EXHIBIT 13.2
FINANCIAL STATEMENTS
PAGE NO.
--------
GENZYME MOLECULAR ONCOLOGY
Combined Selected Financial Data.......................... GMO-2
Management's Discussion and Analysis of Genzyme Molecular
Oncology's Financial Condition and Results of
Operations.............................................. GMO-5
Combined Statements of Operations--For the Years Ended
December 31, 1999, 1998
and 1997................................................ GMO-13
Combined Balance Sheets--December 31, 1999 and 1998....... GMO-14
Combined Statements of Cash Flows--For the Years Ended
December 31, 1999, 1998
and 1997................................................ GMO-15
Notes to Combined Financial Statements.................... GMO-16
Report of Independent Accountants......................... GMO-28
GMO-1
GENZYME MOLECULAR ONCOLOGY COMBINED SELECTED FINANCIAL DATA
Genzyme Molecular Oncology is our operating division that is developing
cancer products, with a focus on cancer vaccines and angiogenesis inhibitors.
Genzyme Molecular Oncology Division Common Stock, which we refer to as "GZMO
Stock," is intended to reflect the value and track the performance of Genzyme
Molecular Oncology.
The following combined selected financial data reflect the results of
operations and financial position of Genzyme Molecular Oncology and should be
read in conjunction with the financial statements of Genzyme Molecular Oncology
and accompanying notes.
GMO-2
COMBINED STATEMENT OF OPERATIONS DATA
FOR THE YEARS ENDED DECEMER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues:
Service revenue............................ $ 1,920 $ 2,229 $ 467 $ -- $ --
Service revenue--related party............. 50 466 -- -- --
Research and development revenue--related
party.................................... 496 2,177 315 -- --
Research and development revenue........... -- 3,256 -- -- --
Licensing revenue.......................... 2,125 11,275 -- -- --
Royalty revenue............................ 28 4 -- -- --
-------- -------- -------- ------- -------
Total revenues........................... 4,619 19,407 782 -- --
Operating costs and expenses:
Cost of service revenues................... 620 1,374 50 -- --
Cost of research and development
revenues................................. 698 4,073 287 -- --
Selling, general and administrative........ 5,529 7,155 2,118 185 87
Research and development................... 15,997 12,743 5,341 818 377
Amortization of intangibles................ 11,825 11,983 5,127 -- --
Charge for in-process technology........... -- -- 7,000 -- --
-------- -------- -------- ------- -------
Total operating costs and expenses....... 34,669 37,328 19,923 1,003 464
-------- -------- -------- ------- -------
Operating loss............................... (30,050) (17,921) (19,141) (1,003) (464)
Other income (expenses):
Equity in net loss of joint venture........ (1,870) (1,647) (258) -- --
Interest income............................ 469 782 392 -- --
Interest expense........................... (28) (2,968) (1,663) -- --
-------- -------- -------- ------- -------
Total other income (expenses)............ (1,429) (3,833) (1,529) -- --
-------- -------- -------- ------- -------
Loss before income taxes..................... (31,479) (21,754) (20,670) (1,003) (464)
Tax benefit.................................. 2,647 2,647 1,092 -- --
-------- -------- -------- ------- -------
Net loss attributable to GZMO Stock.......... $(28,832) $(19,107) $(19,578) $(1,003) $ (464)
======== ======== ======== ======= =======
Per GZMO basic and diluted common share:
Net loss................................... $ (2.25) $ (3.81)
======== ========
Weighted average shares outstanding.......... 12,826 5,019
======== ========
Per pro forma GZMO basic and diluted common
share:
Pro forma net loss......................... $ (4.98) $ (0.26) $ (0.12)
======== ======= =======
Pro forma weighted average shares
outstanding................................ 3,929 3,929 3,929
======== ======= =======
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COMBINED BALANCE SHEET DATA
DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
Cash and investments............... $ 3,587 $11,900 $21,229 $ -- $ --
Working capital.................... (5,889) 9,189 11,953 -- --
Total assets....................... 9,692 35,952 53,801 -- --
Long-term debt and convertible
debt............................. -- -- 24,606 -- --
Parent company investment.......... -- -- -- 1,504 501
Division equity.................... (1,215) 23,364 13,466 -- --
There were no cash dividends paid.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF GENZYME MOLECULAR ONCOLOGY'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 Molecular Oncology 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
Molecular Oncology and Genzyme.
We formed Genzyme Molecular Oncology on June 18, 1997 by acquiring
PharmaGenics, Inc. and combining it with several of our ongoing programs in the
field of oncology.
For purposes of financial presentation, we allocate certain of our programs,
products, assets and liabilities to Genzyme Molecular Oncology and prepare
separate financial statements for Genzyme Molecular Oncology. Notwithstanding
the allocation of assets and liabilities to Genzyme Molecular Oncology, Genzyme
Corporation continues to hold title to all of the assets and is responsible for
all of the liabilities allocated to Genzyme Molecular Oncology. Holders of GZMO
Stock are common stockholders of Genzyme Corporation and have no specific rights
to the assets to which GZMO Stock relates.
We present financial information and accounting policies specific to Genzyme
Molecular Oncology 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
Molecular Oncology's financial position and results of operations in conjunction
with the financial statements and related notes of Genzyme Molecular Oncology,
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 with this annual report.
RESULTS OF OPERATIONS
The following discussion summarizes the key factors management believes are
necessary for an understanding of Genzyme Molecular Oncology's financial
statements.
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The components of Genzyme Molecular Oncology's combined statements of
operations are described in the following table:
99/98 98/97
INCREASE/(DECREASE) INCREASE/(DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ------------------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Total revenues................ $ 4,619 $ 19,407 $ 782 (76%) 2,382%
Cost of revenues.............. 1,318 5,447 337 (76%) 1,516%
Selling, general and
administrative.............. 5,529 7,155 2,118 (23%) 238%
Research and development...... 15,997 12,743 5,341 26% 139%
Amortization of intangibles... 11,825 11,983 5,127 (1%) 134%
Charge for in-process
technology.................. -- -- 7,000 0% (100%)
-------- -------- --------
Total operating costs and
expenses.................. 34,669 37,328 19,923 (7%) 87%
-------- -------- --------
Operating loss................ (30,050) (17,921) (19,141) (68%) 6%
Other expenses, net........... (1,429) (3,833) (1,529) 63% (151%)
-------- -------- --------
Loss before income taxes...... (31,479) (21,754) (20,670) (45%) (5%)
Tax benefit................... 2,647 2,647 1,092 0% 142%
-------- -------- --------
Net loss attributable to GZMO
Stock....................... $(28,832) $(19,107) $(19,578) (51%) 2%
======== ======== ========
REVENUES
99/98 98/97
INCREASE/(DECREASE) INCREASE/(DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ------------------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Service revenue............... $ 1,970 $ 2,695 $ 467 (27%) 477%
Research and development
revenue..................... 496 5,433 315 (91%) 1,625%
Licensing revenue............. 2,125 11,275 -- (81%) 100%
Royalty revenue............... 28 4 -- 600% 100%
-------- -------- --------
Total revenues.............. $ 4,619 $ 19,407 $ 782 (76%) 2,382%
======== ======== ========
1999 AS COMPARED TO 1998
Service revenue decreased as a result of a decline in the provision of
genomics services using Genzyme Molecular Oncology's SAGE-TM- gene expression
technology.
Research and development revenue also decreased as a result of a reduction
in work performed by Genzyme Molecular Oncology on behalf of StressGen/Genzyme
LLC (Genzyme Molecular Oncology's joint venture with StressGen Biotechnologies
Corporation and the Canadian Medical Discoveries Fund, Inc. to develop stress
gene therapies for the treatment of cancer that was dissolved in 1999) and the
completion of research and development work performed on behalf of
Schering-Plough in 1998.
Licensing revenue decreased in 1999 as a result of the receipt in 1998 of a
licensing fee and milestone payments under a license agreement with
Schering-Plough relating to p53 gene therapy. This amount was partially offset
by amounts received upon the grant by Genzyme Molecular Oncology of licenses
under its rights to the SAGE-TM- gene expression technology and the MDM2
protein.
GMO-6
1998 AS COMPARED TO 1997
The increase in Genzyme Molecular Oncology's research and development and
licensing revenue was primarily due to $13.0 million in revenue recorded in
connection with a research and license agreement with Schering-Plough. Genzyme
Molecular Oncology's revenue includes work performed for StressGen/Genzyme LLC.
COST OF REVENUES
1999 AS COMPARED TO 1998
Genzyme Molecular Oncology's cost of revenues includes:
- work performed on behalf of StressGen/Genzyme LLC;
- services performed using the SAGE-TM- technology on behalf of third
parties;
- performance of gene therapy research on behalf of Schering-Plough; and
- royalties payable to third parties.
Cost of revenues decreased in 1999 as a result of the completion of the
Schering-Plough research project and a reduction in the royalty rate payable by
Genzyme Molecular Oncology for using the SAGE-TM- gene expression technology on
behalf of third parties.
1998 AS COMPARED TO 1997
The increase in Genzyme Molecular Oncology's cost of revenues in 1998 was
primarily attributable to:
- costs related to the delivery of services using the SAGE-TM- technology;
- royalties payable for using the SAGE-TM- technology on behalf of third
parties; and
- costs incurred in connection with research and development performed on
behalf of StressGen/ Genzyme LLC and Schering-Plough.
SG&A AND R&D EXPENSES
1999 AS COMPARED TO 1998
Genzyme Molecular Oncology's selling, general and administrative expense
decreased primarily as a result of:
- reduced legal costs in 1999 associated with the prosecution and
maintenance of its intellectual property portfolio; and
- a one-time charge taken in 1998 to write off costs incurred in
connection with a public offering of GZMO Stock that was not completed.
Genzyme Molecular Oncology's research and development expense increased as a
result of:
- the initiation of a clinical trial for its melanoma tumor vaccine
product; and
- an increase in the number of research personnel and related expenses
required to support the continued development of its cancer vaccine and
angiogenesis inhibitor programs.
1998 AS COMPARED TO 1997
Genzyme Molecular Oncology's selling, general and administrative expense
increased in 1998 primarily as a result of:
GMO-7
- increased administrative support needed to support the growth of its
business; and
- a one-time charge taken in the third quarter of 1998 to write off costs
incurred in connection with a public offering of GZMO Stock that was
not completed.
Genzyme Molecular Oncology's research and development expense increased in
1998 as a result of increases in research personnel and related expenses to
support Genzyme Molecular Oncology's SAGE-TM-, gene therapy and small molecule
programs.
AMORTIZATION OF INTANGIBLES
Genzyme Molecular Oncology's amortization of intangibles is attributable to
intangible assets acquired in connection with the acquisition of PharmaGenics,
Inc. in June 1997. Because Genzyme Molecular Oncology only amortized these
assets over a six month period in 1997, amortization expense increased in 1998.
OTHER INCOME AND EXPENSES
1999 AS COMPARED TO 1998
Genzyme Molecular Oncology's other expenses decreased because it had reduced
interest expense resulting from the transfer of its convertible debt to Genzyme
General in August 1998. The decrease in interest expense, however, was offset in
part by a $1.0 million charge taken by Genzyme Molecular Oncology in the third
quarter of 1999 in connection with its repurchase of one-half of the Canadian
Medical Discoveries Fund's interest in StressGen/Genzyme LLC. StressGen/Genzyme
LLC was dissolved in December 1999 and, as a result, Genzyme Molecular Oncology
will no longer incur expenses related to this joint venture.
1998 AS COMPARED TO 1997
Interest income increased in 1998 mainly as the result of higher average
cash balances. Interest expense increased to $3.0 million in 1998 compared to
$1.7 million in 1997. The increase in interest expense is the result of interest
and related amortization of the discount on the 6% convertible debentures issued
in August 1997. These debentures, which had been convertible into shares of GZMO
Stock, were exchanged in August 1998 for 5% convertible debentures convertible
into shares of GENZ Stock.
StressGen/Genzyme LLC was established in July 1997. Genzyme Molecular
Oncology recorded an equity in net loss of the joint venture of $1.6 million in
1998 and $0.3 million in 1997.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, Genzyme Molecular Oncology had cash, cash equivalents
and short-term investments of $3.6 million, a decrease of $8.3 million from
December 31, 1998.
In 1999, Genzyme Molecular Oncology used $14.6 million of cash for
operations. Investing activities provided $2.0 million of cash, which consisted
primarily of $1.0 million in proceeds from the maturities of investments, and
$0.9 million from the distribution of cash from StressGen/Genzyme LLC upon the
joint venture's dissolution. Financing activities provided $5.0 million of cash
from the issuance of debt, and $0.3 million of cash proceeds from the exercise
of stock options and the issuance of stock under our employee stock purchase
plan.
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 in exchange for GZMO designated shares. GZMO designated shares are shares
of GZMO Stock that are not issued and outstanding, but
GMO-8
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 down any funds under this equity line.
At December 31, 1999, $5.0 million of funds outstanding under one of our
revolving credit facilities was allocated to Genzyme Molecular Oncology. Genzyme
Molecular Oncology, together with our other operating divisions, has access to
our 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 anticipate that Genzyme Molecular Oncology's current cash resources,
together with amounts available from the following sources, will be sufficient
to fund its operations through 2000:
- the $30.0 million equity line of credit from Genzyme General;
- our revolving credit facilities;
- revenues generated from the SAGE-TM- gene expression technology; and
- revenues from license agreements.
We expect Genzyme Molecular Oncology to have significant operating losses
for the next several years. Genzyme Molecular Oncology plans to spend
substantial amounts of money on, among other things:
- research and development;
- preclinical and clinical testing; and
- pursuing regulatory approvals.
Genzyme Molecular Oncology's cash needs may differ from those planned as a
result of many factors, including the:
- results of research and development and clinical testing;
- achievement of milestones under existing strategic alliances;
- ability to establish and maintain additional strategic collaborations
and licensing arrangements;
- costs of protecting its intellectual property rights;
- development of competitive products and services; and
- ability to satisfy regulatory requirements of the FDA and other
government authorities.
Genzyme Molecular Oncology may require significant additional financing to
continue operations. We cannot guarantee that Genzyme Molecular Oncology will be
able to obtain any additional financing or find it on favorable terms. If
Genzyme Molecular Oncology has insufficient funds or is unable to raise
additional funds, it may delay, scale back or eliminate certain of its programs.
Genzyme Molecular Oncology may also have to give third parties rights to
commercialize technologies or products that it would otherwise have sought to
commercialize itself. Genzyme Molecular Oncology recently announced a proposed
public offering of 3,000,000 shares of GZMO Stock. We cannot guarantee, however,
that this offering will be completed.
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.
GMO-9
FACTORS AFFECTING FUTURE OPERATING RESULTS
The future operating results of Genzyme Molecular Oncology 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.
GENZYME MOLECULAR ONCOLOGY MAY NEVER BE ABLE TO SUCCESSFULLY DEVELOP OR
COMMERCIALIZE ANY OF ITS CANCER THERAPIES.
Genzyme Molecular Oncology does not have any cancer therapies on the market
and its only therapies in clinical development are its melanoma and breast
cancer vaccines. Before commercializing any cancer therapies, Genzyme Molecular
Oncology will need to conduct substantial research and development, including,
in some cases, the replication of preclinical studies performed by its
collaborators, undertake preclinical and clinical testing and obtain regulatory
approvals. This process involves a high degree of uncertainty and may take
several years. Its product development efforts may fail for many reasons,
including:
- the product fails in preclinical studies;
- clinical trials may not support the safety or effectiveness of the
product; or
- we fail to obtain the required regulatory approvals.
We cannot guarantee that Genzyme Molecular Oncology will successfully
develop any particular product or that any product it successfully develops will
gain market acceptance.
GENZYME MOLECULAR ONCOLOGY ANTICIPATES FUTURE LOSSES AND MAY NEVER BECOME
PROFITABLE.
Genzyme Molecular Oncology has not generated significant revenues to date
and does not expect to do so for several years. As of December 31, 1999, Genzyme
Molecular Oncology had an accumulated deficit of approximately $69.0 million. It
expects to have significant operating losses for the next several years. Genzyme
Molecular Oncology plans to spend substantial amounts of money on, among other
things:
- research and development;
- preclinical and clinical testing; and
- pursuing regulatory approvals.
We cannot guarantee that the efforts underlying these expenditures will be
successful or that Genzyme Molecular Oncology's operations will ever be
profitable.
IF GENZYME MOLECULAR ONCOLOGY FAILS TO OBTAIN THE CAPITAL NECESSARY TO FUND ITS
OPERATIONS, IT WILL BE UNABLE TO FUND DEVELOPMENT PROGRAMS AND COMPLETE
CLINICAL TRIALS.
We anticipate that Genzyme Molecular Oncology's current cash resources,
together with amounts available under a line of credit from Genzyme General and
revenues generated from our SAGE-TM- technology and license agreements, will be
sufficient to fund its operations through 2000. Genzyme Molecular Oncology's
cash needs may differ from those planned, however, because of many factors,
including the:
- results of research and development and clinical testing;
- achievement of milestones under existing strategic collaborations;
GMO-10
- ability to establish and maintain additional strategic collaborations
and licensing arrangements;
- costs of protecting its intellectual property rights;
- development of competing products and services; and
- ability to satisfy regulatory requirements of the FDA and other
government authorities.
Genzyme Molecular Oncology may require significant additional financing to
continue operations at anticipated levels. We cannot guarantee that it will be
able to obtain any additional financing or find it on favorable terms. If
Genzyme Molecular Oncology has insufficient funds or is unable to raise
additional funds, it may have to delay, reduce or eliminate some of its
programs. Genzyme Molecular Oncology may also have to give third parties rights
to commercialize technologies or products that it would otherwise have sought to
commercialize itself.
GENZYME MOLECULAR ONCOLOGY MAY NOT RECEIVE SIGNIFICANT PAYMENTS FROM
COLLABORATORS DUE TO UNSUCCESSFUL RESULTS IN EXISTING COLLABORATIONS OR A
FAILURE TO ENTER INTO FUTURE COLLABORATIONS.
Genzyme Molecular Oncology's strategy to develop and commercialize some of
its products and services includes entering into various arrangements with
academic and corporate collaborators and licensees. It depends on the success of
these parties in performing research, preclinical and clinical testing and
marketing. These arrangements may require Genzyme Molecular Oncology to transfer
important rights to its corporate collaborators and licensees. These
collaborators and licensees could choose not to devote resources to these
arrangements or, under certain circumstances, may terminate them early. In
addition, these collaborators and licensees, outside of their arrangements with
Genzyme Molecular Oncology, may develop technologies or products that are
competitive with those that Genzyme Molecular Oncology is developing. As a
result, we cannot guarantee that Genzyme Molecular Oncology will receive
revenues from these relationships or that any of its strategic collaborations
will continue or not terminate early. In addition, we cannot guarantee that
Genzyme Molecular Oncology will be able to enter into collaborations in the
future.
GENZYME MOLECULAR ONCOLOGY MAY BE REQUIRED TO LICENSE TECHNOLOGY FROM
COMPETITORS IN ORDER TO DEVELOP AND COMMERCIALIZE SOME OF ITS PRODUCTS AND
SERVICES, AND IT IS UNCERTAIN WHETHER THESE LICENSES WILL BE AVAILABLE.
Third party patent rights and pending patent applications filed by third
parties, if issued, may cover some of the products Genzyme Molecular Oncology is
developing or testing. As a result, Genzyme Molecular Oncology may be required
to obtain licenses from the holders of these patents in order to use or sell
certain products and services. We cannot guarantee that these licenses will be
made available on acceptable terms or at all. If these licenses are not
available, Genzyme Molecular Oncology's ability to commercialize its products
and services may be impaired.
In its cancer vaccine program, Genzyme Molecular Oncology is in the process
of evaluating the therapeutic administration of peptide products and genes that
encode specific tumor antigens, including MART-1 and gp100. Genzyme Molecular
Oncology is aware of two issued U.S. patents directed to the gene that encodes
MART-1. While it has obtained rights under one of these patents, Genzyme
Molecular Oncology is still in the process of evaluating the scope and validity
of the other to determine whether it needs to obtain a license. Genzyme
Molecular Oncology is also evaluating an issued U.S. patent covering the gene
that encodes gp100 and three published Patent Cooperation Treaty applications by
three different applicants that may cover antigens derived from gp100. Genzyme
Molecular Oncology is in the process of evaluating the scope and validity of
these patents and patent applications to determine whether it needs to obtain
licenses.
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GENZYME MOLECULAR ONCOLOGY MAY INCUR SUBSTANTIAL COSTS AS A RESULT OF LITIGATION
OR OTHER PROCEEDINGS RELATING TO PATENT AND OTHER INTELLECTUAL PROPERTY
RIGHTS.
If Genzyme Molecular Oncology or one of its strategic collaborators initiate
litigation to enforce Genzyme Molecular Oncology's patent or license rights, or
are required to defend these rights in response to third party claims, its
business or financial position may be negatively affected. Genzyme Molecular
Oncology has licensed its p53 gene therapy rights to Schering-Plough. These
patent rights are the subject of an interference proceeding in the U.S. and an
opposition proceeding in Europe. Adverse determinations in these proceedings may
negatively affect Genzyme Molecular Oncology's ability to receive future
milestones and product royalties under its agreement with Schering-Plough.
ADVERSE EVENTS IN THE FIELD OF GENE THERAPY MAY NEGATIVELY AFFECT REGULATORY
APPROVAL OR PUBLIC PERCEPTION OF GENZYME MOLECULAR ONCOLOGY'S GENE THERAPY
PRODUCTS.
The recent death of a patient undergoing gene therapy using an adenoviral
vector to deliver a therapeutic gene has been widely publicized. This death and
any other adverse events in the field of gene therapy that may occur in the
future may result in greater governmental regulation and potential regulatory
delays relating to the testing or approval of Genzyme Molecular Oncology's gene
therapy products. As a result of this death, the U.S. Senate has commenced
hearings to determine whether additional legislation is required to protect
volunteers and patients who participate in gene therapy clinical trials.
Additionally, the Recombinant DNA Advisory Committee, which acts as an advisory
body to the National Institutes of Health (NIH), has extensively discussed the
use of adenoviral vectors in gene therapy clinical trials and recently issued a
draft report on the safety of adenoviral vectors. While this draft report
recommends that clinical trials using adenoviral vectors should continue with
caution, it also suggested a number of changes in the way gene therapy clinical
trials are conducted. If any new guidelines are adopted by the NIH, Genzyme
Molecular Oncology's gene therapy clinical trials could be delayed or become
more expensive to conduct.
Genzyme Molecular Oncology has reported to the FDA and the NIH that there
have been three deaths in its Phase I/II melanoma cancer vaccine trial at
Massachusetts General Hospital. The principal investigator for this trial
indicated that each of these deaths was due to disease progression and not
related to the patient's treatment. Deaths are not unexpected in a clinical
trial treating patients with advanced stage melanoma because these patients have
short life expectancies. Genzyme Molecular Oncology cannot, however, rule out
the possibility that its cancer vaccines may be a contributing cause of death
for patients in the future.
The commercial success of any gene therapy products that Genzyme Molecular
Oncology develops will depend in part on public acceptance of the use of gene
therapies for the prevention or treatment of human diseases. Public attitudes
may be influenced by claims that gene therapy is unsafe, and gene therapy may
not gain the acceptance of the public or the medical community. Negative public
reaction to gene therapy could result in greater government regulation and
stricter clinical trial oversight and commercial product labeling requirements
of gene therapies and could cause a decrease in the demand for any gene therapy
product that Genzyme Molecular Oncology may develop.
SUBSEQUENT EVENT
In March 2000, Genzyme Molecular Oncology announced a proposed public
offering of 3,000,000 shares of GZMO Stock.
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GENZYME MOLECULAR ONCOLOGY
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Revenues:
Service revenue........................................... $ 1,920 $ 2,229 $ 467
Service revenue--related party............................ 50 466 --
Research and development--related party................... 496 2,177 315
Research and development.................................. -- 3,256 --
Licensing revenue......................................... 2,153 11,279 --
--------- --------- ---------
Total revenues........................................ 4,619 19,407 782
Operating costs and expenses:
Cost of service revenues.................................. 620 1,374 50
Cost of research and development revenue.................. 698 4,073 287
Selling, general and administrative....................... 5,529 7,155 2,118
Research and development.................................. 15,997 12,743 5,341
Amortization of intangibles............................... 11,825 11,983 5,127
Charge for in-process technology.......................... -- -- 7,000
--------- --------- ---------
Total operating costs and expenses.................... 34,669 37,328 19,923
--------- --------- ---------
Operating loss.............................................. (30,050) (17,921) (19,141)
Other income (expenses):
Equity in net loss of joint venture....................... (1,870) (1,647) (258)
Interest income........................................... 469 782 392
Interest expense.......................................... (28) (2,968) (1,663)
--------- --------- ---------
Total other income (expenses)......................... (1,429) (3,833) (1,529)
--------- --------- ---------
Loss before income taxes.................................... (31,479) (21,754) (20,670)
Tax benefit................................................. 2,647 2,647 1,092
--------- --------- ---------
Net loss attributable to GZMO Stock......................... $ (28,832) $ (19,107) $ (19,578)
========= ========= =========
Per GZMO basic and diluted common share:
Net loss.................................................. $ (2.25) $ (3.81)
========= =========
Weighted average shares outstanding......................... 12,826 5,019
========= =========
Pro forma net loss per GZMO basic and diluted common
share..................................................... $ (4.98)
=========
Pro forma weighted average shares outstanding............... 3,929
=========
Net loss.................................................... $ (28,832) $ (19,107) $ (19,578)
Other comprehensive income (loss) net of tax:
Unrealized gains (losses) on securities arising during the
period.................................................. -- 7 (7)
--------- --------- ---------
Comprehensive loss...................................... $ (28,832) $ (19,100) $ (19,585)
========= ========= =========
The accompanying notes are an integral part of these combined financial
statements.
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GENZYME MOLECULAR ONCOLOGY
COMBINED BALANCE SHEETS
DECEMBER 31,
-----------------------
1999 1998
-------- --------
(AMOUNTS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,587 $10,868
Short-term investments.................................... -- 1,032
Accounts receivable, net.................................. -- 5,931
Prepaid expenses and other current assets................. 218 85
------- -------
Total current assets.................................. 3,805 17,916
Equipment, net............................................ 467 791
Intangibles, net.......................................... 5,420 17,245
------- -------
Total assets.......................................... $ 9,692 $35,952
======= =======
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accrued expenses.......................................... $ 676 $ 1,273
Due to Genzyme General.................................... 3,793 4,773
Payable to joint venture.................................. -- 1,181
Deferred revenue.......................................... 225 1,500
Current portion of long-term debt......................... 5,000 --
------- -------
Total current liabilities............................. 9,694 8,727
Deferred tax liability...................................... 1,213 3,861
------- -------
Total liabilities..................................... 10,907 12,588
Commitments and contingencies (See Notes)
Division equity (Note H).................................... (1,215) 23,364
------- -------
Total liabilities and division equity................. $ 9,692 $35,952
======= =======
The accompanying notes are an integral part of these combined financial
statements.
GMO-14
GENZYME MOLECULAR ONCOLOGY
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(AMOUNTS IN THOUSANDS)
OPERATING ACTIVITIES:
Net loss.................................................... $ (28,832) $ (19,107) $ (19,578)
Reconciliation of net loss to net cash used in operating
activities:
Depreciation and amortization............................. 12,057 12,353 5,245
Charge for in-process technology.......................... -- -- 7,000
Deferred tax benefit...................................... (2,647) (2,647) (1,092)
Accretion of debt conversion feature...................... -- 1,867 957
Equity in loss of joint venture........................... 1,870 1,647 258
Accrued interest/amortization of marketable securities.... 10 131 (141)
Gain on sale of equipment................................. (54) -- --
Provision for bad debts................................... 256 100 --
Non-cash compensation expense............................. 10 114 58
Increase (decrease) in cash from working capital:
Accounts receivable..................................... 5,675 (5,915) (117)
Prepaid expenses and other current assets............... (75) 986 (773)
Accrued expenses, payable to joint venture and deferred
revenue............................................... (1,927) 1,779 2,139
Due to Genzyme General.................................. (980) 553 2,011
--------- --------- ---------
Net cash used in operating activities................. (14,637) (8,139) (4,033)
INVESTING ACTIVITIES:
Acquisition of PharmaGenics, Inc., net of acquired cash..... -- -- 9
Investment in unconsolidated affiliate...................... -- -- (724)
Purchases of investments.................................... -- (2,056) (6,086)
Distribution from joint venture............................. 881 -- --
Maturities of investments................................... 1,022 7,120 --
Acquisitions of equipment................................... (43) (559) (357)
Sale of equipment........................................... 188 -- --
Other....................................................... -- (488) --
--------- --------- ---------
Net cash provided by (used in) investing activities... 2,048 4,017 (7,158)
FINANCING ACTIVITIES:
Allocation of debt from Genzyme General..................... -- -- 5,000
Cash allocated from Genzyme General......................... -- 5,000 --
Proceeds from issuance of debt.............................. 5,000 -- --
Proceeds from issuance of common stock...................... 308 7 --
Proceeds from issuance of warrants.......................... -- -- 724
Proceeds from issuance of convertible debentures, net....... -- -- 19,150
Repayments of debts......................................... -- (5,000) --
Parent company investment, Genzyme General.................. -- -- 1,371
Other....................................................... -- (27) (44)
--------- --------- ---------
Net cash provided by (used in) financing activities... 5,308 (20) 26,201
Increase (decrease) in cash and cash equivalents............ (7,281) (4,142) 15,010
Cash and cash equivalents at beginning of period............ 10,868 15,010 --
--------- --------- ---------
Cash and cash equivalents at end of period.................. $ 3,587 $ 10,868 $ 15,010
========= ========= =========
Supplemental disclosures of non-cash transactions:
PharmaGenics acquisition--Note D.
Repurchase of interest in StressGen/Genzyme LLC--Note F.
The accompanying notes are an integral part of these combined financial
statements.
GMO-15
GENZYME MOLECULAR ONCOLOGY
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Genzyme Molecular Oncology is our operating division that is developing
cancer products, with a focus on cancer vaccines and angiogenesis inhibitors.
Genzyme Molecular Oncology Division Common Stock, which we refer to as "GZMO
Stock," is intended to reflect the value and track the performance of Genzyme
Molecular Oncology.
BASIS OF PRESENTATION; PRINCIPLES OF COMBINATION
The combined financial statements of Genzyme Molecular Oncology for each
period include the balance sheets, results of operations and cash flows of the
businesses we allocate to Genzyme Molecular Oncology. We also allocate a portion
of our corporate operations to Genzyme Molecular Oncology 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.
We created Genzyme Molecular Oncology in June 1997 by acquiring
PharmaGenics, Inc. and combining it with several of Genzyme General's ongoing
programs in the field of oncology. These financial statements reflect the
financial position, results of operations and cash flows of Genzyme Molecular
Oncology as if it 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 Molecular Oncology has a substantial ownership interest (20% to 50%), or
in which it participates in policy decisions. Genzyme Molecular Oncology's
consolidated net income includes its share of the earnings of these entities. We
report at fair value investments in entities in which Genzyme Molecular
Oncology'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 Molecular Oncology and prepare
separate financial statements for Genzyme Molecular Oncology. Notwithstanding
the allocation of assets and liabilities to Genzyme Molecular Oncology, Genzyme
Corporation continues to hold title to all of the assets and is responsible for
all of the liabilities allocated to Genzyme Molecular Oncology. Holders of GZMO
Stock are common stockholders of Genzyme Corporation and have no specific rights
to the assets to which GZMO Stock relates.
We prepare the financial statements of Genzyme Molecular Oncology 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 Molecular Oncology 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 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.
GMO-16
GENZYME MOLECULAR ONCOLOGY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DIVIDEND POLICY
We have never paid a cash dividend on shares of GZMO Stock. We currently
intend to retain our earnings to finance future growth and do not anticipate
paying any cash dividends on GZMO Stock in the foreseeable future.
TRANSLATION OF FOREIGN CURRENCIES
We translate the financial statements of foreign subsidiaries allocated to
Genzyme Molecular Oncology from local currency into U.S. dollars and include
translation adjustments for these subsidiaries in division equity. Genzyme
Molecular Oncology records gains and losses in foreign currency transactions in
income.
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.
REVENUE RECOGNITION
Genzyme Molecular Oncology recognizes service revenue when the service
procedures have been completed or applicable milestones have been achieved.
Revenues from research and development contracts are recognized over applicable
contractual periods as specified by each contract and as costs related to the
contracts are incurred. Up-front license fees and milestone payments are
recognized as revenue only if there are no remaining performance obligations and
the fees are non-refundable.
NET INCOME (LOSS) PER SHARE
To calculate basic earnings per share for Genzyme Molecular Oncology, we
divide the earnings attributable to Genzyme Molecular Oncology by the weighted
average number of outstanding shares of GZMO Stock during the applicable period.
When we calculate diluted earnings per share, we also include in the denominator
all potentially dilutive securities outstanding during the applicable period. We
disclose PRO FORMA net loss per share for Genzyme Molecular Oncology for the
year ended December 31, 1997 because GZMO Stock was not outstanding during the
entire year.
To determine what earnings are attributable to Genzyme Molecular Oncology,
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.
For all periods presented, basic and diluted net loss per GZMO common share
and PRO FORMA basic and diluted net loss per GZMO common share are the same. We
did not include the securities described in the following table in the
computation of Genzyme Molecular Oncology's diluted net loss
GMO-17
GENZYME MOLECULAR ONCOLOGY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
per share for each period because these securities would have an anti-dilutive
effect due to Genzyme Molecular Oncology's net loss per share.
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
Shares of GZMO Stock issuable for options................... 1,809 1,158 826
Warrants to purchase GZMO Stock............................. 10 10 10
GZMO designated shares issuable upon conversion of 5 1/4%
convertible subordinated notes allocated to Genzyme
General(1)................................................ 682 682 --
GZMO designated shares(1)................................... 1,006 728 6,000
----- ----- -----
Total shares excluded from the diluted net loss per GZMO
share calculation......................................... 3,507 2,578 6,836
===== ===== =====
- ------------------------
(1) 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. As of
December 31, 1999, there were 1,688,237 GZMO designated shares. Of these
designated shares:
- 682,316 were issuable upon conversion of the 5 1/4% convertible
subordinated notes and under our directors' deferred compensation plan;
- 291,635 were available for distribution; and
- 714,286 were reserved for issuance in connection with a draw under an
equity line of credit in 1998. If Genzyme Molecular Oncology completes a
public offering of GZMO Stock prior to June 18, 2000, this number will
decrease based on a formula set forth in our charter. If such an offering
is not completed prior to that date, all of these shares will become
available for distribution.
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
in the case of a program under development:
- the commercial potential of the program;
- the phase of clinical development of the program;
GMO-18
GENZYME MOLECULAR ONCOLOGY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS
(CONTINUED)
- 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 Genzyme Molecular Oncology, our board may elect instead to account
for the reallocation as an increase in GZMO designated shares 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 GZMO Stock voting as
a separate class unless the policy change does not affect Genzyme Molecular
Oncology.
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
GMO-19
GENZYME MOLECULAR ONCOLOGY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE B. POLICIES GOVERNING THE RELATIONSHIP OF GENZYME'S OPERATING DIVISIONS
(CONTINUED)
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.
On December 31, 1999, Genzyme Molecular Oncology owed Genzyme General
approximately $3.8 million in connection with these services. On December 31,
1998, approximately $4.8 million was owed.
TAX ALLOCATIONS
We file a consolidated tax return and allocate income taxes to Genzyme
Molecular Oncology 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 Genzyme Molecular
Oncology 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 Molecular Oncology 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. ACCOUNTS RECEIVABLE AND INTANGIBLE ASSETS
Genzyme Molecular Oncology's trade receivables primarily represent amounts
due from third party collaborators. Genzyme Molecular Oncology performs credit
evaluations of its customers on an ongoing basis and generally does not require
collateral. Genzyme Molecular Oncology states accounts receivable at fair value
after reflecting an allowance for doubtful accounts. This allowance was $0.3
million at December 31, 1999 and $0.1 million at December 31, 1998.
Genzyme Molecular Oncology's net intangible assets include $2.2 million in
goodwill as of December 31, 1999 and $7.1 million in goodwill as of December 31,
1998. This goodwill is primarily a result of the acquisition of
PharmaGenics, Inc. in 1997.
Genzyme Molecular Oncology's accumulated amortization of intangible assets
was $29.0 million as of December 31, 1999 and $17.2 million as of December 31,
1998.
GMO-20
GENZYME MOLECULAR ONCOLOGY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE D. PHARMAGENICS ACQUISITION
In June 1997, we acquired PharmaGenics, Inc., a company engaged in the
research and development of products for the treatment of cancer and other
diseases. We allocated this acquisition to Genzyme Molecular Oncology and
accounted for it as a purchase. We allocated the aggregate purchase price of
$27.5 million, plus acquisition costs of $2.5 million and assumed liabilities of
$4.9 million, to the tangible and intangible assets we acquired from
PharmaGenics based on their respective fair values (amounts in thousands):
Equipment.................................................. $ 208
Other assets............................................... 50
Completed technology (to be amortized over 3 years)........ 20,000
Goodwill (to be amortized over 3 years).................... 15,193
Deferred tax liability (to be amortized over 3 years)...... (7,600)
In-process technology...................................... 7,000
-------
Total.................................................. $34,851
=======
In 1998, we made an adjustment of $0.5 million in the amount of liabilities
we assumed.
The $7.0 million allocated to in-process technology represents the value we
assigned to PharmaGenics's programs that were still in the development stage and
for which there was no alternative use. We assigned values to all of
PharmaGenics's programs (both complete and in-process) by selecting the maximum
anticipated value of these programs and comparing them to the values of
comparable technologies. In 1997, we recorded a one-time charge to operations
for the amount of the purchase price allocated to in-process technology.
NOTE E. EQUIPMENT
DECEMBER 31,
-------------------------
1999 1998
-------- --------
(AMOUNTS IN THOUSANDS)
Equipment.............................................. $ 966 $1,111
Furniture and fixtures................................. 13 13
------ ------
$ 979 $1,124
Less accumulated depreciation.......................... (512) (333)
------ ------
Equipment, net......................................... $ 467 $ 791
====== ======
Genzyme Molecular Oncology's depreciation expense was $232,000 in 1999,
$255,000 in 1998, and $74,000 in 1997.
NOTE F. INVESTMENT IN STRESSGEN/GENZYME LLC
In July 1997, together with StressGen Biotechnologies Corp. and the Canadian
Medical Discoveries Fund, Inc., we established StressGen/Genzyme LLC, a joint
venture to develop stress gene therapies for the treatment of cancer.
Because the Canadian Medical Discoveries Fund had the right to require
StressGen and Genzyme Molecular Oncology to purchase its membership interest in
the joint venture, Genzyme Molecular Oncology recorded 50% of the net operating
losses of the joint venture.
GMO-21
GENZYME MOLECULAR ONCOLOGY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE F. INVESTMENT IN STRESSGEN/GENZYME LLC (CONTINUED)
As of December 31, 1998, Genzyme Molecular Oncology's portion of the
cumulative losses of StressGen/Genzyme LLC exceeded its initial capital
contribution to the joint venture by $1.2 million. As a result, Genzyme
Molecular Oncology recorded the $1.2 million as a noncurrent liability in 1999.
In August 1999, the Canadian Medical Discoveries Fund exercised its put
right and Genzyme Molecular Oncology repurchased one-half of the fund's interest
in the joint venture in October 1999 for approximately $3.9 million by issuing
to the fund 617,200 shares of GZMO Stock. Genzyme Molecular Oncology received a
cash distribution of $0.9 million and recorded a charge of $1.0 million in
connection with the dissolution of StressGen/Genzyme LLC in 1999.
We do not present summary financial information for StressGen/Genzyme LLC
because we do not consider the impact of its activities on our statement of
operations for the years ended December 31, 1999, 1998 and 1997 to be material.
NOTE G. DEBT INSTRUMENTS
REVOLVING CREDIT FACILITY
In November 1999, our $225.0 million revolving credit facility matured. We
refinanced this facility with a $50.0 million revolving credit facility that
matures in November 2000 and a $100.0 million revolving credit facility that
matures in November 2002. At December 31, 1999, $5.0 million of the amount
outstanding under our revolving credit facility was allocated to Genzyme
Molecular Oncology. On that date, the interest rate on this borrowing was
6.765%.
Genzyme Molecular Oncology incurred interest expense of approximately
$11,000 on the $5.0 million outstanding in 1999. Additionally, Genzyme Molecular
Oncology incurred interest expense of approximately $73,000 in 1998 and $160,000
in 1997 on amounts borrowed under our credit facility that matured in 1999.
6% CONVERTIBLE SUBORDINATED DEBENTURES
In August 1997, we issued $20.0 million in principal of 6% convertible
subordinated debentures. These debentures were convertible into shares of GZMO
Stock at a discount to the market value of that stock. Genzyme Molecular
Oncology recorded charges to interest expense of $1.9 million in 1998 and
$0.9 million in 1997 to reflect the accretion to fair value of the conversion
feature of this debenture. In accordance with the terms of these debentures,
they were exchanged in August 1998 for $21.2 million in principal of 5%
convertible subordinated debentures convertible into GENZ Stock. In
November 1998 we reserved approximately 3.0 million GZMO designated shares for
issuance in connection with this exchange. In October 1999 we increased the
number of GZMO designated shares reserved in connection with this exchange by
approximately 0.3 million.
NOTE H. DIVISION EQUITY
At December 31, 1999 and 1998, 40 million shares of GZMO Stock were
authorized for issuance. At December 31, 1999 13,421,018 shares of GZMO Stock
were issued and outstanding and at December 31, 1998 12,648,295 shares of GZMO
Stock were issued and outstanding. At December 31, 1999, approximately 4,011,000
shares of GZMO Stock were reserved for issuance under our various equity plans
and options to purchase approximately 1,809,000 shares of GZMO Stock were
outstanding.
GMO-22
GENZYME MOLECULAR ONCOLOGY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
The following table contains the components of division equity for Genzyme
Molecular Oncology for the periods presented:
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
Balance at beginning of period.............................. $ 23,364 $ 13,466 $ --
Net loss.................................................... (28,832) (19,107) (19,578)
Allocation of cash from Genzyme General for GZMO designated
shares(1)................................................. -- 5,000 1,381
Conversion of debentures into GZMO designated shares........ -- 19,802 --
Conversion of note payable into GZMO designated shares...... -- 2,696 --
Issuance of common stock under stock plans.................. 308 7 --
Sale of warrants............................................ -- -- 724
Stock-based compensation.................................... 10 114 (116)
Shares issued upon acquisition of PharmaGenics.............. -- -- 27,369
Shares issued upon repurchase of joint venture interest..... 3,935 -- --
Value of debt conversion feature............................ -- -- 3,529
Unrealized gain (loss) on investments....................... -- 7 (7)
Other....................................................... -- 1,379 164
-------- -------- --------
Balance at end of period.................................... $ (1,215) $ 23,364 $ 13,466
======== ======== ========
- ------------------------
(1) 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. As of
December 31, 1999, there were 1,688,237 GZMO designated shares, assuming
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 this transaction 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 Molecular Oncology 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.
The following table sets forth net income and income per share data for
Genzyme Molecular Oncology calculated in accordance with SFAS 123 as if
compensation expense for our stock-based
GMO-23
GENZYME MOLECULAR ONCOLOGY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
compensation plans was determined based on the fair value at the grant dates for
options granted and shares purchased under the plans:
DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Net loss:
As reported............................................. $ (28,832) $ (19,107) $ (19,578)
Pro forma............................................... $ (29,973) $ (20,018) $ (19,787)
Basic and diluted loss per share:
As reported............................................. $ (2.25) $ (3.81) $ (4.98)
Pro forma............................................... $ (2.34) $ (3.99) $ (5.04)
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.
PREFERRED STOCK, STOCK RIGHTS, EQUITY PLANS, WARRANTS AND DESIGNATED SHARES
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 for GZMO Stock; and
- GZMO designated shares and our policy for distributing them.
We incorporate that information into this note by reference.
EQUITY LINE OF CREDIT
In 1997, our board of directors made $25.0 million of Genzyme General's cash
available to Genzyme Molecular Oncology under an equity line of credit. This
equity line was subject to dollar-for dollar reduction by the proceeds of
outside financing received by Genzyme Molecular Oncology. When we issued
$20.0 million in principal of 6% convertible subordinated debentures in August
1997, the amount available under the equity line was reduced to $5.0 million. In
September 1998, Genzyme Molecular Oncology drew the remaining $5.0 million
available under this equity line, thus reducing the amount available under this
equity line to zero, in exchange for GZMO designated shares.
In August 1998, our board of directors made an additional $30.0 million of
Genzyme General's cash available to Genzyme Molecular Oncology under 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 based on the fair market value of GZMO Stock (as defined in our charter)
at the time of the draw. As of December 31, 1999, Genzyme Molecular Oncology had
not yet drawn any funds from this equity line.
GMO-24
GENZYME MOLECULAR ONCOLOGY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE I. 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 Molecular Oncology's results of
operations, financial condition, or liquidity.
NOTE J. INCOME TAXES
There was no provision for income taxes due to Genzyme Molecular Oncology's
continuing operating losses. As part of the acquisition of PharmaGenics, Genzyme
Molecular Oncology recorded a deferred tax liability of $7.6 million resulting
from the difference between the book and tax basis of the completed technology
computed at a 38% incremental tax rate. This amount is being amortized over
three years consistent with the life of the completed technology. Genzyme
Molecular Oncology recorded deferred tax benefits of $2.6 million in each of
1999 and 1998 and $1.1 million in 1997.
Genzyme Molecular Oncology's income (loss) before income taxes and the
related income tax expense (benefit) are described in the following table:
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
Currently payable:
Federal................................................... $ -- $ -- $ --
State..................................................... -- -- --
-------- -------- --------
Total................................................. $ -- $ -- $ --
======== ======== ========
Deferred:
Federal................................................... $ (2,438) $ (2,438) $ (1,006)
State..................................................... (209) (209) (86)
-------- -------- --------
Total income tax benefit.............................. $ (2,647) $ (2,647) $ (1,092)
======== ======== ========
Genzyme Molecular Oncology'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)%
State taxes, net............................................ (1.1) (2.0) (3.0)
Tax credits................................................. (2.5) (2.5) (2.4)
Nondeductible interest...................................... -- 3.0 2.7
Nondeductible amortization.................................. 5.4 8.1 6.4
Deductions subject to deferred tax valuation allowance...... 24.8 16.2 22.4
----- ----- -----
Effective tax rate attributable to GZMO Stock............... (8.4)% (12.2)% (8.9)%
===== ===== =====
GMO-25
GENZYME MOLECULAR ONCOLOGY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE J. INCOME TAXES (CONTINUED)
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.......................... $ 14,720 $ 8,166
Reserves and other........................................ 177 --
Tax credits............................................... 2,209 1,003
-------- --------
Gross deferred tax asset.................................... 17,106 9,169
Valuation allowance......................................... (17,106) (9,169)
-------- --------
Net deferred tax asset...................................... -- --
Deferred tax liabilities:
Intangible amortization................................... (1,213) (3,861)
-------- --------
Net deferred tax liabilities.............................. $ (1,213) $ (3,861)
======== ========
As a result of uncertainty surrounding our ability to realize certain tax
benefits that primarily relate to operating loss carryforwards, capital losses
from the purchase of in-process research and development, we placed valuation
allowances of $17.1 million in 1999 and $9.2 million in 1998 against otherwise
recognizable deferred tax assets.
As Genzyme Molecular Oncology recognizes these deferred tax assets in
accordance with generally accepted accounting principles, the benefits of those
assets will be reflected in its tax provision. However, the benefit of these
deferred tax assets has previously been allocated to Genzyme General in
accordance with our management and accounting policies, and will be reflected as
a reduction of Genzyme Molecular Oncology's net income to determine net income
attributable to GZMO Stock.
NOTE K. BENEFIT PLANS
Note P., "Benefit Plans," to our consolidated financial statements contains
information regarding our 401(k) plan. We incorporate that information into this
note by reference.
NOTE L. SIGNIFICANT CUSTOMERS
Genzyme Molecular Oncology has two significant pharmaceutical customers. The
following table describes the revenue for each customer in comparison to total
revenue (amounts in thousands):
% OF % OF % OF
TOTAL TOTAL TOTAL
1999 REVENUE 1998 REVENUE 1997 REVENUE
-------- -------- -------- -------- -------- --------
Customer A.................. $2,800 61% $ 933 5% $467 60%
Customer B.................. -- -- $13,000 67% -- --
The portion of Genzyme Molecular Oncology's revenues related to work
performed on behalf of StressGen/Genzyme LLC were:
- $0.5 million, or 11% of total revenues in 1999;
GMO-26
GENZYME MOLECULAR ONCOLOGY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE L. SIGNIFICANT CUSTOMERS (CONTINUED)
- $2.2 million, or 11% of total revenues in 1998; and
- $0.3 million, or 40% of total revenues in 1997.
NOTE M. SUBSEQUENT EVENT
In March 2000, Genzyme Molecular Oncology announced a proposed public
offering of 3,000,000 shares of GZMO Stock.
GMO-27
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 Molecular Oncology (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. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements 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
Molecular Oncology is a division of Genzyme Corporation; accordingly, the
combined financial statements of Genzyme Molecular Oncology should be read in
conjunction with the audited consolidated financial statements of Genzyme
Corporation and Subsidiaries.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 23, 2000
GMO-28