EXHIBIT 13.1
FINANCIAL STATEMENTS
PAGE NO.
--------
GENZYME GENERAL
Combined Selected Financial Data.......................... GG-2
Management's Discussion and Analysis of Genzyme General's
Financial Condition and Results of Operations........... GG-4
Combined Statements of Operations--For the Years Ended
December 31, 1999, 1998 and 1997........................ GG-16
Combined Balance Sheets--December 31, 1999 and 1998....... GG-17
Combined Statements of Cash Flows--For the Years Ended
December 31, 1999, 1998 and 1997........................ GG-18
Notes to Combined Financial Statements.................... GG-20
Report of Independent Accountants......................... GG-41
GG-1
GENZYME GENERAL COMBINED SELECTED FINANCIAL DATA
Genzyme General is our operating division that develops and markets:
- therapeutic products, with an expanding focus on products to treat
patients suffering from lysosomal storage disorders and other specialty
therapeutics, and
- diagnostic products, with a focus on IN VITRO diagnostics,
- other products and services, such as genetic testing services and lipids
and peptides for drug delivery.
Genzyme General Division Common Stock, which we refer to as "GENZ Stock," is
intended to reflect the value and track the performance of Genzyme General.
The following combined selected financial data reflect the results of
operations and financial position of Genzyme General and should be read in
conjunction with the financial statements of Genzyme General and accompanying
notes.
In June 1999, we created Genzyme Surgical Products. The business of Genzyme
Surgical Products previously operated as a business unit of Genzyme General.
These combined selected financial data reflect the results and financial
position of Genzyme General as if Genzyme Surgical Products had existed as a
separate division of Genzyme for all periods presented.
GG-2
GENZYME GENERAL COMBINED SELECTED FINANCIAL DATA
COMBINED STATEMENT OF OPERATIONS DATA
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
Revenues:
Net product sales........................... $571,531 $509,727 $429,092 $373,769 $304,365
Net service sales........................... 57,223 55,445 55,835 61,638 47,230
Revenues from research and development
contracts:
Related parties........................... 1,516 3,568 8,041 23,011 26,758
Other..................................... 5,096 579 3,400 2,310 202
-------- -------- -------- -------- --------
Total revenues.......................... 635,366 569,319 496,368 460,728 378,555
Operating costs and expenses:
Cost of products sold....................... 115,125 138,802 146,226 123,276 113,231
Cost of services sold....................... 35,637 34,240 35,451 42,889 31,137
Selling, general and administrative......... 149,427 126,172 118,616 107,219 94,944
Research and development (including research
and development related to contracts)..... 97,746 73,139 62,905 62,276 51,936
Amortization of intangibles................. 8,106 7,610 6,887 5,865 4,647
Purchase of in-process research and
development............................... 5,436 -- -- 106,469 14,216
Other....................................... -- -- -- 1,000 --
-------- -------- -------- -------- --------
Total operating costs and expenses........ 411,477 379,963 370,085 448,994 310,111
-------- -------- -------- -------- --------
Operating income.............................. 223,889 189,356 126,283 11,734 68,444
Other income (expenses):
Equity in net loss of unconsolidated
affiliates................................ (37,423) (19,739) (5,782) (3,656) (1,809)
Gain on affiliate sale of stock............. 6,683 2,369 -- 1,013 --
Gain on sale of investment in equity
securities................................ 1,963 3,391 -- 1,711 --
Minority interest........................... 3,674 4,285 -- -- 1,608
Gain on sale of product line................ 8,018 31,202 -- -- --
Charge for impaired investments............. (5,712) (3,397) -- -- --
Other....................................... 14,389 -- (2,000) -- --
Investment income........................... 30,881 22,953 9,940 13,825 7,428
Interest expense............................ (19,885) (16,994) (8,074) (6,784) (1,069)
-------- -------- -------- -------- --------
Total other income (expenses)............. 2,588 24,070 (5,916) 6,109 6,158
-------- -------- -------- -------- --------
Income before income taxes.................. 226,477 213,426 120,367 17,843 74,602
Provision for income taxes.................. (84,400) (80,374) (43,725) (28,530) (34,234)
-------- -------- -------- -------- --------
Net income (loss)........................... 142,077 133,052 76,642 (10,687) 40,368
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 attributable to GENZ Stock....... $176,883 $170,909 $107,175 $ 13,811 $ 52,953
======== ======== ======== ======== ========
GG-3
GENZYME GENERAL COMBINED SELECTED FINANCIAL DATA
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income attributable to GENZ Stock....... $176,883 $170,909 $107,175 $13,811 $52,953
======== ======== ======== ======= =======
Per GENZ common share:
Net income per GENZ common share--basic... $ 2.13 $ 2.16 $ 1.40 $ 0.20 $ 0.95
======== ======== ======== ======= =======
Weighted average shares outstanding......... 83,092 79,063 76,531 68,289 55,531
======== ======== ======== ======= =======
Net income per GENZ common and common
equivalent share-diluted................ $ 2.00 $ 2.06 $ 1.36 $ 0.19 $ 0.83
======== ======== ======== ======= =======
Adjusted weighted average shares
outstanding............................... 93,228 85,822 78,925 73,038 63,967
======== ======== ======== ======= =======
COMBINED BALANCE SHEET DATA
DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- -------- -------- --------
Cash and investments................... $ 513,905 $ 556,097 $192,222 $169,543 $278,663
Working capital........................ 487,561 381,685 273,697 340,817 307,918
Total assets........................... 1,399,583 1,410,391 960,490 975,910 854,411
Long-term debt and convertible debt.... 272,622 274,646 117,978 223,846 124,473
Division equity........................ 1,007,614 939,967 745,895 645,185 659,106
There were no cash dividends paid.
GG-4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF GENZYME GENERAL'S 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" for
Genzyme General and Genzyme Corporation included in this annual report. You
should consider carefully each of these risks and uncertainties in evaluating
the financial condition and results of operations of Genzyme General and
Genzyme.
In June 1999, we created 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 of Genzyme General as
if Genzyme Surgical Products had existed as a separate division of Genzyme for
all periods presented.
For purposes of financial presentation, we allocate certain of our programs,
products, assets and liabilities to Genzyme General and prepare separate
financial statements for Genzyme General. Notwithstanding the allocation of
assets and liabilities to Genzyme General, Genzyme Corporation continues to hold
title to all of the assets and is responsible for all of the liabilities
allocated to Genzyme General. Holders of GENZ Stock are common stockholders of
Genzyme Corporation and have no specific rights to the assets to which GENZ
Stock relates.
We present financial information and accounting policies specific to Genzyme
General in the accompanying combined financial statements. We present financial
information and accounting policies relevant to the corporation and its
operating divisions taken as a whole in our consolidated financial statements.
You should, therefore, read this discussion and analysis of Genzyme
General's financial position and results of operations in conjunction with the
financial statements and related notes of Genzyme General, the discussion and
analysis of Genzyme's financial position and results of operations, and the
consolidated financial statements and related notes of Genzyme, all of which are
included in this annual report.
GG-5
RESULTS OF OPERATIONS
The following discussion summarizes the key factors our management believes
are necessary for an understanding of Genzyme General's financial statements.
The components of Genzyme General's combined statements of operations are
described in the following table:
99/98 98/97
INCREASE/ INCREASE/
(DECREASE) (DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Total revenues............................ $635,366 $569,319 $496,368 12% 15%
Cost of products and services sold........ 150,762 173,042 181,677 (13)% (5)%
Selling, general and administrative....... 149,427 126,172 118,616 18% 6%
Research and development (including
research and development related to
contracts).............................. 97,746 73,139 62,905 34% 16%
Amortization of intangibles............... 8,106 7,610 6,887 7% 10%
Purchase of in-process research and
development............................. 5,436 -- -- 100% N/A
-------- -------- --------
Total operating costs and expenses.... 411,477 379,963 370,085 8% 3%
-------- -------- --------
Operating income.......................... 223,889 189,356 126,283 18% 50%
Other income (expenses), net.............. 2,588 24,070 (5,916) (89)% 507%
-------- -------- --------
Income before income taxes................ 226,477 213,426 120,367 6% 77%
Provision for income taxes................ (84,400) (80,374) (43,725) 5% 84%
-------- -------- --------
Net income................................ 142,077 133,052 76,642 7% 74%
Allocated tax benefits.................... 34,806 37,857 30,533 (8)% 24%
-------- -------- --------
Net income attributable to GENZ Stock..... $176,883 $170,909 $107,175 3% 59%
======== ======== ========
REVENUES
99/98 98/97
INCREASE/ INCREASE/
(DECREASE) (DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Product revenue........................... $571,531 $509,727 $429,092 12% 19%
Service revenue........................... 57,223 55,445 55,835 3% (1)%
-------- -------- --------
Total product and service revenue..... 628,754 565,172 484,927 11% 17%
Research and development revenue.......... 6,612 4,147 11,441 59% (64)%
-------- -------- --------
Total revenues........................ $635,366 $569,319 $496,368 12% 15%
======== ======== ========
GG-6
The following table sets forth Genzyme General's product and service revenue
on a segment basis:
99/98 98/97
INCREASE/ INCREASE/
(DECREASE) (DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Therapeutics.............................. $488,705 $413,645 $332,712 18% 24%
Diagnostic Products....................... 57,971 65,683 66,288 (12)% (1)%
Other:
Product revenue......................... 24,855 30,399 30,092 (18)% 1%
Service revenue......................... 57,223 55,445 55,835 3% (1)%
-------- -------- --------
Total product and service revenue......... $628,754 $565,172 $484,927 11% 17%
======== ======== ========
THERAPEUTICS
Genzyme General's increase in product revenue during both periods is largely
due to increased sales of Cerezyme-Registered Trademark- enzyme, which was
attributed to the identification of new Gaucher disease patients throughout the
world and strong international sales. We have provided information regarding the
growth in sales of Genzyme General's Gaucher disease therapies during both
periods in the following table:
99/98 98/97
INCREASE/ INCREASE/
(DECREASE) (DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Sales of Cerezyme-Registered Trademark-
enzyme and
Ceredase-Registered Trademark- enzyme... $478,538 $411,060 $332,712 16% 24%
% of total product revenue................ 84% 81% 78%
Genzyme General's results of operations are highly dependent on sales of
Cerezyme-Registered Trademark- enzyme and a reduction in revenue from sales of
this product would adversely affect its results of operations. Revenue from
Cerezyme-Registered Trademark- enzyme would be impacted negatively if
competitors developed alternative treatments for Gaucher disease and the
alternative products gained commercial acceptance. Genzyme General is aware of
companies that have initiated efforts to develop competitive products and other
companies may do so in the future.
Therapeutics revenue for each period also includes sales of
Thyrogen-Registered Trademark- hormone, which is an adjunctive diagnostic tool
for well differentiated thyroid cancer.
DIAGNOSTIC PRODUCTS
The decrease in diagnostic products revenue for 1999 as compared to 1998
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 Corp. in July 1999. Diagnostic products revenue includes
royalties on product sales by Techne's biotechnology group.
OTHER
Other revenue for each period include sales of:
- lipids and peptides for drug delivery; and
- genetic testing services.
GG-7
INTERNATIONAL PRODUCT AND SERVICE REVENUE
A substantial portion of Genzyme General's revenue was generated outside of
the United States, as described in the following table. Most of these revenues
were attributable to sales of Cerezyme-Registered Trademark- enzyme.
99/98 98/97
INCREASE/ INCREASE/
(DECREASE) (DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
International product and service
revenue................................. $273,851 $248,365 $217,777 10% 14%
% of total product and service revenue.... 44% 44% 45%
MARGINS
99/98 98/97
INCREASE/ INCREASE/
(DECREASE) (DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Product margin............................ $456,406 $370,925 $282,866 23% 31%
% of product revenue.................. 80% 73% 66%
Service margin............................ 21,586 21,205 20,384 2% 4%
% of service revenue.................. 38% 38% 37%
Total gross margin........................ 477,992 392,130 303,250 22% 29%
% of total product and service
revenue............................. 76% 69% 63%
Genzyme General provides a broad range of healthcare products and services.
As a result, Genzyme General's gross margin varies significantly based on the
category of product or service. Sales of therapeutic products, including
Cerezyme-Registered Trademark- enzyme, result in higher margins than diagnostic
products.
During 1998, Genzyme General recorded a $14.8 million charge to cost of
products sold to write down excess inventory used to make
Ceredase-Registered Trademark- enzyme. Without the effect of this charge,
Genzyme General's product margin for 1998 would have been 76% and its total
gross margin during that period would have been 72%.
Excluding the charge described above, the increases in product margin and
total gross margin during each period are 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 each period as a result of
increases in sales of DNA and cancer testing services.
OPERATING EXPENSES
1999 AS COMPARED TO 1998
The increase in selling, general and administrative expenses in 1999 as
compared to 1998 is related to:
- increased staffing to support the growth in several of Genzyme General's
product lines;
- an increased reserve for doubtful accounts in Genzyme General's genetic
testing business;
- costs associated with the market introduction of
Thyrogen-Registered Trademark- hormone in January 1999; and
GG-8
- increased expenditures to support the increased sales of
Cerezyme-Registered Trademark- enzyme.
The increase in research and development expense in 1999 as compared to 1998
is a result of:
- increased costs in connection with the results of ATIII LLC, the joint
venture with Genzyme Transgenics Corporation for the development and
commercialization of transgenic recombinant human antithrombin III; and
- increased spending on Genzyme General's program to develop Fabrazyme-TM-
enzyme for the treatment of Fabry disease and other internal programs.
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 focuses on a treatment for pemphigus vulgaris. We allocated
$5.4 million to in-process technology representing Peptimmune's programs that
were still in the development stage and for which there was no alternative
future use. In 1999, we recorded a one-time charge to operations for the amount
of the purchase price allocated to in-process technology.
1998 AS COMPARED TO 1997
The increase in selling, general and administrative expenses in 1998 as
compared to 1997 was related to:
- increased sales and marketing costs related to the product launch of
Thyrogen-Registered Trademark- hormone; and
- increased expenditures to support the increased sales of
Cerezyme-Registered Trademark- enzyme.
The increase in research and development expense in 1998 as compared to 1997
was primarily attributable to $12.0 million in costs resulting from the
consolidation of the results of ATIII LLC, for which there were no comparable
amounts in 1997.
OTHER INCOME AND EXPENSES
99/98 98/97
INCREASE/ INCREASE/
(DECREASE) (DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Equity in net loss of unconsolidated
affiliates................................ $(37,423) $(19,739) $(5,782) 90% 241%
Gain on affiliate sale of stock............. 6,683 2,369 -- 182% N/A
Gain on sale of investments in equity
securities................................ 1,963 3,391 -- (42)% N/A
Minority interest........................... 3,674 4,285 -- (14)% 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....................................... 14,389 -- (2,000) N/A N/A
Investment income........................... 30,881 22,953 9,940 35% 131%
Interest expense............................ (19,885) (16,994) (8,074) 17% 110%
-------- -------- -------
Total other income (expense), net....... $ 2,588 $ 24,070 $(5,916) (89)% 507%
======== ======== =======
GG-9
1999 AS COMPARED TO 1998
EQUITY IN NET LOSS OF UNCONSOLIDATED AFFILIATES
Genzyme General records in equity in net loss of unconsolidated affiliates
its portion of the results of its joint ventures with GelTex, BioMarin
Pharmaceutical Inc., Pharming Group, N.V. and Diacrin, Inc. Genzyme General also
records a portion of the results of Genzyme Transgenics in equity in net loss of
unconsolidated affiliates.
Genzyme General's equity in net loss of unconsolidated affiliates increased
in 1999 as compared to 1998 as a result of:
- increased losses from RenaGel LLC, our joint venture with GelTex to
develop and commercialize Renagel-Registered Trademark- capsules;
- increased losses from our joint venture with BioMarin to develop and
commercialize Aldurazyme(TM) enzyme for the treatment of
mucopolysaccharidosis-I, which was formed in September 1998;
- increased losses from our joint venture with Pharming to develop a therapy
for Pompe disease, which was formed in October 1998; and
- the reallocation of our joint venture with Diacrin from Genzyme Tissue
Repair to Genzyme General in May 1999.
These increases were offset in part by decreased losses from Genzyme
Transgenics for both periods.
GAIN ON AFFILIATE SALE OF STOCK
In 1999 and 1998, Genzyme General recorded gains on its investment in
Genzyme Transgenics as a result of its issuance of additional shares of common
stock.
MINORITY INTEREST
Genzyme General consolidates the results of ATIII LLC and records Genzyme
Transgenics' portion of the losses of that joint venture as minority interest.
Minority interest decreased in both periods, notwithstanding increases in ATIII
LLC's losses, because Genzyme Transgenics' portion of those losses decreased.
GAIN ON SALE OF INVESTMENTS IN EQUITY SECURITIES
Genzyme General recorded gains of $2.0 million in January 1999 and
$3.4 million in December 1998 upon the sales of shares of Techne common stock
that it received when it sold its research products business to Techne.
GAIN ON SALE OF PRODUCT LINE
In July 1999, Genzyme General recorded a gain of $0.5 million in connection
with the sale of its immunochemistry product lines to an operating unit of
Sybron Laboratory Products.
In June 1999, Genzyme General recorded a gain of $7.5 million representing
the payment of a note receivable that it received as partial consideration for
the sale of Genetic Design, Inc. in 1996. Genzyme General had previously fully
reserved the amount of this note because it considered the repayment of the note
to be uncertain.
In July 1998, Genzyme General recorded a gain of $31.2 million in connection
with the sale of its research products business to Techne.
GG-10
CHARGE FOR IMPAIRED INVESTMENTS
In 1999, Genzyme General recorded $5.7 million in charges to write down
certain strategic investments in collaborators' common stock because it
considered the decline in the value of these investments to be other than
temporary.
In 1998, Genzyme General recorded a $3.4 million charge to write down a
strategic investment in a company because we considered the decline in the value
of the company's common stock to be other than temporary.
OTHER
In December 1999, Genzyme General recorded a net gain of $14.4 million upon
receipt of a payment associated with the termination of an agreement to acquire
Cell Genesys, Inc.
INVESTMENT INCOME
Investment income increased in both periods because our cash balances were
higher. The increase in cash balances was attributable to the 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
Genzyme General's interest expense increased in both periods, primarily as a
result of the issuance of the 5 1/4% convertible subordinated notes.
TAX PROVISION AND ALLOCATED TAX BENEFITS
99/98 98/97
INCREASE/ INCREASE/
(DECREASE) (DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Provision for income taxes................. $(84,400) $(80,374) $(43,725) 5% 84%
Effective tax rate......................... 37% 38% 36%
Tax benefits allocated from:
Genzyme Molecular Oncology............. 7,812 3,527 2,755 121% 28%
Genzyme Surgical Products.............. 16,128 17,936 10,112 (10)% 77%
Genzyme Tissue Repair.................. 10,866 16,394 17,666 (34)% (7)%
-------- -------- --------
Net allocated tax benefits........... 34,806 37,857 30,533 (8)% (24)%
-------- -------- --------
Net tax provision.......................... $(49,594) $(42,517) $(13,192) 17% 222%
======== ======== ========
Genzyme General net tax rate............... 22% 20% 11%
======== ======== ========
Genzyme General's tax rates for all periods vary from the U.S. statutory tax
rate as a result of its:
- provision for state income taxes;
- use of a foreign sales corporation;
- nondeductible amortization of intangibles;
- use of tax credits; and
- share of losses of unconsolidated affiliates.
GG-11
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, Genzyme General had cash, cash-equivalents, and short-
and long-term investments of $513.9 million, a decrease of $42.2 million from
December 31, 1998.
Genzyme General generated $284.8 million in cash from its operations in
1999.
Genzyme General's investing activities utilized $192.7 million in cash in
1999. Investing activities generated:
- $5.0 million from the sale of Genzyme General's immunochemistry product
line;
- $11.1 million from the sale of Techne common stock; and
- $8.4 million from the payment of a note issued in connection with the sale
of Genetic Design.
Investing activities used:
- $93.4 million for Genzyme General's net purchases of investments;
- $52.9 million to fund capital expenditures;
- $36.4 million to fund Genzyme General's investments in joint ventures;
- $6.5 million to fund its acquisition of Peptimmune;
- $10.0 million to GelTex to make a milestone payment upon the first
anniversary of FDA approval of Renagel-Registered Trademark- capsules;
- $6.6 million to Genzyme Transgenics for the purchase of preferred stock;
- $10.0 million to Biomarin for the purchase of shares of common stock; and
- $3.4 million to Genovo, Inc. for the purchase of shares of preferred
stock.
In 1999, Genzyme General received $59.2 million in cash from employee stock
plans. Genzyme General's financing activities used the following cash during
1999:
- $85.0 million to repay short-term debt and capital lease obligations; and
- $49.4 million paid to Genzyme Surgical Products in connection with the
creation of Genzyme Surgical Products as a separate division of Genzyme.
- $30.0 million paid to Genzyme Tissue Repair for the transfer of the
interest in Diacrin/Genzyme LLC and a draw under Genzyme Tissue Repair's
equity line of credit.
In 1998, our board of directors made $30.0 million of Genzyme General's cash
available to Genzyme Molecular Oncology under an equity line of credit. Under
the terms of this equity line, Genzyme Molecular Oncology may draw down funds as
needed each quarter in exchange for GZMO designated shares. GZMO designated
shares are shares of GZMO 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. Genzyme Molecular Oncology has not yet
drawn any funds under this equity line.
GG-12
In 1998, our board of directors also made $50.0 million of Genzyme General's
cash available to Genzyme Tissue Repair under an equity line of credit. Under
the terms of this equity line, Genzyme Tissue Repair may draw down funds as
needed each quarter in exchange for GZTR designated shares. GZTR designated
shares are shares of GZTR 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. In February 1999, Genzyme Tissue Repair made
a $5.0 million draw under this equity line in exchange for 1,633,399 GZTR
designated shares. In May 1999, the amount available under this equity line 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.
In June 1999, Genzyme General transferred $150.0 million in cash, cash
equivalents and investments to Genzyme Surgical Products in connection with the
creation of Genzyme Surgical Products as a separate division of Genzyme. In
exchange for this transfer, approximately 14.8 million shares of GZSP Stock were
issued and distributed as a dividend to holders of GENZ Stock.
Genzyme General, together with our other operating divisions, has access to
Genzyme's revolving credit facilities. At December 31, 1999, $50.0 million was
available under a facility that matures in November 2000 and $77.0 million was
available under a facility that matures in November 2002.
We believe that Genzyme General's available cash, investments and cash flow
from operations will be sufficient to fund its planned operations and capital
requirements for the foreseeable future. Although Genzyme General currently has
substantial cash resources and positive cash flow, it intends to use substantial
portions of its available cash for:
- product development and marketing;
- expanding facilities;
- working capital; and
- strategic business initiatives.
Genzyme General's cash reserves will be further reduced to pay principal and
interest on the following debt:
- $21.2 million in principal under our 5% convertible subordinated
debentures due August 2003, which are convertible into GENZ Stock; and
- $250.0 million in principal under our 5 1/4% convertible subordinated
notes due June 2005, which are convertible into GENZ Stock.
If Genzyme General uses cash to pay or redeem this debt, including the
interest due on it, its cash reserves will be diminished. In addition, Genzyme
General's cash resources will be reduced to the extent that the liabilities of
Genzyme Molecular Oncology, Genzyme Surgical Products or Genzyme Tissue Repair
affect our consolidated results of operations.
To satisfy these and other commitments, Genzyme General may have to obtain
additional financing. We cannot guarantee that Genzyme General will be able to
obtain any additional financing, extend any existing financing arrangement, or
obtain either on favorable terms.
NEW ACCOUNTING PRONOUNCEMENTS, EURO, YEAR 2000 AND MARKET RISK
See "Management's Discussion and Analysis of Genzyme Corporation and
Subsidiaries' Financial Condition and Results of Operations" included in this
annual report.
GG-13
FACTORS AFFECTING FUTURE OPERATING RESULTS
The future operating results of Genzyme General could differ materially from
the results described above due to the risks and uncertainties described below
and under the heading "Management's Discussion and Analysis of Genzyme
Corporation and Subsidiaries' Financial Condition and Results of
Operations--Factors Affecting Future Operating Results" included in this annual
report.
A REDUCTION IN REVENUES FROM SALES OF PRODUCTS THAT TREAT GAUCHER DISEASE WOULD
HAVE AN ADVERSE EFFECT ON GENZYME GENERAL'S BUSINESS.
Genzyme General generates a majority of its product revenues from sales of
Ceredase-Registered Trademark- enzyme and Cerezyme-Registered Trademark- enzyme,
which are products for patients with Gaucher disease. Sales of
Ceredase-Registered Trademark- enzyme and Cerezyme-Registered Trademark- enzyme
totaled $478.5 million for the year ended December 31, 1999, representing
approximately 84% of Genzyme General's product revenues for that year.
Because Genzyme General's business is highly dependent on
Cerezyme-Registered Trademark- enzyme, a reduction in revenue from sales of this
product would have an adverse effect on its operations and may cause the value
of GENZ Stock 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 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.
GENZYME GENERAL MAY NOT BE ABLE TO SUCCESSFULLY COMMERCIALIZE
THYROGEN-REGISTERED TRADEMARK- HORMONE AND RENAGEL-REGISTERED TRADEMARK-
CAPSULES.
In January 1999, Genzyme General, together with Knoll Pharmaceutical
Company, launched U.S. sales of Thyrogen-Registered Trademark- recombinant
thyroid stimulating hormone for use in the treatment of thyroid cancer. At about
the same time, Genzyme General, in collaboration with GelTex
Pharmaceuticals, Inc., launched Renagel-Registered Trademark- capsules, a
non-absorbed phosphate binder used in the treatment of end-stage renal disease.
The commercial success of Thyrogen-Registered Trademark- hormone and
Renagel-Registered Trademark- capsules will depend on a number of factors,
including:
- regulation by the FDA;
- the ability to obtain regulatory approvals in foreign countries;
- the development and commercial success of competitive products; and
- the availability of third party reimbursement.
Genzyme General cannot be sure that market penetration of
Thyrogen-Registered Trademark- hormone and Renagel-Registered Trademark-
capsules will increase.
IF THE STRATEGIC COLLABORATIONS GENZYME GENERAL HAS ENTERED INTO TO DEVELOP AND
COMMERCIALIZE ITS PRODUCTS ARE NOT SUCCESSFUL, GENZYME GENERAL'S RESULTS OF
OPERATIONS WILL BE ADVERSELY IMPACTED.
Several of Genzyme General's strategic initiatives involve collaborations
with other biotechnology companies and arrangements with academic medical
centers. These include:
- a joint venture with GelTex for the commercialization of
Renagel-Registered Trademark- capsules;
GG-14
- an agreement with Knoll Pharmaceutical Company for the marketing of
Thyrogen-Registered Trademark- hormone in the U.S.;
- an agreement with Biogen, Inc. for the marketing of
AVONEX-Registered Trademark- (Interferon-beta 1a), Biogen's treatment for
relapsing forms of multiple sclerosis, in Japan following regulatory
approval;
- a joint venture with BioMarin for the development and commercialization of
Aldurazyme(TM) enzyme for the treatment of the lysosomal storage known as
mucopolysaccharidosis I;
- a joint venture with Genzyme Transgenics for the development and
commercialization of transgenic antithrombin III, a human protein that
Genzyme Transgenics produces in the milk of genetically modified animals;
- a joint venture with Pharming for the development and commercialization of
human alpha-glucosidase for the treatment of Pompe disease;
- an agreement with Genovo for the development of gene therapy products for
the treatment of lysosomal storage disorders;
- a relationship with Mount Sinai Medical Center for the development of a
therapy for the treatment of Niemann-Pick disease;
- a joint venture with Diacrin to develop and commercialize products and
processes using porcine fetal cells for the treatment of Parkinson's
disease and Huntington's disease; and
- an agreement with Dyax Corp. to develop and commercialize the protein
EPI-KAL2 for the treatment of chronic inflammatory diseases.
Genzyme General plans to enter into additional collaborations in the future.
The success of these arrangements are largely dependent on the efforts and
skills of Genzyme General's collaborators. Genzyme General cannot guarantee
that:
- these agreements will not be terminated;
- its strategic collaborators will devote significant resources to the
collaborations; or
- any of these collaborations will result in the successful development or
commercialization of any products.
OUR OPTION TO PURCHASE LIMITED PARTNERSHIP INTERESTS COULD DILUTE THE RIGHTS OF
HOLDERS OF GENZ STOCK.
We organized Genzyme Development Partners, L.P., a special purpose research
and development entity, in 1989 and transferred to it technology and commercial
rights to our hyaluronic acid-based products designed to prevent the occurrence
and severity of post-operative adhesions. These products, which we refer to as
the Sepra products, are now allocated to Genzyme Surgical Products. We have an
option to purchase the limited partnership interests in the partnership. If this
option is exercised, we may have to issue shares of GENZ Stock or make
substantial cash payments or both. If we make payments in GENZ Stock, the rights
of holders of GENZ Stock could be diluted and the market price of that stock may
fall. If we make cash payments, our cash resources would diminish.
SUBSEQUENT EVENT
In February 2000, we converted our shares of the Series B Convertible
Preferred Stock of Genzyme Transgenics into 1,048,021 shares of Genzyme
Transgenics common stock. Also in February 2000, Genzyme Transgenics completed a
public offering of its common stock. Genzyme General will recognize a gain on
affiliate sale of stock of approximately $20 million in the first quarter of
2000.
GG-15
GENZYME GENERAL
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Revenues:
Net product sales......................................... $571,531 $509,727 $429,092
Net service sales......................................... 57,223 55,445 55,835
Revenue from research and development contracts:
Related parties......................................... 1,516 3,568 8,041
Other................................................... 5,096 579 3,400
-------- -------- --------
Total revenues........................................ 635,366 569,319 496,368
Operating costs and expenses:
Cost of products sold..................................... 115,125 138,802 146,226
Cost of services sold..................................... 35,637 34,240 35,451
Selling, general and administrative....................... 149,427 126,172 118,616
Research and development (including research and
development relating to contracts)...................... 97,746 73,139 62,905
Amortization of intangibles............................... 8,106 7,610 6,887
Purchase of in-process research and development........... 5,436 -- --
-------- -------- --------
Total operating costs and expenses...................... 411,477 379,963 370,085
-------- -------- --------
Operating income............................................ 223,889 189,356 126,283
Other income (expenses):
Equity in net loss of unconsolidated affiliates........... (37,423) (19,739) (5,782)
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..................................................... 14,389 -- (2,000)
Investment income......................................... 30,881 22,953 9,940
Interest expense.......................................... (19,885) (16,994) (8,074)
-------- -------- --------
Total other income (expenses)......................... 2,588 24,070 (5,916)
-------- -------- --------
Income before income taxes.................................. 226,477 213,426 120,367
Provision for income taxes.................................. (84,400) (80,374) (43,725)
-------- -------- --------
Net income.................................................. 142,077 133,052 76,642
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 attributable to GENZ Stock....................... $176,883 $170,909 $107,175
======== ======== ========
Per GENZ common share:
Net income per GENZ common share--basic..................... $ 2.13 $ 2.16 $ 1.40
======== ======== ========
Weighted average shares outstanding......................... 83,092 79,063 76,531
======== ======== ========
Net income per GENZ common and common equivalent
share--diluted............................................ $ 2.00 $ 2.06 $ 1.36
======== ======== ========
Adjusted weighted average shares outstanding................ 93,228 85,822 78,925
======== ======== ========
Net income.................................................. $142,077 $133,052 $ 76,642
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..... 26,785 (6,059) 833
Reclassification adjustment for losses included in net
income.................................................. 2,092 2,100 --
-------- -------- --------
Unrealized gains (losses) on securities, net............ 28,877 (3,959) 833
-------- -------- --------
Other comprehensive income................................ 13,994 3,722 (10,871)
-------- -------- --------
Comprehensive income........................................ $156,071 $136,774 $ 65,771
======== ======== ========
The accompanying notes are an integral part of these combined financial
statements.
GG-16
GENZYME GENERAL
COMBINED BALANCE SHEETS
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(AMOUNTS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 94,523 $ 100,012
Short-term investments.................................... 214,240 174,421
Accounts receivable, net.................................. 141,949 137,615
Inventories............................................... 84,384 85,162
Prepaid expenses and other current assets................. 17,632 27,727
Due from Genzyme Molecular Oncology....................... 3,793 4,773
Due from Genzyme Surgical Products........................ 6,406 --
Due from Genzyme Tissue Repair............................ 683 548
Deferred tax assets--current.............................. 41,195 39,725
---------- ----------
Total current assets.................................... 604,805 569,983
Property, plant and equipment, net........................ 362,548 362,743
Long-term investments..................................... 205,142 281,664
Intangibles, net.......................................... 75,370 85,851
Deferred tax assets--noncurrent........................... 19,844 28,138
Investments in equity securities.......................... 94,719 51,977
Other noncurrent assets................................... 37,155 30,035
---------- ----------
Total assets............................................ $1,399,583 $1,410,391
========== ==========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable.......................................... $ 23,229 $ 22,324
Accrued expenses.......................................... 62,514 65,643
Income taxes payable...................................... 27,946 16,532
Deferred revenue.......................................... 3,475 1,231
Current portion of long-term debt and capital lease
obligations............................................. 80 82,568
---------- ----------
Total current liabilities............................... 117,244 188,298
Noncurrent liabilities:
Long-term debt.............................................. -- 3,087
Convertible notes and debentures............................ 272,622 271,559
Other noncurrent liabilities................................ 2,103 7,480
---------- ----------
Total liabilities....................................... 391,969 470,424
Commitments and contingencies (See Notes)
Division equity (Note M).................................... 1,007,614 939,967
---------- ----------
Total liabilities and division equity................... $1,399,583 $1,410,391
========== ==========
The accompanying notes are an integral part of these combined financial
statements.
GG-17
GENZYME GENERAL
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(AMOUNTS IN THOUSANDS)
OPERATING ACTIVITIES:
Net income.................................................. $ 142,077 $ 133,052 $ 76,642
Reconciliation of net income to net cash provided
by operating activities:
Depreciation and amortization............................. 50,234 37,758 34,822
Loss on disposal of fixed assets.......................... 971 108 1,234
Non-cash compensation expense............................. 58 8,519 2,881
Equity in loss of unconsolidated affiliates............... 37,423 19,739 5,440
Accrued interest/amortization of marketable securities.... (1,647) (7,242) (571)
Provision for bad debts and inventory..................... 14,194 8,113 13,440
Accretion of debt conversion feature...................... -- 705 --
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............................... (3,414) (3,022) (3,969)
Charge for in-process research and development............ 5,436 -- --
Other..................................................... 556 26 528
Increase (decrease) in cash from working capital:
Accounts receivable..................................... (18,459) (36,437) (13,669)
Inventories............................................. (3,435) 27,928 (31,676)
Prepaid expenses and other assets....................... 9,925 (10,785) (9,033)
Due from Genzyme Molecular Oncology..................... 980 (553) (2,011)
Due from Genzyme Surgical Products...................... (6,406) -- --
Due from Genzyme Tissue Repair.......................... (135) 665 391
Accounts payable, accrued expenses, income taxes
Payable and deferred revenue.......................... 71,026 52,275 21,192
--------- --------- ---------
Net cash provided by operating activities........... 284,758 192,999 95,641
INVESTING ACTIVITIES:
Purchases of investments.................................... (494,016) (439,431) (131,197)
Sales and maturities of investments......................... 400,630 118,871 80,867
Proceeds from sale of investments in equity securities...... 11,090 9,564 --
Acquisitions of property, plant and equipment............... (52,910) (53,312) (25,344)
Sales of property, plant and equipment...................... -- 1,795 --
Proceeds from sale of product line.......................... 5,000 24,760 --
Acquisitions, net of acquired cash and assumed
liabilities............................................... (6,500) (9,949) --
Purchase of technology rights............................... (10,000) (15,100) --
Purchase of equity investments.............................. (13,700) (25,783) (6,449)
Investments in unconsolidated affiliates.................... (43,027) (14,811) --
Loans to affiliates......................................... -- (1,000) (4,601)
Proceeds from notes receivable.............................. 8,360 -- --
Repayment of loans by affiliates............................ -- 3,019 --
Other....................................................... 2,388 (4,431) (134)
--------- --------- ---------
Net cash used in investing activities............... (192,685) (405,808) (86,858)
GG-18
GENZYME GENERAL
COMBINED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(AMOUNTS IN THOUSANDS)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... 59,216 74,649 123,837
Proceeds from issuance of debt............................ -- 250,000 --
Payments of debt.......................................... (84,985) (33,236) (100,945)
Net cash allocated to Genzyme Molecular Oncology.......... -- (5,000) (5,000)
Net cash allocated to Genzyme Surgical Products........... (49,414) (41,484) (19,003)
Net cash allocated to Genzyme Tissue Repair............... (30,037) (155) (14,892)
Bank overdraft............................................ 7,220 -- --
Other..................................................... 2,510 2,412 (242)
--------- --------- ---------
Net cash provided by (used in) financing
activities........................................ (95,490) 247,186 (16,245)
Effect of exchange rate changes on cash................... (2,072) 334 (2,275)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents.......... (5,489) 34,711 (9,737)
Cash and cash equivalents at beginning of period.......... 100,012 65,301 75,038
--------- --------- ---------
Cash and cash equivalents at end of period................ $ 94,523 $ 100,012 $ 65,301
========= ========= =========
Supplemental disclosures of cash flows:
Cash paid during the year for:
Interest................................................ $ 18,508 $ 15,047 $ 8,684
Income taxes............................................ $ 30,992 $ 24,463 $ 18,887
Supplemental disclosures of non-cash transactions:
Transfer of investments to Genzyme Surgical Products--
Note A.
Other gains and charges--Note C.
Dispositions of assets--Note D.
Peptimmune acquisition--Note E.
Investment in unconsolidated affiliate--Note J.
Conversion of 5% convertible subordinated notes--Note L.
Conversion of 6% convertible subordinated debentures into
5% convertible subordinated debentures--Note L.
Warrant exercise--Note M.
Distributions of GZMO, GZSP and GZTR designated
shares--Note M.
The accompanying notes are an integral part of these combined financial
statements.
GG-19
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Genzyme General is our operating division that 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 General Division Common Stock, which we refer to as "GENZ Stock," is
intended to reflect the value and track the performance of Genzyme General.
BASIS OF PRESENTATION; PRINCIPLES OF COMBINATION
The combined financial statements of Genzyme General for each period include
the balance sheets, results of operations and cash flows of the businesses we
allocate to Genzyme General. We also allocate a portion of our corporate
operations to Genzyme General using methods we believe are reasonable. These
combined financial statements are prepared using amounts included in our
consolidated financial statements included in this annual report. We have
reclassified certain 1998 and 1997 data to conform with the 1999 presentation.
In June 1999, we created Genzyme Surgical Products. Genzyme General
transferred $150.0 million in cash, cash equivalents and investments, and
certain other assets, to Genzyme Surgical Products in connection with the
creation of Genzyme Surgical Products as a separate division of Genzyme. The
business of Genzyme Surgical Products previously operated as a business unit of
Genzyme General. These financial statements reflect the financial position,
results of operations and cash flows of Genzyme General as if Genzyme Surgical
Products had existed as a separate division of the corporation for all periods
presented.
We use the equity method to account for investments in entities in which
Genzyme General has a substantial ownership interest (20% to 50%), or in which
it participates in policy decisions. Genzyme General's consolidated net income
includes its share of the earnings of these entities. We report at fair value
investments in entities in which Genzyme General's ownership interest is less
than 20%.
FINANCIAL INFORMATION
For purposes of financial presentation, we allocate certain of our programs,
products, assets and liabilities to Genzyme General and prepare separate
financial statements for Genzyme General. Notwithstanding the allocation of
assets and liabilities to Genzyme General, Genzyme Corporation continues to hold
title to all of the assets and is responsible for all of the liabilities
allocated to Genzyme General. Holders of GENZ Stock are common stockholders of
Genzyme Corporation and have no specific rights to the assets to which GENZ
Stock relates.
We prepare the financial statements of Genzyme General in accordance with
generally accepted accounting principles, our management and accounting policies
and the divisional accounting policies approved by our board. We present
financial information and accounting policies specific to Genzyme General in the
accompanying combined financial statements. We present financial information and
GG-20
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
accounting policies relevant to the corporation and its operating divisions
taken as a whole in our consolidated financial statements. You should read these
consolidated financial statements.
Note A., "Summary of Significant Accounting Policies," to our consolidated
financial statements contains our accounting policies. We incorporate that
information into this note by reference.
DIVIDEND POLICY
We have never paid a cash dividend on shares of GENZ Stock. We currently
intend to retain our earnings to finance future growth and do not anticipate
paying any cash dividends on GENZ Stock in the foreseeable future.
TRANSLATION OF FOREIGN CURRENCIES
We translate the financial statements of foreign subsidiaries allocated to
Genzyme General from local currency into U.S. dollars and include translation
adjustments for these subsidiaries in division equity. Genzyme General's
division equity includes cumulative foreign currency translation charges of
$19.7 million at December 31, 1999 and $4.8 million at December 31, 1998.
We include exchange gains and losses on intercompany balances which are
long-term in nature in our division equity. Our gains and losses on all other
transactions are included in our results of operations. Genzyme General recorded
a net gain of $0.6 million in 1999, a net gain of $0.3 million in 1998 and a net
loss of $0.1 million in 1997.
REVENUE RECOGNITION
Genzyme General recognizes revenue from product sales when it ships the
product and title has passed, net of any applicable third party contractual
allowances and rebates. Genzyme General recognizes revenue from service sales
when it has finished providing the service or when it has achieved an applicable
milestone. Genzyme General recognizes revenue from research and development
contracts over the term of the applicable contract and as it incurs costs
related to that contract. Up front license fees, milestone fees and royalty
revenue are recognized as revenue only if there are no remaining performance
obligations and the fees are non-refundable.
NET INCOME (LOSS) PER SHARE
To calculate basic earnings per share for Genzyme General, we divide the
earnings attributable to Genzyme General by the weighted average number of
outstanding shares of GENZ 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. To determine what
earnings are attributable to Genzyme General, we take its net income or loss for
the applicable period (determined in accordance with generally accepted
accounting principles) and adjust it for the tax benefits allocated to Genzyme
General in accordance with our management and accounting policies.
GG-21
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table sets forth our computation of basic and diluted earnings
per share of GENZ Stock:
1999 1998 1997
--------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Net income--basic..................................... $176,883 $170,909 $107,175
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--diluted................................... $186,644 $176,860 $107,175
======== ======== ========
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 common share--basic.................... $ 2.13 $ 2.16 $ 1.40
======== ======== ========
Net income per common share--diluted(5)............... $ 2.00 $ 2.06 $ 1.36
======== ======== ========
- ------------------------
(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.
(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 GENZ Stock:
GG-22
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
Shares of GENZ Stock issuable for options*.................. 2,094 2,827 5,921
Shares of GENZ Stock issuable for warrants.................. 26 40 40
----- ----- -----
Total shares with exercise prices greater than the average
market price of GENZ Stock during the period.............. 2,120 2,867 5,961
===== ===== =====
- ------------------------
*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.
NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS
Because each of our operating divisions is a part of a single company, our
board of directors has adopted policies to address issues that may arise among
divisions and to govern the management of and the relationships between each
division. With some exceptions that are mentioned specifically in this note, our
board may modify or rescind these policies, or adopt additional policies, in its
sole discretion without stockholder approval, subject only to our board's
fiduciary duty to stockholders. Generally accepted accounting principles require
that any change in policy be preferable (in accordance with these principles) to
the previous policy.
INTERDIVISION ASSET TRANSFERS
Our board may at any time reallocate any program, product or other asset
from one division to any other division. We make reallocations at fair market
value, as determined by our board. In determining the fair market value of a
program under development, our board takes into account the following criteria:
- the commercial potential of the program;
- the phase of clinical development of the program;
- the expenses associated with realizing any income from the program and the
likelihood and time of the realization; and
- other matters that our board and its financial advisors, if any, deem
relevant.
One division may pay another division the consideration for a reallocation
in cash or other consideration with a value equal to the fair market value of
the reallocated assets. In the case of a reallocation of assets from Genzyme
General to another division, our board may elect instead to account for the
reallocation as an increase in the designated shares representing the division
to which the assets are reallocated in accordance with the provisions of our
charter.
Our policy regarding transfers of assets between divisions may not be
changed by our board without the approval of the holders of GENZ Stock voting as
a separate class unless the policy change does not affect Genzyme General.
GG-23
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS
(CONTINUED)
OTHER INTERDIVISION TRANSACTIONS
Our divisions may engage in transactions directly with one or more other
divisions or jointly with one or more other divisions and one or more third
parties. These transactions may include agreements by one division to provide
products and services for use by another division, license agreements and joint
ventures or other collaborative arrangements involving more than one division to
develop new products and services jointly and with third parties. These
transactions are subject to the following conditions:
- We charge research and development (including clinical and regulatory
support), distribution, sales, marketing, and general and administrative
services (including allocated space) performed by one division for another
division to the division for which the services are performed on a cost
basis. We charge direct costs to the division for which we incur them. We
allocate direct labor and indirect costs in reasonable and consistent
manners based on the use by a division of relevant services. Divisions
performing services for other divisions do not recognize revenue for the
services they perform.
- We charge the manufacturing of goods and performance of services by one
division exclusively for another division to the division for which it is
performed on a cost basis. We include in manufacturing costs an interest
charge (based on our short-term borrowing rate at the beginning of the
fiscal year) on the gross fixed assets used in the manufacturing process.
We determine gross fixed assets for the facility used at the beginning of
each fiscal year. We allocate direct labor and indirect costs in
reasonable and consistent manners based on the benefit received by a
division of related goods and services. Divisions performing services for
other divisions do not recognize revenue for the services they perform.
- Other than transactions involving research and development, manufacturing,
distribution, sales, marketing, general and administrative services, which
are addressed above, all interdivisional transactions are performed on
terms and conditions obtainable in arm's length transactions with third
parties. Divisions performing services for other divisions do not
recognize revenue for the services they perform.
- Our board must approve interdivisional transactions that are performed on
terms and conditions other than as described above and are material to one
or more of the participating divisions. In giving its approval, our board
must determine that the transaction is fair and reasonable to each
participating division and to holders of the common stock representing
each participating division.
- Divisions may make loans to other divisions. Any loan of $1 million or
less matures within 18 months and accrues interest at the best borrowing
rate available to the corporation for a loan of like type and duration.
Our board must approve any loan in excess of $1 million. In giving its
approval, our board must determine that the material terms of the loan,
including the interest rate and maturity date, are fair and reasonable to
each participating division and to holders of the common stock
representing each such division.
- All material interdivisional transactions are set forth in a written
agreement that is signed by an authorized member of the management team of
each division involved in the transaction.
GG-24
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS
(CONTINUED)
TAX ALLOCATIONS
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 provision. As of the end
of any fiscal quarter, however, if a division cannot 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 the other divisions in
proportion to their taxable income without any compensating payment or
allocation.
ACCESS TO TECHNOLOGY AND KNOW-HOW
Genzyme General has unrestricted access to all technology and know-how owned
or controlled by Genzyme Corporation that may be useful in its business, subject
to any obligations or limitations that apply to the corporation generally.
NOTE C. OTHER GAINS AND CHARGES
In December 1999, Genzyme General recorded a net gain of $14.4 million upon
receipt of a payment associated with the termination of an agreement to acquire
Cell Genesys, Inc. Genzyme General recorded this gain as other income.
During the third quarter of 1998, Genzyme General recorded a $14.8 million
charge to cost of products sold to write down excess inventory used to make
Ceredase-Registered Trademark- enzyme. Genzyme General took this charge
following a determination that, based on the status of efforts to convert
Gaucher disease patients to a treatment regimen using
Cerezyme-Registered Trademark- enzyme, the existing supply of
Ceredase-Registered Trademark- enzyme was sufficient to meet estimated patient
needs.
Genzyme General also recorded $20.1 million in other charges in the fourth
quarter of 1997. The components of these charges are:
- a $18.1 million charge to cost of products sold to write down excess
inventory in Genzyme General's melatonin, bulk pharmaceuticals and fine
chemical product lines. Genzyme General took this charge after it
discontinued these product lines; and
- a $2.0 million charge to other expense relating to uncertainty in
collecting a note receivable that was issued upon the sale of Genetic
Design, Inc.
NOTE D. DISPOSITIONS OF ASSETS
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.
GG-25
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE D. DISPOSITIONS OF ASSETS (CONTINUED)
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. In 1999, we recorded a gain of $2.0 million upon the sale
of our remaining shares of Techne common stock. The $3.4 million and
$2.0 million gains were recorded as gains on sale of investments in equity
securities. The research products business had been allocated to Genzyme
General.
Note C., "Dispositions of Assets," to our consolidated financial statements
contains information regarding:
- the sale of Genzyme General's immunochemistry product lines to an
operating unit of Sybron Laboratory Products Corp.; and
- the sale of Genetic Design to Laboratory Corporation of America.
We incorporate that information into this note by reference.
NOTE E. PEPTIMMUNE ACQUISITION
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):
Property, plant & equipment................................. $ 128
Deferred tax asset.......................................... 1,229
In-process technology....................................... 5,436
------
Total................................................... $6,793
======
The $5.4 million allocated to in-process technology 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. Genzyme General recorded this
amount as a charge to operations.
NOTE F. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Note E., "Off-Balance Sheet Financial Instruments," to our consolidated
financial statements contains information regarding interest rate swap contracts
that are allocated to Genzyme General. We incorporate that information into this
note by reference.
NOTE G. ACCOUNTS RECEIVABLE AND INTANGIBLE ASSETS
Genzyme General's trade receivables primarily represent amounts due from
distributors, healthcare service providers and companies and institutions
engaged in research, development or production of pharmaceutical and
biopharmaceutical products. Genzyme General performs credit evaluations of its
customers on an ongoing basis and generally does not require collateral. Genzyme
General states accounts receivable at fair value after reflecting an allowance
for doubtful accounts. This allowance was $17.6 million at December 31, 1999 and
$9.9 million at December 31, 1998.
GG-26
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE G. ACCOUNTS RECEIVABLE AND INTANGIBLE ASSETS (CONTINUED)
Genzyme General's net intangible assets include $41.5 million in goodwill as
of December 31, 1999 and $48.5 million in goodwill as of December 31, 1998. This
goodwill is primarily a result of acquisitions.
Genzyme General's accumulated amortization of intangible assets was
$38.5 million as of December 31, 1999 and $39.6 million as of December 31, 1998.
NOTE H. INVENTORIES
DECEMBER 31,
-----------------------
1999 1998
-------- --------
(AMOUNTS IN THOUSANDS)
Raw materials.......................................... $24,057 $29,497
Work-in-process........................................ 40,592 23,359
Finished products...................................... 19,735 32,306
------- -------
Total.............................................. $84,384 $85,162
======= =======
NOTE I. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(AMOUNTS IN THOUSANDS)
Plant and equipment..................................... $230,151 $243,816
Land and buildings...................................... 180,624 147,806
Leasehold improvements.................................. 90,128 68,414
Furniture and fixtures.................................. 13,169 13,516
Construction-in-progress................................ 26,964 30,191
-------- --------
$541,036 $503,743
Less accumulated depreciation........................... (178,488) (141,000)
-------- --------
Property, plant and equipment, net...................... $362,548 $362,743
======== ========
Genzyme General's depreciation expense was $36.9 million in 1999,
$34.9 million in 1998, and $28.4 million in 1997.
Genzyme General has capitalized approximately $34.6 million, which
represents the costs it has incurred in validating and optimizing the
manufacturing process for products which have reached technological feasibility.
Genzyme General has capitalized the following amounts of interest costs incurred
in financing the construction of manufacturing facilities:
1999 1998 1997
---- ---- ----
$0.9 million $0.7 million $0.5 million
GG-27
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE J. INVESTMENTS
MARKETABLE SECURITIES
DECEMBER 31,
-----------------------------------------
1999 1998
------------------- -------------------
COST MARKET COST MARKET
-------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
Cash equivalents(1):
Corporate notes........................... $ 34,108 $ 34,108 $ 8,131 $ 8,129
Money market fund......................... 22,210 22,210 70,805 70,805
-------- -------- -------- --------
$ 56,318 $ 56,318 $ 78,936 $ 78,934
======== ======== ======== ========
Short-term:
Corporate notes........................... $210,954 $210,173 $173,970 $174,421
Federal agencies.......................... 4,085 4,067 -- --
-------- -------- -------- --------
$215,039 $214,240 $173,970 $174,421
======== ======== ======== ========
Long-term:
Corporate notes........................... $137,482 $135,509 $226,002 $226,259
Federal................................... -- -- 33,412 33,581
U.S. Treasury notes....................... 69,925 69,633 21,323 21,824
-------- -------- -------- --------
$207,407 $205,142 $280,737 $281,664
======== ======== ======== ========
Investments in equity securities.......... $ 59,983 $ 94,719 $ 62,244 $ 51,977
======== ======== ======== ========
- ------------------------
(1) Cash equivalents are included as part of cash and cash equivalents on our
balance sheets.
REALIZED AND UNREALIZED GAINS AND LOSSES ON MARKETABLE SECURITIES AND
INVESTMENTS IN EQUITY SECURITIES
Genzyme General recorded gains of $2.0 million in 1999 and $3.4 million in
1998 upon the sale of its investment in shares of Techne common stock. Genzyme
General also recorded charges of $5.7 million in 1999 and $3.4 million in 1998
because it considered the decline in the value of certain strategic investments
in collaborators' common stock to be other than temporary.
Genzyme General records gross unrealized holding gains and losses in
division equity. The following table sets forth the amounts recorded:
DECEMBER 31,
-----------------------------
1999 1998
------------- -------------
Unrealized holding gains........................ $37.1 million $3.6 million
Unrealized holding losses....................... $5.0 million $12.5 million
GG-28
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE J. INVESTMENTS (CONTINUED)
The following table contains information regarding the range of contractual
maturities of Genzyme General's investments in debt securities:
DECEMBER 31,
-----------------------------------------
1999 1998
------------------- -------------------
COST MARKET COST MARKET
-------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
Within 1 years.............................. $271,357 $270,558 $252,907 $253,355
1-2 years................................... 106,046 104,306 259,363 259,788
2-10 years.................................. 101,361 100,836 21,373 21,876
-------- -------- -------- --------
$478,764 $475,700 $533,643 $535,019
======== ======== ======== ========
Note I., "Investments," to our consolidated financial statements contains
information regarding Genzyme General's:
- Equity investments in:
- Abiomed, Inc.;
- Aronex Pharmaceuticals, Inc.;
- BioMarin;
- Celtrix Pharmaceuticals, Inc.
- GelTex;
- Genovo, Inc.;
- Integramed America, Inc.; and
- Pharming.
- Investments in and relationships with Dyax Corporation, Genzyme
Transgenics and ATIII LLC; and
- Investments in the following joint ventures:
- BioMarin/Genzyme LLC;
- Diacrin/Genzyme LLC;
- Pharming/Genzyme LLC; and
- RenaGel LLC.
We incorporate that information into this note by reference.
GG-29
GENZYME GENERAL
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE K. ACCRUED EXPENSES
DECEMBER 31,
-----------------------
1999 1998
-------- --------
(AMOUNTS IN THOUSANDS)
Compensation........................................... $21,363 $20,434
Technology access fee.................................. -- 10,000
Professional fees...................................... 2,938 4,853
Royalties.............................................. 6,891 5,846
Rebates................................................ 7,126 5,663
Other.................................................. 24,196 18,847
------- -------
$62,514 $65,643
======= =======
NOTE L. LONG-TERM DEBT AND LEASES
LONG-TERM DEBT
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(AMOUNTS IN THOUSANDS)
5 1/4% convertible subordinated notes....................... $250,000 $250,000
Revolving credit facility maturing in November 1999......... -- $ 82,000
5% convertible subordinated debentures...................... 22,622 21,559
Mortgage notes.............................................. -- 3,167
-------- --------
$272,622 $356,726
Less current portion........................................ -- (82,080)
-------- --------
$272,622 $274,646
======== ========
Over the next five years, Genzyme General will be required to repay the
following principal amounts on its long-term debt (excluding capital leases):
2000 2001 2002 2003 2004 AFTER 2004
---- ---- ---- ---- ---- ----------
$0.0 million $0.0 million $0.0 million $22.6 million $0.0 million $250.0 million
REVOLVING CREDIT FACILITY; CONVERTIBLE DEBT; MORTGAGE NOTE
Note K, "Long Term Debt and Leases," to our consolidated financial
statements contains information regarding our:
- revolving credit facilities;
- 5 1/4% convertible subordinated notes due June 2005;
- 5% convertible subordinated debentures due August 2003; and
- mortgage note.
We incorporate that information into this note by reference.
GG-30
NOTE L. LONG-TERM DEBT AND LEASES (CONTINUED)
OPERATING LEASES
Genzyme General incurs expense under operating leases for facilities and
personal property that have terms in excess of one year. Genzyme General's total
expense under operating leases was:
1999 1998 1997
---- ---- ----
$20.7 million $16.3 million $14.2 million
Over the next five years, Genzyme General will be required to repay the
following amounts under operating leases:
2000 2001 2002 2003 2004 AFTER 2004
---- ---- ---- ---- ---- ----------
$15.8 million $15.3 million $14.0 million $11.9 million $11.4 million $115.4 million
In June 1992, one of our wholly-owned subsidiaries entered into a 65-year
lease with an unaffiliated lessor. Our expenses under this lease, which are
allocated to Genzyme General, 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.
Genzyme Tissue Repair leases from Genzyme General a portion of a research
and development facility. Genzyme Tissue Repair is obligated to pay Genzyme
General $0.6 million per year for 3 years commencing on July 1, 1998.
Diacrin/Genzyme LLC has subleased a portion of this facility and is obligated to
pay Genzyme Tissue Repair rent of $0.4 million per year pursuant to the terms of
the sublease agreement.
NOTE M. DIVISION EQUITY
At December 31, 1999 and 1998, 200 million shares of GENZ Stock were
authorized for issuance with a par value of $0.01. At December 31, 1999
approximately 84,352,000 shares of GENZ Stock were issued and approximately
84,245,000 shares of GENZ Stock outstanding and at December 31, 1998
approximately 81,517,000 shares of GENZ Stock were issued and approximately
81,411,000 shares of GENZ Stock were outstanding. At December 31, 1999,
approximately 13,126,000 shares of GENZ Stock were reserved for issuance under
our various equity plans and options to purchase approximately 11,610,000 shares
of GENZ Stock were outstanding.
GG-31
NOTE M. DIVISION EQUITY (CONTINUED)
The following table contains the components of division equity for Genzyme
General for the periods presented:
1999 1998 1997
---------- -------- --------
(AMOUNTS IN THOUSANDS)
Balance at beginning of period.............................. $ 939,967 $745,895 $645,185
Net income................................................ 142,077 133,052 76,642
Allocation of tax benefits generated by:
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
Issuance of common stock under stock plans.................. 59,587 74,360 35,963
Exercise of warrants........................................ -- 289 855
Allocation of cash:
To Genzyme Molecular Oncology for designated
shares(1)............................................. -- (5,000) --
To Genzyme Surgical Products for designated shares(1)... (176,706) (41,975) (25,669)
To Genzyme Tissue Repair for designated shares(1)....... (4,937) -- (14,892)
To Genzyme Tissue Repair for research program........... (100) (250) --
To Genzyme Tissue Repair for transfer of interest in
joint venture......................................... (25,000) -- --
Tax benefit from disqualifying dispositions................. 24,238 18,561 4,127
Conversion of debentures for GZMO designated shares(1)...... -- (19,802) --
Conversion of note receivable for GZMO designated
shares(1)................................................. -- (2,696) --
Loss on purchase of facility from Genzyme Tissue Repair..... -- (711) --
Allocation of acquired deferred tax asset................... -- -- 2,900
Stock compensation expense.................................. 58 48 1,218
Equity adjustments.......................................... 13,624 339 (10,967)
---------- -------- --------
Balance at end of period.................................... $1,007,614 $939,967 $745,895
========== ======== ========
- ------------------------
(1) Designated shares are shares of our common stock that are not issued and
outstanding, but which our board of directors may issue, sell or distribute
without allocating the proceeds to the division tracked by that series of
stock. As of December 31, 1999, there were 1,688,237 GZMO designated shares,
1,164,839 GZSP designated shares and 2,238,053 GZTR designated shares. The
number of GZMO designated shares assumes that Genzyme Molecular Oncology
does not complete a public offering of GZMO Stock prior to June 18, 2000. If
such an offering is completed prior to that date, the number of GZMO
designated shares reserved for issuance in connection with a draw under an
equity line of credit in 1998 will decrease based on a formula set forth in
our charter.
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. Genzyme General does 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.
GG-32
NOTE M. DIVISION EQUITY (CONTINUED)
The following table sets forth net income and income per share data for
Genzyme General calculated in accordance with SFAS 123 as if compensation
expense for our stock-based compensation plans was determined based on the fair
value at the grant dates for options granted and shares purchased under the
plans:
1999 1998 1997
--------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Net income:
As reported............................... $176,883 $170,909 $107,175
Pro forma................................. $159,223 $157,334 $ 95,168
Basic income per share:
As reported............................... $ 2.13 $ 2.16 $ 1.40
Pro forma................................. $ 1.92 $ 1.99 $ 1.24
Diluted income per share:
As reported............................... $ 2.00 $ 2.06 $ 1.36
Pro forma................................. $ 1.81 $ 1.83 $ 1.21
Note L., "Stockholders' Equity," to our consolidated financial statements
contains information regarding the assumptions we made in calculating net income
and income per share data in accordance with SFAS 123. The effects of applying
SFAS 123 are not likely to be representative of the effects on reported net
income in future years. SFAS 123 does not apply to awards granted prior to 1995,
and additional awards are anticipated in future years.
PREFERRED STOCK, STOCK RIGHTS, EQUITY PLANS, WARRANTS, DESIGNATED SHARES AND
EQUITY LINES
Note L., "Stockholders' Equity," to our consolidated financial statements
contains information regarding:
- our authorized preferred stock;
- our shareholder rights plan;
- our directors' deferred compensation plan;
- our other equity plans;
- warrants exercisable into GENZ Stock;
- designated shares and our policies for distributing them; and
- equity lines of credit made available by Genzyme General to Genzyme
Molecular Oncology and Genzyme Tissue Repair.
We incorporate that information into this note by reference.
NOTE N. RESEARCH AND DEVELOPMENT AGREEMENTS
Genzyme General's revenue from research and development agreements with
Genzyme Transgenics Corporation was:
1999 1998 1997
---- ---- ----
$1.5 million $3.6 million $8.0 million
GG-33
NOTE N. RESEARCH AND DEVELOPMENT AGREEMENTS (CONTINUED)
Note M., "Research and Development Agreements," to our consolidated
financial statements contains information regarding Genzyme General's:
- Relationships with Genzyme Transgenics Corporation; and
- Investments in the following joint ventures:
- BioMarin/Genzyme LLC;
- Diacrin/Genzyme LLC;
- Pharming/Genzyme LLC; and
- RenaGel LLC.
We incorporate that information in this note by reference.
NOTE O. 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 Genzyme General's results of operations,
financial condition or liquidity.
NOTE P. INCOME TAXES
Genzyme General's income before income taxes and the related income tax
expense (benefit) are described in the following table:
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
Domestic(1)................................... $210,097 $204,182 $112,349
Foreign....................................... 16,380 9,514 8,822
-------- -------- --------
Total..................................... $226,477 $213,696 $121,171
======== ======== ========
Currently payable:
Federal....................................... $ 77,779 $ 69,567 $ 40,426
State......................................... 4,302 9,354 4,286
Foreign....................................... 5,733 4,016 2,971
-------- -------- --------
Total..................................... $ 87,814 $ 82,937 $ 47,683
======== ======== ========
Deferred:
Federal....................................... $ (3,036) $ (1,734) $ (3,713)
State......................................... (378) (829) (245)
-------- -------- --------
Total..................................... (3,414) $ (2,563) $ (3,958)
-------- -------- --------
Provision for income taxes.................... $ 84,400 $ 80,374 $ 43,725
======== ======== ========
- ------------------------
(1) Includes $5.4 million in charges for purchased research and development and
$5.5 million in charges for impaired investments in 1999.
GG-34
NOTE P. INCOME TAXES (CONTINUED)
Genzyme General's provisions for income taxes were at rates other than the
U.S. federal statutory tax rate for the following reasons:
1999 1998 1997
-------- -------- --------
Tax at U.S. statutory rate............................... 35.0% 35.0% 35.0%
Losses in foreign subsidiary and less than 80% owned
subsidiaries with no current tax benefit............... 0.1 0.8 0.8
State taxes, net......................................... 1.2 3.1 3.0
Foreign sales corporation................................ (2.2) (1.5) (1.8)
Nondeductible amortization............................... 0.7 0.8 1.4
Benefit of tax credits................................... (1.4) (1.0) (1.3)
Other, net............................................... 2.2 0.5 (0.8)
---- ---- -----
Effective tax rate before certain charges................ 35.6% 37.7% 36.3%
Charge for impaired investment........................... 0.5 -- --
Charge for purchased research and development............ 0.5 -- --
---- ---- -----
36.6% 37.7% 36.3%
Allocated tax benefits generated by:
Genzyme Molecular Oncology............................. (3.3) (1.7) (2.2)
Genzyme Surgical Products.............................. (6.8) (8.4) (8.4)
Genzyme Tissue Repair.................................. (4.6) (7.7) (14.7)
---- ---- -----
Effective tax rate attributable to GENZ Stock............ 21.9% 19.9% 11.0%
==== ==== =====
The components of net deferred tax assets are described in the following
table:
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(AMOUNTS IN THOUSANDS)
Deferred tax assets:
Net operating loss carryforwards.................... $ 3,164 $ 2,423
Tax credits......................................... 9,413 3,714
Deferred loss....................................... -- 2,002
Intangible amortization............................. 36,496 38,271
Investments in unconsolidated subsidiary............ 3,396 3,108
Realized and unrealized capital losses.............. 10,088 8,822
Reserves, accruals and other........................ 37,055 35,798
Allocation of tax asset from Genzyme Molecular
Oncology.......................................... 3,787 15,621
Allocation of tax asset from Genzyme Tissue
Repair............................................ 15,510 2,648
-------- --------
Gross deferred tax asset................................ $118,909 $112,407
Valuation allowance..................................... (17,646) (15,383)
-------- --------
$101,263 $ 97,024
Deferred tax liabilities:
Depreciable assets.................................. (22,591) (26,373)
Realized and unrealized capital gains............... (12,686) --
Deferred gains...................................... (878) --
Allocation of tax liability from Genzyme Surgical
Products.......................................... (4,069) (2,788)
-------- --------
Net deferred tax asset.............................. $ 61,039 $ 67,863
======== ========
As a result of uncertainty surrounding our ability to realize certain tax
benefits that primarily relate to capital losses from the purchase of in-process
research and development, we placed valuation
GG-35
NOTE P. INCOME TAXES (CONTINUED)
allowances of $17.6 million in 1999 and $15.4 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.
At December 31, 1999, Genzyme General had for U.S. income tax purposes a net
operating loss carryforwards of $9.0 million and a tax credit carryforward of
$9.4 million. The net operating loss carryforwards expire between 2003 and 2019
and, prior to expiration, Genzyme General's ability to use this carryforward may
be limited under U.S. tax laws. Tax credits of $4.9 million will carryforward
indefinitely and approximately $4.5 million of the tax credit carryforwards will
expire from 2014 to 2019. Approximately $9.4 million of the tax credit
carryforwards relate to exercises of non-qualified stock options and
disqualifying dispositions of incentive stock options, the tax benefit of which,
if realized, will be credited to additional paid-in-capital.
NOTE Q. BENEFIT PLANS
Note P., "Benefit Plans," to our consolidated financial statements contains
information regarding our 401(k) and other pension plans. We incorporate that
information into this note by reference.
NOTE R. 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, Genzyme General has two reportable segments:
- Therapeutics, which develops, manufactures and distributes human
therapeutic products for significant unmet medical needs. The business
derives substantially all of its revenue from sales of
Cerezyme-Registered Trademark- enzyme; and
- Diagnostic Products, which provides diagnostic products to niche markets,
focusing on in vitro diagnostics.
GG-36
NOTE R. SEGMENT INFORMATION (CONTINUED)
We have provided information concerning the operations in these reportable
segments in the following table:
1999 1998 1997
----------- --------- ---------
(AMOUNTS IN THOUSANDS)
Revenues:
Therapeutics.......................................... $ 488,705 $ 413,645 $ 332,712
Diagnostic Products................................... 57,971 65,683 66,288
Other................................................. 86,409 85,846 86,927
Eliminations/Adjustments.............................. 2,281 4,145 10,441
----------- --------- ---------
Total..................................................... $ 635,366 $ 569,319 $ 496,368
=========== ========= =========
Depreciation and Amortization Expense:
Therapeutics.......................................... $ 21,068 $ 10,862 $ 10,054
Diagnostic Products................................... 1,909 4,715 4,540
Other................................................. 6,422 11,470 7,410
Eliminations/Adjustments.............................. 20,835 10,711 12,818
----------- --------- ---------
Total..................................................... $ 50,234 $ 37,758 $ 34,822
=========== ========= =========
Equity in Net Loss of Unconsolidated Affiliates:
Therapeutics.......................................... $ (30,094) $ (12,480) $ (2,310)
Diagnostic Products................................... -- -- --
Other................................................. 56 (107) (71)
Eliminations/Adjustments.............................. (7,385) (7,152) (3,401)
----------- --------- ---------
Total..................................................... $ (37,423) $ (19,739) $ (5,782)
=========== ========= =========
Income Tax (Expense) Benefits:
Therapeutics.......................................... $ (84,859) $ (76,606) $ (61,389)
Diagnostic Products................................... (2,485) (13,755) (1,409)
Other................................................. 2,952 2,134 8,658
Eliminations/Adjustments.............................. (8) 7,853 10,415
----------- --------- ---------
Total..................................................... $ (84,400) $ (80,374) $ (43,725)
=========== ========= =========
Net Income:
Therapeutics(1)....................................... $ 133,854 $ 120,832 $ 104,527
Diagnostic Products(2)................................ 3,915 21,694 2,400
Other................................................. (4,661) (3,367) (14,741)
Eliminations/Adjustments(3)........................... 8,969 (6,107) (15,544)
----------- --------- ---------
Total..................................................... $ 142,077 $ 133,052 $ 76,642
=========== ========= =========
- ------------------------
(1) Therapeutics' net income for 1998 includes a $14.8 million charge to write
down excess inventory used to make Ceredase-Registered Trademark- enzyme.
(2) 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.
(3) Eliminations/Adjustments includes a $14.4 million gain upon receipt of a
payment associated with the termination of the agreement to acquire Cell
Genesys.
GG-37
NOTE R. SEGMENT INFORMATION (CONTINUED)
Segment Assets:
Therapeutics........................................... $ 338,960 $ 326,305
Diagnostic Products.................................... 40,266 49,430
Other.................................................... 83,088 94,930
Eliminations/Adjustments................................. 937,269 939,726
---------- ----------
Total...................................................... $1,399,583 $1,410,391
========== ==========
The Other category includes amounts attributable to our genetic testing and
pharmaceuticals businesses. Eliminations/Adjustments consists of the differences
between:
- the segments' net income and our consolidated net income; and
- total segment assets and our consolidated total assets.
The amount in Eliminations/Adjustments for net income consists primarily of
interest income, interest expense and other income and expense items that we do
not specifically allocate to a particular segment.
Segment assets include accounts receivable, inventory and certain fixed and
intangible assets. The amounts in Eliminations/Adjustments for segment assets
consist of the following:
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(AMOUNTS IN THOUSANDS)
Cash, cash equivalents, and short- and long-term
investments........................................... $513,905 $556,097
Intangibles, net........................................ 34,341 41,556
Property, plant and equipment, net...................... 172,165 133,995
Investment in equity securities......................... 94,719 51,977
Other................................................... 122,139 156,101
-------- --------
Total Eliminations/Adjustments...................... $937,269 $939,726
======== ========
Genzyme General operates in the healthcare industry and manufactures and
markets its products primarily in the United States and Europe. Genzyme
General's principal manufacturing facilities are located in the United States,
United Kingdom, Switzerland and Germany. It purchases products from our English
and Swiss subsidiaries for sale to customers in the United States. Genzyme
General sets transfer prices from our foreign subsidiaries to allow it to
produce profit margins commensurate with its sales and marketing effort. Our
Dutch subsidiary is Genzyme General's primary distributor of therapeutic
products in Europe.
GG-38
NOTE R. SEGMENT INFORMATION (CONTINUED)
The following table contains certain financial information by geographic
area:
1999 1998 1997
--------- -------- --------
(AMOUNTS IN THOUSANDS)
Revenues:
U.S........................................ $ 412,611 $371,587 $363,455
Netherlands................................ 35,499 31,413 39,936
Other...................................... 187,256 166,319 92,977
--------- -------- --------
Total.................................... $ 635,366 $569,319 $496,368
========= ======== ========
Long-lived assets:
U.S........................................ $ 647,024 $755,023 $506,085
Netherlands................................ 1,094 730 652
Other...................................... 51,447 56,517 53,546
--------- -------- --------
Total.................................... $ 699,565 $812,270 $560,283
========= ======== ========
Genzyme General's results of operations are highly dependent on sales of
Ceredase-Registered Trademark- and Cerezyme-Registered Trademark- enzymes. Sales
of these products represented 84% of Genzyme General's product revenue in 1999,
81% of product revenue in 1998, and 78% of product revenue in 1997. Genzyme
General sells 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
these products are sold to a large number of customers in a number of different
industries and over a broad geographic area.
NOTE S. QUARTERLY RESULTS (UNAUDITED)
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1999
Net revenue......................................... $150,766 $154,205 $157,669 $172,726
Gross profit........................................ 113,519 117,557 120,693 126,223
Net income.......................................... 43,226 40,226 38,187 55,244
Income per share of GENZ Stock:
Basic............................................. $ 0.53 $ 0.49 $ 0.46 $ 0.66
Diluted........................................... $ 0.49 $ 0.46 $ 0.43 $ 0.62
1998
Net revenue......................................... 129,896 $141,779 $142,225 $155,419
Gross profit........................................ 89,089 98,860 86,546 117,635
Net income.......................................... 34,056 41,086 53,752 42,015
Income per share of GENZ Stock:
Basic............................................. $ 0.43 $ 0.52 $ 0.68 $ 0.52
Diluted........................................... $ 0.42 $ 0.50 $ 0.64 $ 0.49
NOTE T. SUBSEQUENT EVENT
In February 2000, we converted our shares of the Series B Convertible
Preferred Stock of Genzyme Transgenics into 1,048,021 shares of Genzyme
Transgenics common stock. Also in February 2000, Genzyme Transgenics completed a
public offering of its common stock. Genzyme General will recognize a gain on
affiliate sale of stock of approximately $20 million in the first quarter of
2000.
GG-39
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Genzyme Corporation:
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations and of cash flows present fairly, in all
material respects, the financial position of Genzyme General (as described in
Note A) at December 31, 1999 and 1998, and the results of its operations and its
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.
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 combined 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 which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As more fully described in Note A to these financial statements, Genzyme
General is a division of Genzyme Corporation; accordingly, the combined
financial statements of Genzyme General should be read in conjunction with the
audited consolidated financial statements of Genzyme Corporation and
Subsidiaries.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 23, 2000
GG-40
GENZYME GENERAL DIVISION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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
- ------------------------- ------------------- ---------------- -------------- ----------- -------------
Year ended December 31,
1999:
Allowance for doubtful
accounts............... $ 9,913,100 $12,216,200 $ -- $ 3,167,400(1) $18,961,900
Inventory reserve........ $17,631,100 $ 1,978,000 $ -- $ 3,918,000 $15,691,100
Year ended December 31,
1998:
Allowance for doubtful
accounts............... $ 8,415,700 $ 5,059,000 $ -- $ 3,561,600(1) $ 9,913,100
Inventory reserve........ $15,471,300 $18,178,000 $ -- $16,018,200 $17,631,100
Year ended December 31,
1997:
Allowance for doubtful
accounts............... $11,967,900 $ 2,080,000 $ -- $ 5,632,200(1) $ 8,415,700
Inventory reserve........ $ 2,631,300 $15,101,000 $ -- $ 2,261,000 $15,471,300
- ------------------------
(1) Uncollectible accounts written off, net of recoveries.
GG-41