTMENTS
We recorded gains of $2.0 million in 1999 and $3.4 million in 1998 upon the
sale of our investment in shares of Techne common stock. We also recorded a
$5.7 million charge in 1999 in connection with our investments in the common
stock of Pharming Group N.V. and IntegraMed America, Inc. and a $3.4 million
charge in 1998 in connection with our investment in the common stock of Celtrix
Pharmaceuticals, Inc. because we considered the decline in the value of those
investments to be other than temporary.
In connection with these assessments, we concluded that evidence existed
that the value of the investments would recover to at least our cost. This
included continued positive progress in the issuers' scientific programs,
ongoing activity in our collaborations with the issuers, and a lack of any
substantial company-specific adverse events causing the declines in value.
However, given the significance and duration of the declines as of the end of
the applicable quarter, we concluded that it was unclear over what period such
price recoveries would take place and that, accordingly, the positive evidence
suggesting that the investments would recover to at least our purchase price was
not sufficient to overcome the presumption that the current market price was the
best indicator of the value of these investments.
GCS-59
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I. INVESTMENTS (CONTINUED)
We record gross unrealized holding gains and losses in stockholders' equity.
The following table sets forth the amount we recorded:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Unrealized holding gains........................ $37.1 million $3.6 million
Unrealized holding losses....................... $6.9 million $12.5 million
</TABLE>
The following table contains information regarding the range of contractual
maturities of our investments in debt securities:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1999 1998
----------------------- -----------------------
COST MARKET VALUE COST MARKET VALUE
-------- ------------ -------- ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Within 1 years.......................... $334,341 $333,396 $253,939 $254,387
1-2 years............................... 168,704 166,152 259,363 259,788
2-10 years.............................. 101,361 100,836 21,373 21,876
-------- -------- -------- --------
$604,406 $600,384 $534,675 $536,051
======== ======== ======== ========
</TABLE>
GCS-60
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I. INVESTMENTS (CONTINUED)
We attribute strategic investments in equity securities of unconsolidated
entities among our operating divisions. All of the investments included in the
following table are allocated to Genzyme General except for our investment in
Focal, Inc., which we allocate to Genzyme Surgical Products.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------------------
ADJUSTED UNREALIZED
COST MARKET VALUE GAIN/(LOSS)
-------- ------------ -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Entity
Abiomed, Inc................................ $15,804 $42,404 $26,600
Aronex Pharmaceutical Inc................... 1,693 1,323 (370)
BioMarin Pharmaceutical Inc................. 18,000 24,705 6,705
Celtrix Pharmaceuticals, Inc. (1)........... 4,898 8,692 3,794
Dyax Corporation............................ 3,000 3,000 --
Focal, Inc.................................. 4,000 3,140 (860)
GelTex Pharmaceuticals, Inc................. 2,500 1,281 (1,219)
Genovo, Inc................................. 3,400 3,400 --
Integramed America, Inc. (2)................ 117 115 (2)
Pharming Group, N.V. (3).................... 7,886 7,723 (163)
Other....................................... 2,076 2,076 --
------- ------- -------
Total..................................... $63,374 $97,859 $34,485
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------------
ADJUSTED COST MARKET VALUE UNREALIZED LOSS
------------- ------------ ---------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Total................................. $62,244 $51,977 $10,267
======= ======= =======
</TABLE>
------------------------
(1) In December 1998, we determined that a portion of the impairment in our
investment in Celtrix was other than temporary and recorded a charge to
operations of $3.4 million.
(2) In December 1999, we determined that a portion of the impairment in our
investment in Integramed America was other than temporary and recorded a
charge to operations of $0.2 million.
(3) Our investment in Pharming is denominated in Euros. We translated this
investment into U.S. dollars at the current exchange rate on December 31,
1999. In June 1999, we determined that a portion of the impairment in our
investment in Pharming was other than temporary and recorded a charge to
operations of $5.5 million.
GENZYME TRANSGENICS CORPORATION
At December 31, 1999, we owned approximately 33% of the outstanding common
stock of Genzyme Transgenics Corporation and record in net loss of
unconsolidated affiliates our portion of its results. We refer to Genzyme
Transgenics Corporation in this note as "GTC." Our portion of GTC's net losses
was $7.1 million in 1999, $7.4 million in 1998, and $2.9 million in 1997. The
fair market value of our investment in GTC common stock was $93.8 million on
December 31, 1999 and $41.8 million on December 31, 1998.
GCS-61
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I. INVESTMENTS (CONTINUED)
In November 1999, we purchased $6.6 million in shares of Series B
convertible preferred stock of GTC. We can convert these shares into shares of
GTC common stock at any time at a price of $6.30 per share. We will receive an
escalating annual dividend of between 11% and 12% on amounts that we convert
into common stock.
Our Chairman and Chief Executive Officer is a director of GTC.
The following table contains condensed statement of operations and balance
sheet data for GTC:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Revenues....................................... $ 68,784 $ 62,412 $ 62,938
Operating loss................................. (2,666) (19,365) (8,352)
Net loss....................................... (18,761) (19,950) (9,343)
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------
1999 1998
-------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Current assets........................................ $29,604 $32,417
Noncurrent assets..................................... 54,708 50,920
Current liabilities................................... 43,471 37,297
Noncurrent liabilities................................ 14,676 9,836
</TABLE>
AGREEMENTS WITH GTC
We have a number of agreements with GTC, including the following:
- services agreement under which GTC pays us for services provided by us,
including treasury, data processing and laboratory support services.
- sublease agreement under which we sublease a portion of one of our
facilities in Framingham, Massachusetts; and
- research and development agreement under which each of the parties
performs research services for the other.
During 1999, we received approximately $2.2 million from GTC under these
agreements and we paid GTC approximately $1.2 million under the research and
development agreement. At December 31, 1999, GTC owed Genzyme $0.5 million under
these agreements.
We have guaranteed GTC's obligations under a $17.5 million revolving credit
facility and a $7.1 million term loan with a commercial bank. In exchange for
this guarantee, GTC issued us a warrant to purchase up to 288,000 shares of GTC
common stock at an exercise price of $4.875 per share. Of these shares, 192,000
are currently exercisable. GTC also issued us a warrant to purchase 145,000
shares of GTC common stock at an exercise price of $2.84375 per share in
connection with our guarantee of GTC's obligations under a prior credit
facility. All of the shares subject to this warrant are exercisable.
We have also made a $6.3 million line of credit available to GTC. No amounts
were outstanding under this credit line as of December 31, 1999. This credit
line expires in March 2000. Upon expiration, GTC may
GCS-62
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I. INVESTMENTS (CONTINUED)
convert any outstanding balance into a three-year term loan. The line of credit
requires GTC to meet financial covenants similar to those under GTC's bank
credit facility.
ATIII LLC. In 1998, we formed ATIII LLC, a joint venture with GTC for the
development and commercialization of transgenic recombinant human antithrombin
III. We are funding 70% of the first $33.0 million in development costs,
excluding facility costs, under this program and 50% of all development costs
thereafter. We will pay 50% of all new facility costs to be incurred by ATIII
LLC. All profits of ATIII LLC will be split equally; losses are allocated based
on the amount of funding provided by each venturer. As our combined direct and
indirect interest in ATIII LLC is in excess of 50%, we consolidate the results
of ATIII LLC and record GTC's portion of the ATIII LLC's losses as minority
interest. We allocate our ownership interest in ATIII LLC to Genzyme General.
Under the agreement which established ATIII LLC joint venture in 1998, we
initially owned a 3.7% interest in ATIII LLC and GTC owned a 96.3% interest. In
accordance with the executed purchase agreement, GTC sold and assigned a 46.3%
ownership interest in ATIII LLC to us so that we each own 50% of the venture. In
connection with the purchase agreement, Genzyme has agreed to pay to GTC:
- $2.5 million after the second consecutive quarter in which net sales of
collaboration products for such quarter exceed $5 million; and
- $10 million on the first full approval, if and when approved by the FDA of
a major market country or by the European Union's European Medicines
Evaluation Agency ("EMEA") of:
- a biologics license application ("BLA") filed by ATIII LLC for the use
of transgenic ATIII for the treatment of sepsis; or
- an amendment to the BLA previously filed by ATIII LLC and approved by
the FDA of a major market country or by the EMEA to add sepsis as an
indication for transgenic ATIII.
As of December 31, 1999 and 1998, none of the above milestone events have
been achieved and no payments have been made.
DYAX CORP.
In March 1996, we entered into two license agreements with Dyax Corp. and
Protein Engineering Corporation, a wholly-owned subsidiary of Dyax, for Dyax's
phage display technology. We pay annual license maintenance fees of $50,000 for
this license. We will also make milestone payments and pay royalties on net
sales of diagnostic and therapeutic products discovered, made or developed using
the licensed technology. In September 1996, we subleased office and laboratory
space in Cambridge, Massachusetts to Dyax. Current rent under this sublease is
$53,943 per month.
In October 1998, we entered into a collaboration agreement with 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, we 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. To date, Dyax has not
borrowed any money under the line of credit. We will make milestone payments to
Dyax upon FDA approval of products that arise out of the collaboration, and we
will share equally with Dyax all profits from the sale of these products.
GCS-63
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I. INVESTMENTS (CONTINUED)
One of our directors is chairman and chief executive officer of Dyax and
three of our directors are directors of Dyax.
INVESTMENTS IN JOINT VENTURES
Except as described below, we own a 50% interest in the following joint
ventures:
<TABLE>
<CAPTION>
JOINT VENTURE PARTNER(S) EFFECTIVE DATE PRODUCT/INDICATION GENZYME DIVISION
------------- ---------- -------------- ------------------ ----------------
<S> <C> <C> <C> <C>
RenaGel LLC GelTex Pharmaceuticals, June 1997 Renagel-Registered Trademark- Genzyme General
Inc.(1) capsules for the reduction of
serum phosphorus in patients
with end-stage renal disease
BioMarin/ Genzyme LLC BioMarin Pharmaceutical September 1998 Alpha-L-iduronidase for the Genzyme General
Inc. treatment of
mucopolysaccharidosis-I
Pharming/ Genzyme LLC Pharming Group, N.V. October 1998 Human alpha-glucosidase for the Genzyme General
treatment of Pompe disease
Diacrin/ Genzyme LLC Diacrin, Inc.(2) October 1996 Products using porcine fetal cells Genzyme Tissue
for the treatment of Parkinson's Repair (until May
and Huntington's diseases 1999); Genzyme
General (after May
1999)
StressGen/ Genzyme StressGen July 1997 Stress gene therapies for the Genzyme Molecular
LLC Biotechnologies Corp.; treatment of cancer Oncology
Canadian Medical
Discoveries Fund Inc.
(until October 1999)
</TABLE>
------------------------------
(1) Our Chairman and Chief Executive Officer is a director of GelTex and one of
our other directors is Chairman of GelTex.
(2) Our Chairman and Chief Executive Officer is a director of Diacrin.
In July 1997, together with StressGen Biotechnologies Corp. and the Canadian
Medical Discoveries Fund, Inc. ("CMDF"), we established StressGen/Genzyme LLC, a
joint venture to develop stress gene therapies for the treatment of cancer.
Because CMDF had the right to require StressGen and Genzyme to purchase its
membership interest in the joint venture, we recorded 50% of the net operating
losses of the joint venture. As of December 31, 1998, our portion of the
cumulative losses of StressGen/Genzyme LLC exceeded our initial capital
contribution to the joint venture by $1.2 million and, as a result, we recorded
the $1.2 million as a liability.
For the period January through August 1999, we recorded an additional
$0.8 million of losses from the joint venture increasing the liability related
to the joint venture to $2.0 million. In August 1999, CMDF exercised its put
right and StressGen and Genzyme were required to purchase its membership
interest in the joint venture at an aggregate price of $10.0 million (Canadian)
As a result, Genzyme was obligated to repurchase one-half of the CMDF's interest
in the joint venture for approximately $3.9 million ($5.0 million (Canadian)).
To record the exercise of the put option, we recorded:
- a $1.9 million increase to our liability related to the joint venture,
thus increasing the liability to $3.9 million;
GCS-64
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I. INVESTMENTS (CONTINUED)
- a $0.9 million increase to our investment in joint venture to reflect our
50% interest in the net assets of the joint venture; and
- a $1.0 million charge to equity in net loss of unconsolidated affiliates
because, at that time, it was expected that the joint venture would be
dissolved and the joint venture interest would have no value beyond the
cash it held.
We completed the repurchase of CMDF's interest in October 1999 by issuing to
CMDF 617,200 shares of Molecular Oncology Stock at a price of $6.375 per share.
The purchase price was calculated in accordance with the joint venture
agreements based on the market price of Molecular Oncology Stock over a period
prior to the repurchase. To record the repurchase, we increased stockholders'
equity by $3.9 million to reflect the issuance of the shares of Molecular
Oncology Stock and decreased our liability related to the joint venture by
$3.9 million to zero.
We agreed to dissolve StressGen/Genzyme LLC in December 1999 and in
connection with the dissolution the joint venture received a cash distribution
of $0.9 million which was equal to Genzyme's investment in the joint venture at
that time.
We do not present summary financial information for StressGen/Genzyme LLC
because we do not consider the impact of its activities to be material to our
operations for the years ended December 31, 1999 and 1998.
The following tables describe:
- the amount of funding we have provided to each joint venture to date;
- amounts due to us by each joint venture as of December 31, 1999 for
services we provided on behalf of the joint venture, which we have
recorded on our balance sheet as prepaids and other current assets;
- our portion of the losses of each joint venture for the periods presented,
which we have recorded as charges to equity in net loss of unconsolidated
affiliates in our statement of operations; and
- total net losses of each joint venture for the periods presented.
GCS-65
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
TOTAL FUNDING RECEIVABLES
AS OF AS OF
JOINT VENTURE/ DECEMBER 31, DECEMBER 31,
UNCONSOLIDATED AFFILIATE 1999 1999
------------------------------------------------------------ ------------- ------------
(AMOUNTS IN MILLIONS)
<S> <C> <C>
RenaGel LLC (1)............................................. $29.1 $2.1
BioMarin/Genzyme LLC........................................ 8.3 0.5
Pharming/Genzyme LLC........................................ 14.9 0.4
Diacrin/Genzyme LLC......................................... 23.7 1.0
StressGen/Genzyme LLC....................................... 0.7 --
Genzyme Transgenics Corp.................................... -- 0.6
----- ----
Totals...................................................... $76.7 $4.6
</TABLE>
------------------------
(1) As part of this joint venture, we made payments to GelTex of $10.0 million
in 1999 and $15.0 million in 1998 in exchange for certain technology access
rights. We capitalized these payments and are amortizing these amounts over
15 years.
<TABLE>
<CAPTION>
OUR PORTION OF
THE NET LOSSES
FROM OUR
UNCONSOLIDATED TOTAL LOSSES OF OUR
AFFILIATES UNCONSOLIDATED AFFILIATES
JOINT VENTURE/ ------------------- ------------------------------
UNCONSOLIDATED AFFILIATE 1999 1998 1997 1999 1998 1997
---------------------------------------------------- -------- -------- -------- -------- -------- --------
(AMOUNTS IN MILLIONS) (AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
RenaGel LLC......................................... $ (8.1) $ (7.6) $ (2.3) $(15.9) $(15.1) $ (4.6)
BioMarin/Genzyme LLC................................ (7.0) (0.9) -- (13.9) (1.8) --
Pharming/Genzyme LLC................................ (10.3) (4.0) -- (10.7) (4.1) --
Diacrin/Genzyme LLC................................. (8.0) (7.7) (6.7) (10.7) (9.6) (6.8)
StressGen/Genzyme LLC (1)........................... (1.9) (1.6) (0.3) (1.3) (3.4) (0.4)
Genzyme Transgenics Corp............................ (7.1) (7.3) (2.9) (18.8) (20.0) (9.3)
Other............................................... (0.3) 0.1 (0.1) -- (0.2) (0.3)
------ ------ ------ ------ ------ ------
Totals.............................................. $(42.7) $(29.0) $(12.3) $(71.3) $(54.2) $(21.4)
</TABLE>
------------------------
(1) Because the Canadian Medical Discoveries Fund had the right to require us to
repurchase the fund's interest in the joint venture, we recorded 50% of the
losses incurred by the joint venture. When the fund exercised its repurchase
right in August 1999, we recorded a $1.0 million charge to our statement of
operations in connection with the repurchase.
GCS-66
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I. INVESTMENTS (CONTINUED)
Condensed financial information for our joint ventures, including the
allocation of losses, is summarized below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Revenue.......................................... $ 89,884 $ 62,638 $ 62,938
Gross profit..................................... 20,828 2,256 8,109
Operating expenses............................... (145,717) (113,569) (83,624)
Net loss......................................... (71,343) (54,186) (21,398)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
-------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Current assets.............................................. $57,897 $47,578
Noncurrent assets........................................... 62,865 58,349
Current liabilities......................................... 56,626 47,915
Noncurrent liabilities...................................... 14,676 14,410
</TABLE>
NOTE J. ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
-------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Compensation.......................................... $25,909 $23,310
Technology access fee................................. -- 10,000
Professional fees..................................... 3,908 6,146
Royalties............................................. 7,667 6,895
Rebates............................................... 7,125 5,663
Other................................................. 28,750 20,375
------- -------
$73,359 $72,389
======= =======
</TABLE>
NOTE K. LONG-TERM DEBT AND LEASES
LONG-TERM DEBT
While Genzyme Corporation is responsible for repaying all long-term debt
obligations, we allocate these obligations to our operating divisions for
financial reporting purposes based on the intended use of the funds.
GCS-67
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE K. LONG-TERM DEBT AND LEASES (CONTINUED)
Our long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
5 1/4% convertible subordinated notes................... $250,000 $250,000
Revolving credit facility maturing in November 2002..... 23,000 --
Revolving credit facility maturing in November 1999..... -- 100,000
5% convertible subordinated debentures.................. 22,622 21,559
6% convertible subordinated note........................ -- 12,579
Mortgage notes.......................................... -- 3,167
-------- --------
295,622 387,305
-------- --------
Less current portion.................................... (5,000) (100,080)
-------- --------
$290,622 $287,225
======== ========
</TABLE>
Over the next five years, we will be required to repay the following
principal amounts on our long-term debt (excluding capital leases):
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 AFTER 2004
------------ ------------ ------------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
$ 5.0
million..... $ -- $18.0 million $22.6 million $ -- $250.0 million
</TABLE>
REVOLVING CREDIT FACILITY
In November 1999, our $225 million revolving credit facility matured. We
refinanced this facility with a $50.0 million revolving credit facility that
matures in November 2000 and a $100.0 million revolving credit facility that
matures in November 2002. When we refinanced the credit facility,
$100.0 million was outstanding. Of this amount, we:
- repaid the $82.0 million that was allocated to Genzyme General; and
- refinanced the $18.0 million that was allocated to Genzyme Tissue Repair
under the new credit facility.
Loans under the new credit facility bear interest at LIBOR plus an
applicable margin pursuant to the terms and conditions defined in the credit
agreement, and are collateralized by the stock of Genzyme Securities
Corporation. This facility requires us to satisfy a number of financial
covenants.
At December 31, 1999, $23.0 million was outstanding under the facility that
matures in November 2002. Of this amount, $5.0 million was allocated to Genzyme
Molecular Oncology and $18.0 million was allocated to Genzyme Tissue Repair. The
interest rate on these borrowings was approximately 6.8%.
5 1/4% CONVERTIBLE SUBORDINATED NOTES
In May 1998, we issued $250.0 million in principal of 5 1/4% convertible
subordinated notes due June 2005. After deducting the initial purchasers'
discount and offering costs, we received $243.0 million in proceeds from this
issuance.
GCS-68
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE K. LONG-TERM DEBT AND LEASES (CONTINUED)
We pay interest on the notes on June 1 and December 1 of each year and made
the first interest payment in December 1998. The notes are convertible into one
share of Genzyme General Stock, 0.10805 share of Molecular Oncology Stock and
0.17901 share of Surgical Products Stock at a price of $39.60 and contain
anti-dilution adjustments. We may redeem all or part of the notes at our option
after June 10, 2001 at the following prices (expressed as a percentage of the
principal amount), plus accrued interest:
<TABLE>
<CAPTION>
ON OR BEFORE 5/31/02 6/1/02--5/31/03 6/1/03--5/31/04 ON OR AFTER 6/1/04
-------------------- --------------- --------------- ------------------
<S> <C> <C> <C>
102.63%...... 101.75% 100.88% 100.00%
</TABLE>
The fair value of these notes at December 31, 1999 was $317.5 million.
5% CONVERTIBLE SUBORDINATED NOTE
In February 1997, we issued a 6% convertible subordinated note in a
principal amount of $13.0 million. This note was convertible into shares of
Tissue Repair Stock at a discount to the market value of that stock. We recorded
charges to interest expense of $0.2 million in 1999, $0.5 million in 1998 and
$1.1 million in 1997, to reflect the accretion to fair value of the conversion
feature of this note.
In 1998, the holder of this note converted $0.6 million in principal amount
into 223,405 shares of Tissue Repair Stock. We paid $1.1 million in accrued
interest in connection with these conversions. In 1999, the holder converted the
remaining $12.4 million in principal amount into 7,257,573 shares of Tissue
Repair Stock. We paid $0.5 million in accrued interest in connection with these
conversions. As of December 31, 1999, there was no principal or interest
remaining on this convertible note.
5% CONVERTIBLE SUBORDINATED DEBENTURES
In August 1997, we issued $20.0 million in principal of 6% convertible
subordinated debentures. These debentures were convertible into shares of
Molecular Oncology Stock at a discount to the market value of that stock. We
recorded charges to interest expense of $1.9 million in 1998 and $0.9 million in
1997 to reflect the accretion to fair value of the conversion feature of the 6%
debentures. In accordance with the terms of these debentures, they were
exchanged in August 1998 for $21.2 million in principal of 5% convertible
subordinated debentures due August 2003. These debentures are convertible into
shares of Genzyme General Stock. In November 1998 we reserved approximately 3.0
million Genzyme Molecular Oncology designated shares for issuance in connection
with this exchange. In October 1999 we increased the number of Genzyme Molecular
Oncology designated shares reserved in connection with this exchange by
approximately 0.3 million.
MORTGAGE NOTES
In 1999, we repaid the remaining $3.1 million of principal and accrued
interest of $0.1 million under our mortgage note due in December 2000. This
obligation had been allocated to Genzyme General.
GCS-69
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE K. LONG-TERM DEBT AND LEASES (CONTINUED)
OPERATING LEASES
We lease facilities and personal property under operating leases with terms
in excess of one year. Our total expense under operating leases was:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C>
$22.2
million....... $18.4 million $16.3 million
</TABLE>
Over the next five years, we will be required to repay the following amounts
under operating leases:
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 AFTER 2004
-------------- ------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
$17.5
million....... $17.0 million $15.7 million $13.6 million $13.1 million $119.9 million
</TABLE>
In June 1992, one of our wholly-owned subsidiaries entered into a 65-year
land lease with an unaffiliated lessor. Our expenses under this lease were $1.5
million in 1999 and 1998 and $1.3 million in 1997. Our rent under this lease
increases every five years based on the Consumer Price Index or, if higher, 3%
per year.
NOTE L. STOCKHOLDERS' EQUITY
COMMON STOCK
We have four series of common stock--Genzyme General Stock, Molecular
Oncology Stock, Surgical Products Stock and Tissue Repair Stock--which we refer
to as "tracking stock." Unlike typical common stock, each of our tracking stocks
is designed to track the financial performance of a specific subset of our
business operations and its related allocated assets, rather than operations and
assets of our entire company.
The chief mechanism intended to cause our tracking stock to "track" the
financial performance of a corresponding division are special provisions in our
charter governing dividends and distributions. The provisions governing
dividends provide that our board of directors has discretion to decide if and
when to declare dividends, subject to certain limitations. To the extent that
the following amount does not exceed the funds of Genzyme Corporation that would
be legally available for dividends under Massachusetts law, the dividend limit
for a stock corresponding to a division is the greater of:
- the amount that would be legally available for dividends under
Massachusetts law if the division were a separate corporation; or
- the amount by which the greater of the fair value of the division's
allocated net assets, or its allocated paid-in capital plus allocated
earnings, exceeds its corresponding stock's par value, preferred stock
preferences and debt obligations.
Within these parameters and other, general limits under our charter and
Massachusetts law, the amount of any dividend payment will be at the board of
directors' discretion. To date, we have never paid or declared a cash dividend
on shares of any of our series of common stock, nor do we anticipate doing so in
the foreseeable future. Unless declared, no dividends accrue on our tracking
stocks.
Our charter also requires that distributions be made to holders of Molecular
Oncology Stock, Surgical Products Stock or Tissue Repair Stock if all or
substantially all of the assets allocated to that stock's corresponding division
are sold to a third party. This mandatory distribution can be in the form of a
GCS-70
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE L. STOCKHOLDERS' EQUITY (CONTINUED)
dividend, a redemption of the division's related tracking stock or an exchange
of that tracking stock for Genzyme General Stock, as chosen by our board of
directors in its discretion. The distribution, if by dividend or redemption,
must equal in value the net after-tax proceeds received from the sale. If our
board of directors chooses to make the distribution by issuing Genzyme General
Stock in exchange for the selling division's related tracking stock, then the
exchange must be effected at a 10% premium to the corresponding tracking stock's
average market price following announcement of the sale.
While tracking stock is designed to reflect a division's performance, it is
common stock of the entire company. Therefore, a holder of tracking stock is a
common stockholder subject to risks of investing in the business, assets and
liabilities of Genzyme as a whole. For instance, the assets allocated to any
division are nonetheless subject to company-wide claims of creditors, product
liability plaintiffs and stockholder litigation. Also, in the event of a Genzyme
liquidation, insolvency or similar event, a holder of tracking stock would have
no direct claim against the assets allocated to the corresponding tracked
division; a holder of tracking stock would only have the rights of a common
stockholder in the combined assets of Genzyme, subject also to the Genzyme
charter's allocation of liquidation units as discussed below under the
subheading "Liquidation Units."
RIGHTS OF COMMON STOCK
VOTING RIGHTS
Genzyme General Stock is entitled to one vote per share, which is never
adjusted. However, the votes per share of our other series of common stock are
adjusted every two years. Specifically, on January 1, 2001 and every second
anniversary thereafter, the vote per share to which each series is entitled is
recalculated based on that stock's fair market value divided by the fair market
value of a share of Genzyme General Stock, with "fair market value" meaning the
average closing price over the 20 consecutive trading days beginning the 30th
trading day preceding the January 1st adjustment date. During the 2000 fiscal
year, each series of common stock is entitled the following vote per share:
<TABLE>
<CAPTION>
SERIES VOTE PER SHARE
------ --------------
<S> <C>
Genzyme General Stock....................................... 1.00
Molecular Oncology Stock.................................... 0.08
Surgical Products Stock..................................... 0.61
Tissue Repair Stock......................................... 0.06
</TABLE>
LIQUIDATION UNITS
If we were to dissolve, liquidate or wind up our affairs, other than as part
of a merger, business combination or sale of substantially all of our assets,
our stockholders would receive any remaining assets according to the percentage
of total liquidation units that they hold. Each series of our common stock is
entitled to the following liquidation units:
<TABLE>
<CAPTION>
SERIES UNITS
------ --------
<S> <C>
Genzyme General Stock....................................... 100
Molecular Oncology Stock.................................... 25
Surgical Products Stock..................................... 61
Tissue Repair Stock......................................... 58
</TABLE>
GCS-71
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE L. STOCKHOLDERS' EQUITY (CONTINUED)
Although we adjust liquidation units to prevent dilution in the event of
some subdivisions, combinations or distributions of common stock, we do not
adjust them to reflect changes in the relative market value or performance of
the tracked divisions.
PREFERRED STOCK
Our charter permits us to issue shares of preferred stock at any time in one
or more series. Our board of directors will establish the preferences, voting
powers, qualifications, and special or relative rights or privileges of any
series of preferred stock before it is issued.
STOCK RIGHTS
Under our shareholder rights plan, each outstanding share of Genzyme General
Stock, Molecular Oncology Stock, Surgical Products Stock and Tissue Repair Stock
also represents one preferred stock purchase right for that series of stock.
When the stock purchase rights become exercisable, the holders of our common
stock will be entitled to purchase the following:
- Genzyme General stock right: 0.01 share of Series A Junior Participating
Preferred Stock for $300.00;
- Molecular Oncology stock right: 0.01 share of Series C Junior
Participating Preferred Stock for $26.00;
- Surgical Products stock right: 0.01 share of Series D Junior Participating
Preferred Stock for $150.00; and
- Tissue Repair stock right: 0.01 share of Series B Junior Participating
Preferred Stock for $26.00.
A stock purchase right becomes exercisable either:
- ten days after our board of directors announces that a third party has
become the owner of 15% or more of the total voting power of our
outstanding common stock combined, or
- ten business days after a third party announces or initiates a tender or
exchange offer that would result in that party owning 15% or more of the
total voting power of our outstanding common stock combined.
In either case, the board of directors can extend the ten-day delay. These
stock purchase rights expire in March 2009.
STOCK OFFERINGS
In 1997, we sold 4,000,000 shares of Tissue Repair Stock for net proceeds of
$29.0 million.
DIRECTORS' DEFERRED COMPENSATION PLAN
Each member of our board of directors who is not also one of our officers or
employees may defer receipt of all or a portion of the cash compensation payable
to him or her as a director and receive either cash or stock in the future.
Under this plan, the director may defer his or her compensation until his or her
services as a director cease or until another date specified by the director.
GCS-72
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE L. STOCKHOLDERS' EQUITY (CONTINUED)
Under a deferral agreement, a participant indicates the percentage of
deferral to allocate to cash and stock, upon which a cash deferral account and a
stock deferral account is established. The cash account bears interest at the
rate paid on 90-day Treasury bills with interest payable quarterly.
The stock account is for amounts invested in hypothetical shares of Genzyme
General Stock, Molecular Oncology Stock, Surgical Products Stock or Tissue
Repair Stock. Under the deferral agreement, a participant directs us how to
allocate amounts among each series of stock. These amounts will be converted
into shares quarterly at the average closing price of the stock for all trading
days during the quarter, for each series of stock.
Distributions are paid in a lump sum or in annual installments for up to
five years. Payments begin the year following a director's termination of
service or, subject to certain restrictions, a year elected by the participant.
As of December 31, 1999, one of the six eligible directors was participating in
this plan.
We have reserved the following numbers of shares to cover distributions
credited to stock accounts under the plan:
- 50,000 shares of Genzyme General Stock;
- 50,000 shares of Molecular Oncology Stock;
- 50,000 shares of Surgical Products Stock; and
- 100,000 shares of Tissue Repair Stock.
We had not made any distributions under this plan as of December 31, 1999.
EQUITY PLANS
At December 31, 1999, we had reserved the following numbers of shares for
issuance under our 1990 Equity Incentive Plan, 1997 Equity Incentive Plan, 1998
Director Stock Option Plan, and 1999 Employee Stock Purchase Plan:
- 13,126,000 shares of Genzyme General Stock;
- 4,011,000 shares of Molecular Oncology Stock;
- 3,800,000 shares of Surgical Products Stock; and
- 5,544,000 shares of Tissue Repair Stock.
STOCK OPTIONS
The following number of shares are currently authorized and available for
grant under our 1990 Equity Incentive Plan and 1997 Equity Incentive Plan:
- 24,500,000 shares of Genzyme General Stock;
- 3,500,000 shares of Molecular Oncology Stock;
- 3,200,000 shares of Surgical Products Stock; and
- 5,300,000 shares of Tissue Repair Stock.
GCS-73
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE L. STOCKHOLDERS' EQUITY (CONTINUED)
The purpose of these two plans is to attract and retain key employees and
consultants, provide an incentive for them to achieve long-range performance
goals, and enable them to participate in our long-term growth. Under these two
plans, we grant stock options with exercise prices not less than fair market
value at date of grant. The plans provide for the grant of stock appreciation
rights, performance shares, restricted stock and stock units. Each of these
instruments has a maximum term of ten years and generally vest over four years.
The Board-appointed compensation committee determines the terms and conditions
of each award, including who is eligible to receive awards, the form of payment
of the exercise price, the number of shares granted and the exercise date. No
incentive stock options may be granted under the 1997 plan. After March 15,
2000, no incentive stock options may be granted under the 1990 plan.
The following number of shares are currently authorized and available for
grant under our 1998 Director Stock Option Plan:
- 340,000 shares of Genzyme General Stock;
- 140,000 shares of Molecular Oncology Stock;
- 100,000 shares of Surgical Products Stock; and
- 200,000 shares of Tissue Repair Stock.
Options under our 1998 Director Stock Option Plan are automatically granted
with an exercise price at fair market value to non-employee members of our board
of directors when they are elected or re-elected as directors. These options
expire ten years after the initial grant date and vest on the date of each
annual board of directors meeting following the date of grant.
GCS-74
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE L. STOCKHOLDERS' EQUITY (CONTINUED)
The following table depicts activity under our various stock option plans:
<TABLE>
<CAPTION>
WEIGHTED
SHARES UNDER AVERAGE NUMBER
OPTION EXERCISE PRICE EXERCISABLE
------------ -------------- -----------
<S> <C> <C> <C>
GENZYME GENERAL STOCK:
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 cancelled........................ (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 cancelled........................ (917,556) 27.21
-----------
Outstanding at December 31, 1998................. 11,592,730 24.00 5,579,267
Granted........................................ 1,647,719 43.43
Granted--premium price......................... 1,272,376 58.97
Exercised...................................... (2,526,838) 20.63
Forfeited and cancelled........................ (376,480) 30.22
-----------
Outstanding at December 31, 1999................. 11,609,507 $31.11 5,633,053
===========
MOLECULAR ONCOLOGY STOCK:
Outstanding at June 18, 1997..................... --
Granted........................................ 826,334 $ 7.00
-----------
Outstanding at December 31, 1997................. 826,334 7.00 180,063
Granted........................................ 386,867 6.83
Exercised...................................... (886) 7.00
Forfeited and cancelled........................ (54,530) 7.00
-----------
Outstanding at December 31, 1998................. 1,157,785 6.96 391,044
Granted........................................ 286,363 3.46
Granted--premium price......................... 402,615 5.39
Exercised...................................... (362) 3.50
Forfeited and cancelled........................ (37,291) 6.67
-----------
Outstanding at December 31, 1999................. 1,809,110 $ 6.14 656,648
===========
</TABLE>
GCS-75
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE L. STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
WEIGHTED
SHARES UNDER AVERAGE NUMBER
OPTION EXERCISE PRICE EXERCISABLE
------------ -------------- -----------
<S> <C> <C> <C>
SURGICAL PRODUCTS STOCK:
Outstanding at June 28, 1999................... --
Granted........................................ 3,050,690 $ 6.65
Exercised...................................... 0 --
Forfeited and cancelled........................ (60,120) 6.69
-----------
Outstanding at December 31, 1999................. 2,990,570 $ 6.65 563,048
===========
TISSUE REPAIR STOCK:
Outstanding at December 31, 1996................. 2,574,219 $10.73 739,421
Granted........................................ 636,605 9.84
Exercised...................................... (100,407) 5.21
Forfeited and cancelled........................ (333,655) 12.75
-----------
Outstanding at December 31, 1997................. 2,776,762 10.50 1,084,532
Granted........................................ 996,019 5.44
Exercised...................................... (71,491) 4.83
Forfeited and cancelled........................ (303,344) 10.47
-----------
Outstanding at December 31, 1998................. 3,397,946 9.13 1,464,732
Granted........................................ 667,120 2.22
Granted--premium price......................... 402,615 7.71
Exercised...................................... (357) 2.09
Forfeited and cancelled........................ (291,558) 7.49
-----------
Outstanding at December 31, 1999................. 4,175,766 $ 8.02 1,905,031
===========
</TABLE>
In 1999, we granted the following stock options with exercise prices above
fair market value:
- 1,272,376 shares of Genzyme General Stock at 120% of fair market value on
the date of grant;
- 402,615 shares of Molecular Oncology Stock at 200% of fair market value on
the date of grant; and
- 402,615 shares of Tissue Repair Stock at 200% of fair market value on the
date of grant.
The total exercise proceeds for all options outstanding at December 31, 1999
is:
- $361,260,000 for Genzyme General Stock;
- $11,106,000 for Molecular Oncology Stock;
- $19,897,000 for Surgical Products Stock, and
- $33,482,000 for Tissue Repair Stock.
GCS-76
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE L. STOCKHOLDERS' EQUITY (CONTINUED)
The following table contains information regarding the range of option
prices as of December 31, 1999:
GENZYME GENERAL STOCK:
<TABLE>
<CAPTION>
WEIGHTED EXERCISABLE
AVERAGE -------------------------------
NUMBER REMAINING WEIGHTED WEIGHTED
RANGE OF OUTSTANDING CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES AS OF 12/31/99 LIFE EXERCISE PRICE AS OF 12/31/99 EXERCISE PRICE
--------------------- -------------- ----------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$8.19--$19.44....... 2,710,664 3.94 $15.92 1,840,504 $16.48
19.50--27.56........ 2,456,522 6.80 26.06 1,342,620 25.30
27.63--28.00........ 829,734 6.09 27.96 761,791 27.97
28.06--58.06........ 4,325,198 8.03 35.81 1,688,138 31.73
58.88--62.33........ 1,287,389 9.08 58.98 0 0.00
---------- ---- ------ --------- ------
$8.19--$62.33....... 11,609,507 6.79 $31.11 5,633,053 $24.71
</TABLE>
MOLECULAR ONCOLOGY STOCK:
<TABLE>
<CAPTION>
WEIGHTED EXERCISABLE
AVERAGE -------------------------------
NUMBER REMAINING WEIGHTED WEIGHTED
RANGE OF OUTSTANDING CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES AS OF 12/31/99 LIFE EXERCISE PRICE AS OF 12/31/99 EXERCISE PRICE
--------------------- -------------- ----------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$2.31--$5.75 658,396 9.18 $4.63 39,627 $3.48
7.00 1,150,714 7.97 7.00 617,021 7.00
--------- ---- ----- ------- -----
$2.31--$7.00 1,809,110 8.41 $6.14 656,648 $6.79
</TABLE>
SURGICAL PRODUCTS STOCK:
<TABLE>
<CAPTION>
WEIGHTED EXERCISABLE
AVERAGE -------------------------------
NUMBER REMAINING WEIGHTED WEIGHTED
RANGE OF OUTSTANDING CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES AS OF 12/31/99 LIFE EXERCISE PRICE AS OF 12/31/99 EXERCISE PRICE
--------------------- -------------- ----------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$4.63--$5.94 79,400 9.86 $5.33 0 $0.00
6.69--7.50 2,911,170 9.65 6.69 563,048 6.69
--------- ---- ----- ------- -----
$4.63--$7.50 2,990,570 9.66 $6.65 563,048 $6.69
</TABLE>
TISSUE REPAIR STOCK:
<TABLE>
<CAPTION>
WEIGHTED EXERCISABLE
AVERAGE -------------------------------
NUMBER REMAINING WEIGHTED WEIGHTED
RANGE OF OUTSTANDING CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES AS OF 12/31/99 LIFE EXERCISE PRICE AS OF 12/31/99 EXERCISE PRICE
----------------------- -------------- ----------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$1.63--$3.50 859,572 9.20 $2.41 83,128 $2.31
4.03--6.50 1,244,702 6.32 5.60 942,694 5.37
6.63--9.88 976,902 8.32 8.58 315,066 9.36
10.00--17.50 1,048,037 6.21 14.35 527,816 12.98
17.63--25.75 46,553 6.10 22.10 36,327 22.01
--------- ---- ----- --------- -----
$1.63--$25.75 4,175,766 7.35 $8.02 1,905,031 $8.32
</TABLE>
GCS-77
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE L. STOCKHOLDERS' EQUITY (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
Our 1999 Employee Stock Purchase Plan is an amendment and replacement of our
1990 Employee Stock Purchase Plan. This plan allows full-time employees to
purchase our stock at 85% of fair market value. The number of shares authorized
for purchase under the plan are:
- 589,299 shares of Genzyme General Stock;
- 500,000 shares of Molecular Oncology Stock;
- 500,000 shares of Surgical Products Stock; and
- 500,001 shares of Tissue Repair Stock.
We place limitations on the number of shares of each series of stock that can be
purchased under the plan in a given year.
The following table shows the shares purchased by employees under both
plans:
<TABLE>
<CAPTION>
SHARES ISSUED GENZYME GENERAL STOCK MOLECULAR ONCOLOGY STOCK TISSUE REPAIR STOCK
------------- --------------------- ------------------------ -------------------
<S> <C> <C> <C>
1997................. 366,922 0 280,819
1998................. 388,048 0 515,936
1999................. 313,180 126,066 208,375
Available for
purchase as of
December 31,
1999............... 351,472 373,934 345,744
</TABLE>
As of December 31, 1999, we had not offered shares of Surgical Products
Stock for sale to employees.
STOCK COMPENSATION PLANS
We apply APB Opinion 25 and related interpretations in accounting for our
five stock-based compensation plans: the 1990 Equity Incentive Plan, the 1997
Equity Plan (both of which are stock option plans), the 1990 Employee Stock
Purchase Plan, the 1999 Employee Stock Purchase Plan, and the 1998 Director
Stock Option Plan. We do not recognize compensation expense for options granted
and shares purchased under the provisions of these plans for options granted to
employees with an exercise price greater than or equal to fair market value.
The following table sets forth our net income (loss) data as if compensation
expense for our stock-based compensation plans was determined in accordance with
SFAS 123, "Accounting for Stock-Based
GCS-78
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE L. STOCKHOLDERS' EQUITY (CONTINUED)
Compensation," based on the fair value at the grant dates of the awards. The
resulting compensation expense would be allocated to each division in accordance
with our allocation policies:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
CONSOLIDATED:
Net income (loss):
As reported............................................. $ 70,981 $ 62,567 $ 13,629
Pro forma............................................... $ 46,382 $ 43,986 $ (2,150)
ALLOCATED TO GENZYME GENERAL STOCK (REVISED):
Basic income per share:
As reported............................................. $ 1.80 $ 1.53 $ 1.01
Pro forma............................................... $ 1.59 $ 1.36 $ .85
Diluted income per share:
As reported............................................. $ 1.71 $ 1.48 $ .98
Pro forma............................................... $ 1.52 $ 1.32 $ .83
ALLOCATED TO MOLECULAR ONCOLOGY STOCK:
Basic and diluted loss per share:
As reported............................................. $ (2.25) $ (3.81) $ (4.64)
Pro forma............................................... $ (2.34) $ (3.99) $ (4.69)
ALLOCATED TO SURGICAL PRODUCTS STOCK (REVISED):
Basic and diluted loss per share:
As reported............................................. $ (1.38) -- --
Pro forma............................................... $ (1.53) -- --
ALLOCATED TO TISSUE REPAIR STOCK:
Basic and diluted loss per share:
As reported............................................. $ (1.26) $ (1.99) $ (3.07)
Pro forma............................................... $ (1.40) $ (2.19) $ (3.31)
</TABLE>
GCS-79
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE L. STOCKHOLDERS' EQUITY (CONTINUED)
We estimate the fair value of each option grant using the Black-Scholes
option-pricing model. In computing these PRO FORMA amounts, we used the
following assumptions:
<TABLE>
<CAPTION>
RISK-FREE DIVIDEND TERM OF GRANT
INTEREST RATE VOLATILITY YIELD (IN YEARS) AVERAGE FAIR VALUE
------------- ---------- -------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
GENZYME GENERAL STOCK:
1999.................................... 5.58% 45% 0 5 $20.31
1998.................................... 5.59% 44% 0 4 $12.87
1997.................................... 5.96% 42% 0 4 $12.21
MOLECULAR ONCOLOGY STOCK:
1999.................................... 5.58% 70% 0 5 $ 2.16
1998.................................... 5.59% 70% 0 4 $ 3.92
1997.................................... 5.96% 45% 0 4 $ 2.97
SURGICAL PRODUCTS STOCK:
1999.................................... 5.58% 42% 0 5 $ 2.99
TISSUE REPAIR STOCK:
1999.................................... 5.58% 68% 0 5 $ 1.36
1998.................................... 5.59% 73% 0 4 $ 3.27
1997.................................... 5.96% 70% 0 4 $ 5.66
</TABLE>
For stock options that were granted in 1999 at prices above fair market
value, we made the following assumptions:
<TABLE>
<CAPTION>
RISK-FREE DIVIDEND TERM OF GRANT
INTEREST RATE VOLATILITY YIELD (IN YEARS) AVERAGE FAIR VALUE
------------- ---------- -------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
Genzyme General Stock............... 4.73% 45% 0 5 $15.26
Molecular Oncology Stock............ 4.73% 70% 0 5 $ 2.03
Tissue Repair Stock................. 4.73% 68% 0 5 $ 1.05
</TABLE>
WARRANTS
In 1997, we sold warrants to purchase a total of 120,000 shares of Genzyme
General Stock for an aggregate purchase price of $1.0 million (Canadian). All of
these warrants were cancelled in August 1999 when the Canadian Medical
Discoveries Fund exercised its right to require us to repurchase the fund's
interest in StressGen/Genzyme LLC.
In 1992 and 1995, we issued warrants which, if exercised between
December 16, 1994 and July 10, 1997, would have entitled the holders to purchase
two shares of Genzyme General Stock and .0675 share of Tissue Repair Stock. If
the holders had exercised the warrants after July 10, 1997, they would have
received two shares of Genzyme General Stock and .0975 share of Tissue Repair
Stock. We granted these warrants in exchange for the receipt of options to
purchase the callable common stock of Neozyme II Corporation and in connection
with our acquisition of IG Laboratories, Inc.
GCS-80
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE L. STOCKHOLDERS' EQUITY (CONTINUED)
Activity for Genzyme General warrants is summarized below:
<TABLE>
<CAPTION>
WARRANTS EXERCISE PRICE
-------- --------------------
<S> <C> <C>
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
Cancelled........................................ (120,000) 30.18
--------
Outstanding at December 31, 1999................... 0 --
========
</TABLE>
When we acquired PharmaGenics in 1997, we assumed a warrant that expires in
2001. This warrant is exercisable into 9,563 shares of Molecular Oncology Stock
at $8.04 per share.
DESIGNATED SHARES
Designated shares are authorized shares of Molecular Oncology Stock,
Surgical Products Stock and Tissue Repair Stock that are not issued and
outstanding, but which our board of directors may issue, sell or distribute
without allocating the proceeds or benefits to the division that the series of
stock tracks. Designated shares are not eligible to receive dividends and cannot
be voted by Genzyme. We create designated shares when we transfer cash or other
assets from Genzyme General to Genzyme Molecular Oncology, Genzyme Surgical
Products or Genzyme Tissue Repair or from other interdivision transactions. Our
board of directors may issue designated shares:
- as a stock dividend to the holders of Genzyme General Stock;
- by selling the shares in a public or private sale and allocating all of
the proceeds to Genzyme General; and
- when convertible securities are converted, the proceeds of which will be
allocated to Genzyme General.
DISTRIBUTION OF DESIGNATED SHARES
We will distribute designated shares of Molecular Oncology Stock, Surgical
Products Stock and Tissue Repair Stock each year to holders of Genzyme General
Stock if the number of designated shares of a particular series exceeds 10% of
the number of shares of that series issued and outstanding as of the following
dates:
- November 30, 2000 for Molecular Oncology Stock;
- June 30, 2000 for Surgical Products Stock; and
- May 31, 2000 for Tissue Repair Stock.
GCS-81
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE L. STOCKHOLDERS' EQUITY (CONTINUED)
We will not distribute designated shares reserved for issuance upon the
exercise or conversion of Genzyme General convertible securities and the number
of designated shares our board of directors may reserve for sale not later than
six months after these dates. Any proceeds from the sale of designated shares
will be allocated to Genzyme General.
Designated share activity is summarized in the following table:
<TABLE>
<CAPTION>
GENZYME GENZYME GENZYME
MOLECULAR SURGICAL TISSUE
ONCOLOGY PRODUCTS REPAIR
DESIGNATED DESIGNATED DESIGNATED
SHARES SHARES SHARES
------------ ----------- ----------
<S> <C> <C> <C>
Balance at December 31, 1996............ -- -- 1,793,592
Established at merger................. 6,000,000 -- --
Stock options exercised............... -- -- (103,729)
Stock warrants exercised.............. -- -- (2,617)
Exercise of Genzyme Tissue Repair
purchase option..................... -- -- 1,000,000
Increase from equity line............. -- -- 489,810
Dividend distribution................. -- -- (2,292,003)
------------ ----------
Balance at December 31, 1997............ 6,000,000 -- 885,053
Debenture exchange.................... 3,028,571 -- --
Credit facility exchange.............. 385,972 -- --
Increase from equity line (1)......... 714,286 -- --
Dividend distribution................. (8,717,485) -- --
Stock options exercised............... -- -- (167,064)
Stock warrants exercised.............. (1,352) -- (1,721)
------------ ----------
Balance at December 31, 1998............ 1,409,992 -- 716,268
Established........................... -- 16,000,000 --
Dividend distribution................. (14,835,161)
Debenture adjustment.................. 278,245 --
Increase from equity line............. -- -- 1,633,399
Stock options exercised............... -- -- (111,614)
------------ ----------- ----------
Balance at December 31, 1999............ 1,688,237 1,164,839 2,238,053
============ =========== ==========
</TABLE>
------------------------
(1) Assumes that a public offering of Molecular Oncology Stock does not occur
prior to June 18, 2000. If such an offering is completed prior to that date,
the number of Genzyme Molecular Oncology designated shares reserved for
issuance in connection with this transaction will decrease based on a
formula set forth in our charter.
In October 1999, we adjusted the number of Genzyme Molecular Oncology
designated shares reserved in connection with the exchange in August 1998 of 6%
debentures convertible into Molecular Oncology Stock into 5% debentures
convertible into Genzyme General Stock. We made this adjustment based on the
fair market value of Molecular Oncology Stock on October 16, 1999 in accordance
with the terms of the exchange established by our board.
GCS-82
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE L. STOCKHOLDERS' EQUITY (CONTINUED)
In June 1999, we distributed Genzyme Surgical Products designated shares to
holders of Genzyme General Stock.
In November 1998, we distributed Genzyme Molecular Oncology designated
shares to holders of Genzyme General Stock.
Prior to our acquisition of PharmaGenics, we made a credit facility
available to fund PharmaGenics' operating costs pending completion of the
acquisition. When the acquisition was completed, the $2,450,000 drawn by
PharmaGenics under this facility became a liability allocated to Genzyme
Molecular Oncology. In September 1998, our board of directors approved the
exchange of that credit facility to Genzyme General, plus accrued interest of
$246,080, for Genzyme Molecular Oncology designated shares based on the fair
market value of the Molecular Oncology Stock. We reclassified the amount of the
note and the accrued interest to division equity upon the exchange.
In July 1997, we distributed Genzyme Tissue Repair designated shares to
holders of Genzyme General Stock and reserved approximately 394,000 Genzyme
Tissue Repair designated shares for issuance upon the exercise of Genzyme
General Stock options and warrants outstanding on the record date.
We had an option to allocate up to $30.0 million in cash from Genzyme
General to Genzyme Tissue Repair, at $10.00 per Genzyme Tissue Repair designated
share. In June 1997, our board of directors allocated $10.0 million in cash from
Genzyme General to Genzyme Tissue Repair in exchange for 1,000,000 Genzyme
Tissue Repair designated shares. This option has expired.
INTERDIVISIONAL FINANCING ARRANGEMENTS
GENZYME MOLECULAR ONCOLOGY
In 1997, our board of directors made $25.0 million of Genzyme General's cash
available to Genzyme Molecular Oncology. This arrangement was subject to
dollar-for dollar reduction by the proceeds of outside financing allocated to
Genzyme Molecular Oncology. When Genzyme issued $20.0 million in principal of 6%
convertible subordinated debentures in August 1997 and allocated the proceeds to
Genzyme Molecular Oncology, the amount available under the arrangement was
reduced to $5.0 million. In September 1998, Genzyme Molecular Oncology drew the
remaining $5.0 million available under this arrangement in exchange for Genzyme
Molecular Oncology designated shares.
In August 1998, our board of directors made an additional $30.0 million of
Genzyme General's cash available to Genzyme Molecular Oncology. Under the terms
of this arrangement, Genzyme Molecular Oncology may draw down funds as needed
each quarter in exchange for Genzyme Molecular Oncology designated shares based
on the fair market value of Molecular Oncology Stock (as defined in our charter)
at the time of the draw. As of December 31, 1999, Genzyme Molecular Oncology had
not yet drawn any funds from this arrangement.
GENZYME TISSUE REPAIR
In October 1996, our board of directors made $20.0 million of Genzyme
General's cash available to Genzyme Tissue Repair in order for Genzyme Tissue
Repair to fund its obligations under its joint venture with Diacrin. Under this
arrangement, Genzyme Tissue Repair may draw down funds as needed each quarter in
exchange for Genzyme Tissue Repair designated shares based on the fair market
value of Tissue
GCS-83
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE L. STOCKHOLDERS' EQUITY (CONTINUED)
Repair Stock (as defined in our charter) at the time of the draw. Genzyme Tissue
Repair made a $7.0 million draw under this line in 1997.
In May 1998, our board of directors increased the amount committed under
this arrangement from $13.0 million to $50.0 million. Genzyme Tissue Repair made
a $5.0 million draw in February 1999. In May 1999, the amount available under
this arrangement was reduced by $25.0 million in connection with the
reallocation of our ownership interest in Diacrin/Genzyme LLC from Genzyme
Tissue Repair to Genzyme General.
NOTE M. RESEARCH AND DEVELOPMENT AGREEMENTS
Our revenues from research and development agreements with related parties
include the following:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Genzyme Transgenics Corporation......................... $1,516 $3,568 $8,041
StressGen/Genzyme LLC................................... 496 2,177 315
------ ------ ------
$2,012 $5,745 $8,356
====== ====== ======
</TABLE>
We allocate all of our research and development agreements with
unconsolidated affiliates to our operating divisions based on the business to
which the research relates.
GENZYME TRANSGENICS CORPORATION. Note I., "Investments," contains
disclosure regarding our relationship with Genzyme Transgenics Corporation.
JOINT VENTURES. Note I., "Investments," contains disclosure regarding the
following joint ventures:
- RenaGel LLC;
- BioMarin/Genzyme LLC;
- Pharming/Genzyme LLC;
- Diacrin/Genzyme LLC;
- ATIII LLC; and
- StressGen/Genzyme LLC.
Genzyme Development Partners, L.P. was formed in September 1989 to develop,
produce and derive income from the sale of the Sepra products. We refer to
Genzyme Development Partners as GDP. One of our wholly-owned subsidiaries is the
general partner of GDP. In September 1989, we also formed a joint venture with
GDP to manufacture and market the Sepra products in the United States and Canada
for use in human clinical trials or human clinical procedures. We refer to this
joint venture as GVII. We consolidate GVII for financial statement purposes and
allocate it to Genzyme Surgical Products.
We have the option to purchase all of the outstanding partnership interests
in GDP for approximately $26.0 million in cash, Genzyme General Stock or
Surgical Products Stock or a combination of cash and either series of stock,
plus future royalty payments on the sale of the Sepra products. We can exercise
this option during the 90-day period beginning on August 31, 2000. This option
will be accelerated if at any
GCS-84
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE M. RESEARCH AND DEVELOPMENT AGREEMENTS (CONTINUED)
time prior to August 31, 2000 GDP receives distributions from GVII of at least
$5.5 million. While we had no obligation to fund the research and development
activities of GDP, we elected to fund the following amounts:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C>
$ 9.0
million..... $8.4 million $7.3 million
</TABLE>
We currently intend to provide approximately $6.0 million of funding to GDP
for the Sepra programs through 2000, based on the 2000 budget for the programs.
Future funding commitments for the Sepra development programs will be evaluated
on an annual basis. We believe, however, that additional funds will be required
to complete the development, clinical testing and commercialization of GDP's
products.
NOTE N. COMMITMENTS AND CONTINGENCIES
We periodically become subject to legal proceedings and claims arising in
connection with our business. We do not believe that there were any asserted
claims against us as of December 31, 1999 which, if adversely decided, would
have a material adverse effect on our results of operations, financial
condition, or liquidity.
NOTE O. INCOME TAXES
Our income (loss) before income taxes and the related income tax expense
(benefit) are described in the following table:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Domestic(1).................................... $101,548 $ 92,923 $16,907
Foreign........................................ 16,380 9,514 8,822
-------- -------- -------
Total...................................... $117,928 $102,437 $25,729
======== ======== =======
Currently payable:
Federal...................................... $ 41,638 $ 32,501 $11,344
State........................................ 2,990 6,375 1,754
Foreign...................................... 5,733 4,016 2,971
-------- -------- -------
Total...................................... $ 50,361 $ 42,892 $16,069
======== ======== =======
Deferred:
Federal...................................... $ (3,036) $ (2,180) $(3,723)
State........................................ (378) (842) (246)
-------- -------- -------
Total...................................... (3,414) $ (3,022) $(3,969)
======== ======== =======
Provision for income taxes................... $ 46,947 $ 39,870 $12,100
======== ======== =======
</TABLE>
------------------------
(1) Includes $5.4 million in charges for purchased research and development and
acquisition expenses in 1999 and $7.0 million in similar charges in 1997 as
well as $5.7 million in charges for impaired investments in 1999.
GCS-85
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE O. INCOME TAXES (CONTINUED)
Our provisions for income taxes were at rates other than the U.S. federal
statutory tax rate for the following reasons:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<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.................................. 0.2 1.7 3.1
State taxes, net....................................... 1.3 3.5 3.0
Foreign sales corporation.............................. (4.0) (3.2) (6.7)
Nondeductible amortization............................. 3.3 4.2 10.6
Benefit of tax credits................................. (3.3) (3.9) (7.7)
Nondeductible interest and other....................... 3.9 1.6 (0.4)
---- ---- -----
Effective tax rate before certain charges.............. 36.4% 38.9% 36.9%
---- ---- -----
Charge for impaired investment......................... 1.7%
Charge for purchased research and development net of
related tax benefit.................................. 1.7% -- 10.1%
---- ---- -----
Effective tax rate..................................... 39.8% 38.9% 47.0%
==== ==== =====
</TABLE>
The components of net deferred tax assets are described in the following
table:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...................... $ 5,568 $ 6,853
Tax credits........................................... 10,648 3,714
Deferred loss......................................... -- 2,002
Intangible amortization............................... 38,757 42,717
Investments in unconsolidated subsidiaries............ 3,396 3,108
Realized and unrealized capital losses................ 11,405 10,139
Reserves, accruals and other.......................... 48,531 44,509
-------- --------
Gross deferred tax asset................................ $118,305 $113,042
Valuation allowance..................................... (18,963) (16,700)
-------- --------
$ 99,342 $ 96,342
Deferred tax liabilities:
Depreciable assets.................................... (24,736) (28,479)
Realized and unrealized capital gains................. (12,686) --
Deferred gain......................................... (878) --
Intangible amortization............................... (1,213) (3,861)
-------- --------
Net deferred tax asset................................ $ 59,829 $ 64,002
======== ========
</TABLE>
As a result of uncertainty surrounding our ability to realize certain
favorable tax attributes that primarily relate to capital losses from the
purchase of in-process research and development, we placed
GCS-86
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE O. INCOME TAXES (CONTINUED)
valuation allowances of $19.0 million in 1999 and $16.7 million in 1998 against
otherwise recognizable deferred tax assets.
Our ability to realize the benefit of net deferred tax assets is dependent
on our generating sufficient taxable income before loss carryforwards expire.
While it is not assured, we believe that it is more likely than not that we will
be able to realize all of our net deferred tax assets. The amount we can
realize, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
For U.S. income tax purposes, we had net operating loss carryforwards of
$15.9 million in 1999 and $19.6 million in 1998. Our net operating loss
carryforwards expire between 2003 and 2019. Prior to expiration, our ability to
use these carryforwards may be limited under U.S. tax laws, specifically
Section 382 of the Internal Revenue Code.
Approximately, $10.6 million of the tax carryforwards we have available for
federal income tax purposes relate to exercises of non-qualified stock options
and disqualifying dispositions of incentive stock options. The tax benefits from
stock exercises under these plans, if realized, will be credited to additional
paid-in capital.
NOTE P. BENEFIT PLANS
We have a 401(k) plan that covers nearly all of our employees. We also
maintain a separate 401(k) plan for the former employees of Deknatel Snowden
Pencer, Inc., which we acquired in 1996. These plans permit qualifying employees
to make contributions up to a specified percentage of their compensation, and we
match a portion of those contributions. We contributed the following amounts to
the 401(k) plans:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Allocated to Genzyme General.......... $3.9 million $3.0 million $1.1 million
Allocated to Genzyme Surgical 0.8 million
Products............................ 0.8 million 0.8 million
Allocated to Genzyme Tissue Repair.... 0.1 million 0.1 million 0.2 million
------------ ------------ ------------
$4.8 million $3.9 million $2.1 million
============ ============ ============
</TABLE>
We also maintain defined-benefit pension plans for qualifying employees of a
number of our foreign subsidiaries and qualifying former employees of Deknatel
Snowden Pencer. We fund pension costs as they are accrued. Our expense related
to these plans was:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Allocated to Genzyme General.......... $1.3 million $0.8 million $0.8 million
Allocated to Genzyme Surgical 0.5 million
Products............................ 0.3 million 0.3 million
------------ ------------ ------------
$1.8 million $1.1 million $1.1 million
============ ============ ============
</TABLE>
We do not present actuarial and other disclosures for these plans because we
do not consider them to be material.
GCS-87
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE Q. SEGMENT INFORMATION
In accordance with SFAS 131, "Disclosures about Segments of an Enterprise
and Related Information." We present segment information in a manner consistent
with the method we use to report this information to our management. Applying
SFAS 131, we have five reportable segments:
- Therapeutics, which develops, manufactures and distributes human
therapeutic products for significant unmet medical needs. The business
derives substantially all of its revenue from sales of
Cerezyme-Registered Trademark- enzyme.
- Diagnostic Products, which provides diagnostic products to niche markets,
focusing on in vitro diagnostics.
- Genzyme Molecular Oncology, which is developing cancer products, with a
focus on therapeutic vaccines and angiogenesis inhibitors.
- Genzyme Surgical Products, which develops, manufactures and markets
surgical products for cardiovascular surgery and general surgery.
- Genzyme Tissue Repair, which develops and markets biological products for
orthopedic injuries, such as cartilage repair, and severe burns.
GCS-88
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE Q. SEGMENT INFORMATION (CONTINUED)
We have provided information concerning the operations in these reportable
segments in the following table:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Genzyme General:
Therapeutics............................................ $488,705 $413,645 $332,712
Diagnostic Products..................................... 57,971 65,683 66,288
Other................................................... 86,409 85,846 86,927
Eliminations/Adjustments(1)............................. 2,281 4,145 10,441
-------- -------- --------
Total Genzyme General................................. 635,366 569,319 496,368
Genzyme Molecular Oncology.............................. 4,619 19,407 782
Genzyme Surgical Products............................... 111,981 103,958 100,835
Genzyme Tissue Repair................................... 20,402 17,117 10,856
Eliminations/Adjustments(2)............................. (80) (466) --
-------- -------- --------
Total....................................................... $772,288 $709,335 $608,841
======== ======== ========
Depreciation and Amortization Expense:
Genzyme General:
Therapeutics............................................ $ 21,068 $ 10,862 $ 10,054
Diagnostic Products..................................... 1,909 4,715 4,540
Other................................................... 6,422 11,470 7,410
Eliminations/Adjustments(1)............................. 20,835 10,711 12,818
-------- -------- --------
Total Genzyme General................................. 50,234 37,758 34,822
Genzyme Molecular Oncology.............................. 12,057 12,354 5,245
Genzyme Surgical Products............................... 8,181 8,449 8,220
Genzyme Tissue Repair................................... 1,186 1,757 2,482
Eliminations/Adjustments(3)............................. (1,007) (1,449) 195
-------- -------- --------
Total....................................................... $ 70,651 $ 58,869 $ 50,964
======== ======== ========
Equity in Net Loss of Unconsolidated Affiliates:
Genzyme General:
Therapeutics............................................ $(30,094) $(12,480) $ (2,310)
Diagnostic Products..................................... -- -- --
Other................................................... 56 (107) (71)
Eliminations/Adjustments(4)............................. (7,385) (7,152) (3,401)
-------- -------- --------
Total Genzyme General................................. (37,423) (19,739) (5,782)
Genzyme Molecular Oncology.............................. (1,870) (1,647) (258)
Genzyme Surgical Products............................... (35) 54 158
Genzyme Tissue Repair................................... (3,368) (7,674) (6,719)
Eliminations/adjustments................................ -- -- 343
-------- -------- --------
Total....................................................... $(42,696) $(29,006) $(12,258)
======== ======== ========
</TABLE>
GCS-89
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE Q. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Income Tax (Expense) Benefits:
Genzyme General:
Therapeutics............................................ $(84,859) $(76,606) $(61,389)
Diagnostic Products..................................... (2,485) (13,755) (1,409)
Other................................................... 2,952 2,134 8,658
Eliminations/Adjustments(1)............................. (8) 7,853 10,415
-------- -------- --------
Genzyme General tax provision......................... (84,400) (80,374) (43,725)
Genzyme Molecular Oncology................................ 2,647 2,647 1,092
Genzyme Surgical Products................................. -- -- --
Genzyme Tissue Repair..................................... -- -- --
Eliminations/Adjustments(11).............................. 34,806 37,857 30,533
-------- -------- --------
Total....................................................... $(46,947) $(39,870) $(12,100)
======== ======== ========
Net Income:
Genzyme General:
Therapeutics(5)......................................... $133,854 $120,832 $104,527
Diagnostic Products(6).................................. 3,915 21,694 2,400
Other(7)................................................ (4,661) (3,367) (14,741)
Eliminations/Adjustments(8)............................. 8,969 (6,107) (15,544)
-------- -------- --------
Net income for Genzyme General........................ 142,077 133,052 76,642
Genzyme Molecular Oncology................................ (28,832) (19,107) (19,578)
Genzyme Surgical Products(9).............................. (48,037) (49,856) (29,740)
Genzyme Tissue Repair..................................... (30,040) (40,386) (45,984)
Eliminations/Adjustments(10).............................. 35,813 38,864 32,289
-------- -------- --------
Total....................................................... $ 70,981 $ 62,567 $ 13,629
======== ======== ========
</TABLE>
------------------------
(1) Includes primarily amounts related to Genzyme General's corporate research
and development and administrative activities that we do not specifically
allocate to a particular segment of Genzyme General.
(2) Represents the elimination of inter-divisional revenues.
(3) Consists primarily of a difference in amortization due to $2.9 million of
additional goodwill associated with the PharmaGenics acquisition carried at
the Genzyme Molecular Oncology as compared to amounts carried at the
consolidated level and other adjustments related to our corporate activities
that we do not specifically allocate to a particular segment. The difference
in the amortization results from the application of our policy to account
for income taxes at the divisional level as if each division were a separate
taxpayer.
(4) Represents our portion of the net loss of Genzyme Transgenics Corporation,
an unconsolidated affiliate, which we do not specifically allocate to a
particular segment of Genzyme General.
GCS-90
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE Q. SEGMENT INFORMATION (CONTINUED)
(5) Therapeutics' net income for 1998 includes a $14.8 million charge to write
down excess inventory used to make Ceredase-Registered Trademark- enzyme.
(6) Diagnostic Products' net income for 1998 and 1999 includes gains on the sale
of product lines of $0.5 million in 1999 and $31.2 million in 1998.
(7) Other net income for 1999 includes a $7.5 million gain on the sale of a
product line.
(8) Includes the net income for Genzyme General's corporate administrative and
research and development activities which we do not specifically allocate to
a particular segment of Genzyme General. Includes a $14.4 million gain upon
receipt of a payment associated with the termination of the agreement to
acquire Cell Genesys, Inc.
(9) In 1998, Genzyme Surgical Products recorded a $10.4 million charge to cost
of goods sold to reduce Sepra products inventory to net realizable value.
(10) Includes income tax benefits that have not been recognized in the tax
provisions of any of the divisions. Also includes the elimination of
inter-divisional revenues and expenses and a difference in amortization due
to $2.9 million of additional goodwill associated with the PharmaGenics
acquisition carried at the Genzyme Molecular Oncology as compared to amounts
carried at corporate levels. The difference in the amortization results from
the application of our policy to account for income taxes at the divisional
level as if each division were a separate taxpayer.
(11) Represents income tax benefits that have not been recognized in the tax
provisions of any of the divisions.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Segment Assets:
Genzyme General:
Therapeutics............................................ $ 338,960 $ 326,305
Diagnostic Products..................................... 40,266 49,430
Other................................................... 83,088 94,930
Eliminations/Adjustments................................ 937,269 939,726
---------- ----------
Total Genzyme General................................. 1,399,583 1,410,391
Genzyme Molecular Oncology................................ 9,692 35,952
Genzyme Surgical Products................................. 370,924 277,578
Genzyme Tissue Repair..................................... 19,648 18,954
Eliminations/Adjustments.................................. (12,565) (52,321)
---------- ----------
Total....................................................... $1,787,282 $1,690,554
========== ==========
</TABLE>
GCS-91
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE Q. SEGMENT INFORMATION (CONTINUED)
Segment assets for Genzyme include accounts receivable, inventory, and
certain fixed and intangible assets. Eliminations/Adjustments for Genzyme
General consists of the differences between the total assets for Genzyme
General's segments and the total combined assets for Genzyme General as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents, and short- and long-term
investments............................................... $513,905 $575,729
Deferred tax assets-current................................. 41,195 39,725
Intangibles, net............................................ 33,871 40,079
Property, plant and equipment, net.......................... 172,165 133,995
Investment in equity securities............................. 94,719 51,977
Deferred tax assets-noncurrent.............................. 18,631 24,277
Other....................................................... 50,218 21,623
-------- --------
Total Eliminations/Adjustments............................ $924,704 $887,405
======== ========
</TABLE>
We operate in the healthcare industry, and we manufacture and market our
products primarily in the United States and Europe. Our principal manufacturing
facilities are located in the United States, the United Kingdom, Switzerland and
Germany. We purchase products from our English and Swiss subsidiaries for sale
to customers in the United States. We set transfer prices from our foreign
subsidiaries to allow us to produce profit margins commensurate with our sales
and marketing effort. Our Dutch subsidiary is our primary distributor of
therapeutic products in Europe.
No subsidiary in any individual foreign country has revenue from external
customers in excess of 10% of our total revenue. The following table contains
certain financial information by geographic area:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1999 1998 1997
-------- ---------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
U.S....................................................... $512,304 $ 485,864 $446,991
Europe.................................................... 184,169 171,302 158,121
Other..................................................... 75,815 52,169 3,729
-------- ---------- --------
Total................................................... $772,288 $ 709,335 $608,841
======== ========== ========
Long-lived assets:
U.S....................................................... $732,771 $ 970,898 $755,040
Other..................................................... 52,540 57,247 54,349
-------- ---------- --------
Total................................................... $785,311 $1,028,145 $809,389
======== ========== ========
</TABLE>
Our results of operations are highly dependent on sales of
Ceredase-Registered Trademark- and Cerezyme-Registered Trademark- enzymes. Sales
of these products represented 70% of product revenue in 1999, 67% of product
revenue in 1998, and 63% of product revenue in 1997. We sell these products
directly to physicians, hospitals and treatment centers as well as through
unaffiliated distributors. Sales to one distributor represented 20% of
Ceredase-Registered Trademark- and Cerezyme-Registered Trademark- enzyme
revenues in 1999, 19% of these revenues in 1998, and 18% of these revenues in
1997. We believe that our credit risk associated with trade receivables is
mitigated as a result of the fact that we
GCS-92
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE Q. SEGMENT INFORMATION (CONTINUED)
sell these products to a large number of customers in a number of different
industries and over a broad geographic area.
NOTE R. QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
2ND
1ST QUARTER QUARTER 3RD QUARTER 4TH QUARTER
1999 1999 1999 1999
----------- --------- ----------- -----------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net revenue...................................... $183,744 $186,684 $191,415 $210,445
Gross profit..................................... 126,526 128,683 133,404 142,536
Net income....................................... 16,057 6,291 13,778 34,855
Income per share:
Allocated to Genzyme General Stock (Revised--
Note A):
Basic........................................ $ 0.40 $ 0.28 $ 0.46 $ 0.66
Diluted...................................... $ 0.38 $ 0.28 $ 0.43 $ 0.62
Allocated to Molecular Oncology Stock:
Basic and diluted............................ $ (0.56) $ (0.64) $ (0.60) $ (0.46)
Allocated to Surgical Products Stock (Revised--
Note A):
Basic and diluted............................ N/A $ (0.06) $ (0.74) $ (0.59)
Allocated to Tissue Repair Stock:
Basic and diluted............................ $ (0.44) $ (0.37) $ (0.25) $ (0.22)
</TABLE>
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
1998 1998 1998 1998
----------- ----------- ----------- -----------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net revenue..................................... $160,551 $174,874 $173,394 $200,516
Gross profit.................................... 99,434 111,436 87,142 130,802
Net income...................................... 7,784 13,096 14,967 26,720
Income per share:
Allocated to Genzyme General Stock (Revised--
Note A):
Basic....................................... $ 0.32 $ 0.40 $ 0.41 $ 0.40
Diluted..................................... $ 0.31 $ 0.39 $ 0.39 $ 0.39
Allocated to Molecular Oncology Stock:
Basic....................................... $ (1.66) $ (1.90) $ (2.06) $ 0.36
Diluted..................................... $ (1.66) $ (1.90) $ (2.06) $ 0.22
Allocated to Tissue Repair Stock:
Basic and diluted........................... $ (0.57) $ (0.52) $ (0.47) $ (0.44)
</TABLE>
GCS-93
<PAGE>
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE S. SUBSEQUENT EVENTS
GENZYME TRANSGENICS CORPORATION
In February 2000, we recorded a gain of $20.3 million relating to a public
offering of 3.5 million common shares by our unconsolidated affiliate, Genzyme
Transgenics Corporation ("GTC"). The public offering resulted in net proceeds to
GTC of $75.2 million (after the exercise of the underwriters' overallotment
option). As a result of the issuance of additional shares by GTC, our ownership
interest in GTC decreased from 33% to 28%.
ACQUISITION OF BIOMATRIX, INC. AND FORMATION OF GENZYME BIOSURGERY
In March 2000, we entered into an agreement to acquire Biomatrix, Inc. Upon
the effectiveness of our Registration Statement on Form S-4 and completion of
the merger, we will form a new operating division called Genzyme Biosurgery and
create a new series of common stock that is intended to reflect its value and
track its performance. We refer to this stock as "Biosurgery Stock." In
connection with the merger, and upon Genzyme shareholder approval, the assets
and liabilities allocated to Genzyme Surgical Products and Genzyme Tissue Repair
will be re-allocated to Genzyme Biosurgery and shares of Surgical Products Stock
and Tissue Repair Stock will be exchanged for Biosurgery Stock. We will account
for the acquisition of Biomatrix as a purchase.
Biomatrix stockholders will receive $37.00 in cash, one share of Biosurgery
Stock or a combination of cash and stock for each share of Biomatrix common
stock they hold. The merger agreement provides that we will pay cash for up to
28.38% of the outstanding shares of Biomatrix common stock that receive merger
consideration, or up to approximately $245.0 million.
Holders of Surgical Products Stock will receive 0.6060 share of Biosurgery
Stock in exchange for each share of Surgical Products Stock they hold and
holders of Tissue Repair Stock will receive 0.3352 share of Biosurgery Stock in
exchange for each share of Tissue Repair Stock they hold.
REGISTRATION STATEMENT
In March 2000, we filed a prospectus with the SEC covering the offering of
3,000,000 shares of Molecular Oncology Stock (plus 450,000 shares issuable upon
exercise of the underwriters' over-allotment option). The proceeds of the
offering were to be used by Genzyme Molecular Oncology to fund research,
pre-clinical and clinical development programs, to repay existing indebtedness,
and for working capital and general corporate purposes.
GCS-94
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF GENZYME CORPORATION:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Genzyme
Corporation and its subsidiaries at December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, 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.
The consolidated financial statements for each of the three years in the
period ended December 31, 1999 have been revised, as described in Note A.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
February 23, 2000, except for the information
in Note A, as to which
the date is October 11, 2000
GCS-95
<PAGE>
GENZYME CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
------------------------- ------------------- --------------------------------- ----------- -------------
ADDITIONS
---------------------------------
BALANCE AT CHARGED TO COSTS CHARGED TO BALANCE AT
DESCRIPTION BEGINNING OF PERIOD AND EXPENSES OTHER ACCOUNTS DEDUCTIONS END OF PERIOD
------------------------- ------------------- ---------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1999:
Allowance for doubtful
accounts............... $11,299,100 $12,775,200 $ -- $ 3,789,400 $20,284,900
Inventory reserve........ $40,410,100 $ 5,568,400 $ -- $ 8,378,400 $37,600,100
Year ended December 31,
1998:
Allowance for doubtful
accounts............... $ 9,730,700 $ 5,482,000 $ -- $ 3,913,600 $11,299,100
Inventory reserve........ $27,518,300 $31,664,000 $ -- $18,772,200 $40,410,100
Year ended December 31,
1997:
Allowance for doubtful
accounts............... $13,292,900 $ 2,835,000 $ -- $ 6,397,200(1) $ 9,730,700
Inventory reserve........ $10,912,300 $19,505,000 $ -- $ 2,899,000 $27,518,300
</TABLE>
------------------------
(1) Uncollectible accounts written off, net of recoveries.
GCS-96
