EXHIBIT 13.5
FINANCIAL STATEMENTS
PAGE NO.
--------
GENZYME CORPORATION AND SUBSIDIARIES
Consolidated Selected Financial Data........................ GCS-2
Management's Discussion and Analysis of Genzyme Corporation
and Subsidiaries' Financial Condition and Results of
Operations................................................ GCS-4
Consolidated Statements of Operations--For the Years Ended
December 31, 1999, 1998 and 1997.......................... GCS-21
Consolidated Balance Sheets--December 31, 1999 and 1998..... GCS-23
Consolidated Statements of Cash Flows--For the Years Ended
December 31, 1999, 1998 and 1997.......................... GCS-25
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997.............. GCS-27
Notes to Consolidated Financial Statements.................. GCS-30
Report of Independent Accountants........................... GCS-72
GCS-1
GENZYME CORPORATION CONSOLIDATED SELECTED FINANCIAL DATA
The following consolidated selected financial data reflect the results of
operations and financial position of each of our divisions and corporate
operations taken as a whole and should be read in conjunction with our
consolidated financial statements and accompanying notes.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
Revenues:
Net product sales....................... $683,482 $613,685 $529,927 $424,483 $304,373
Net service sales....................... 79,448 74,791 67,158 68,950 52,450
Revenues from research and development
contracts:
Related parties....................... 2,012 5,745 8,356 23,011 26,758
Other................................. 7,346 15,114 3,400 2,310 202
-------- -------- -------- -------- --------
Total revenues...................... 772,288 709,335 608,841 518,754 383,783
Operating costs and expenses:
Cost of products sold................... 182,337 211,076 206,028 155,930 113,964
Cost of services sold................... 49,444 48,586 47,289 54,082 35,868
Selling, general and administrative..... 242,797 215,203 200,476 162,264 110,447
Research and development (including
research and development related to
contracts)............................ 150,516 119,005 89,558 80,849 68,845
Amortization of intangibles............. 24,674 24,334 17,245 8,849 4,647
Purchase of in-process research and
development........................... 5,436 -- 7,000 130,639 14,216
Other................................... -- -- -- 1,465 --
-------- -------- -------- -------- --------
Total operating costs and expenses.... 655,204 618,204 567,596 594,078 347,987
-------- -------- -------- -------- --------
Operating income (loss)................... 117,084 91,131 41,245 (75,324) 35,796
Other income (expenses):
Equity in net loss of unconsolidated
affiliates............................ (42,696) (29,006) (12,258) (5,373) (1,810)
Gain on affiliate sale of stock......... 6,683 2,369 -- 1,013 --
Minority interest....................... 3,674 4,285 -- -- 1,608
Gain on sale of investments in equity
securities............................ 1,963 3,391 -- 1,711 --
Gain on sale of product line............ 8,018 31,202 -- -- --
Charge for impaired investments......... (5,712) (3,397) -- -- --
Other................................... 14,527 -- (2,000) -- --
Investment income....................... 36,158 25,055 11,409 15,341 8,814
Interest expense........................ (21,771) (22,593) (12,667) (6,990) (1,109)
-------- -------- -------- -------- --------
Total other income (expenses)......... 844 11,306 (15,516) 5,702 7,503
-------- -------- -------- -------- --------
Income (loss) before income taxes......... 117,928 102,437 25,729 (69,622) 43,299
Provision for income taxes................ (46,947) (39,870) (12,100) (3,195) (21,649)
-------- -------- -------- -------- --------
Net income (loss)......................... $ 70,981 $ 62,567 $ 13,629 $(72,817) $ 21,650
======== ======== ======== ======== ========
GCS-2
GENZYME CORPORATION CONSOLIDATED SELECTED FINANCIAL DATA (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ATTRIBUTABLE TO GENZYME GENERAL:
Net income attributable to GENZ Stock............. $176,883 $170,909 $107,175 $ 13,811 $52,953
======== ======== ======== ======== =======
Per GENZ common share:
Net income per Genzyme General 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
======== ======== ======== ======== =======
ATTRIBUTABLE TO GENZYME MOLECULAR ONCOLOGY:
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
======== ========
Pro forma net loss per GZMO basic and diluted common
share............................................. $ (4.98) $ (0.26) $ (0.12)
======== ======== =======
Pro forma weighted average shares outstanding....... 3,929 3,929 3,929
======== ======== =======
ATTRIBUTABLE TO GENZYME SURGICAL PRODUCTS:
Net loss attributable to GZSP Stock................. $(48,037) $(49,856) $(29,740) $(44,313) $(9,273)
======== ======== ======== ======== =======
Pro forma net loss per GZSP basic and diluted common
share............................................. $ (3.25) $ (3.37) $ (2.01) $ (2.99) $ (0.63)
======== ======== ======== ======== =======
Pro forma weighted average shares outstanding....... 14,800 14,800 14,800 14,800 14,800
======== ======== ======== ======== =======
ATTRIBUTABLE TO GENZYME TISSUE REPAIR:
Net loss attributable to GZTR Stock................. $(30,040) $(40,386) $(45,984) $(42,315) $(22,030)
======== ======== ======== ======== =======
Per GZTR basic and diluted common share:
Net loss.......................................... $ (1.26) $ (1.99) $ (3.07) $ (3.38) $ (2.28)
======== ======== ======== ======== =======
Weighted average shares outstanding................. 23,807 20,277 14,976 12,525 9,659
======== ======== ======== ======== =======
CONSOLIDATED BALANCE SHEET DATA
DECEMBER 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- --------
(AMOUNTS IN THOUSANDS)
Cash, cash equivalents, short- and long-term
investments................................ $ 652,990 $ 575,729 $ 246,341 $ 187,955 $326,236
Working capital.............................. 592,249 417,116 350,822 395,605 352,410
Total assets................................. 1,787,281 1,688,854 1,295,453 1,270,508 905,201
Long-term debt and convertible debt.......... 290,622 287,225 170,276 241,998 124,473
Stockholders' equity......................... 1,356,392 1,172,535 1,012,050 902,309 705,207
There were no cash dividends paid.
GCS-3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF GENZYME CORPORATION AND SUBSIDIARIES'
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
This discussion contains forward-looking statements. These forward-looking
statements represent the expectations of our management as of the filing date of
this annual report. Actual results could differ materially from those
anticipated by the forward-looking statements due to the risks and uncertainties
described under the caption "Factors Affecting Future Operating Results" below.
You should consider carefully each of these risks and uncertainties in
evaluating our financial condition and results of operations.
We are a biotechnology company that develops innovative products and
services for significant unmet medical needs. We have four operating divisions:
- Genzyme General, which develops and markets:
- therapeutic products, with an expanding focus on products to treat
patients suffering from lysosomal storage disorders and other specialty
therapeutics;
- diagnostic products, with a focus on IN VITRO diagnostics; and
- other products and services, such as genetic testing services and
lipids and peptides for drug delivery.
- Genzyme Molecular Oncology, which is developing cancer products, with a
focus on therapeutic vaccines and angiogenesis inhibitors;
- Genzyme Surgical Products, which develops, manufactures and markets
surgical products for cardiovascular surgery and general surgery; and
- Genzyme Tissue Repair, which develops and markets biological products for
orthopedic injuries, such as cartilage damage, and severe burns.
We currently have four designated series of common stock. Each of these
series is intended to reflect the value and track the performance of one of our
divisions. We refer to our series of common stock by their Nasdaq trading
symbols:
- Genzyme General Division Common Stock = "GENZ Stock;"
- Genzyme Molecular Oncology Division Common Stock = "GZMO Stock;"
- Genzyme Surgical Products Division Common Stock = "GZSP Stock;" and
- Genzyme Tissue Repair Division Common Stock = "GZTR Stock."
For purposes of financial presentation, we allocate all of our programs,
products, assets and liabilities to our divisions and prepare separate financial
statements for each of our divisions. We provide separate financial statements
for each of our divisions as well as consolidated financial statements that
include the consolidated results of each of our divisions and our corporate
operations taken as a whole. Holders of GENZ Stock, GZMO Stock, GZSP Stock and
GZTR Stock are common stockholders of Genzyme Corporation and have no specific
rights to the assets to which each stock relates. Genzyme Corporation continues
to hold title to all of the assets and is responsible for all of the liabilities
allocated to each of our divisions.
You should read this discussion and analysis of our financial position and
results of operations in conjunction with our consolidated financial statements
and related notes, which are included in this annual report.
GCS-4
RESULTS OF OPERATIONS
The following discussion summarizes the key factors our management believes
are necessary for an understanding of our consolidated financial statements.
The components of our consolidated statements of operations are described in
the following table:
99/98 98/97
INCREASE/(DECREASE) INCREASE/(DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ------------------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Total revenues................ $772,288 $709,335 $608,841 9% 17%
Cost of products and services
sold........................ 231,781 259,662 253,317 (11)% 3%
Selling, general and
administrative.............. 242,797 215,203 200,476 13% 7%
Research and development
(including research and
development related to
contracts).................. 150,516 119,005 89,558 26% 33%
Amortization of intangibles... 24,674 24,334 17,245 1% 41%
Purchase of in-process
research and development.... 5,436 -- 7,000 N/A N/A
-------- -------- --------
Total operating costs and
expenses.................... 655,204 618,204 567,596 6% 9%
-------- -------- --------
Operating income.............. 117,084 91,131 41,245 28% 121%
Other income (expenses),
net......................... 844 11,306 (15,516) (93)% 173%
-------- -------- --------
Income before income taxes.... 117,928 102,437 25,729 15% 298%
Provision for income taxes.... (46,947) (39,870) (12,100) 18% 230%
-------- -------- --------
Net income.................... $ 70,981 $ 62,567 $ 13,629 13% 359%
======== ======== ========
REVENUES
99/98 98/97
INCREASE/(DECREASE) INCREASE/(DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ------------------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Product revenue............... $683,482 $613,685 $529,927 11% 16%
Service revenue............... 79,448 74,791 67,158 6% 11%
-------- -------- --------
Total product and service
revenue..................... 762,930 688,476 597,085 11% 15%
Research and development
revenue..................... 9,358 20,859 11,756 (55)% 77%
-------- -------- --------
Total revenues................ $772,288 $709,335 $608,841 9% 17%
======== ======== ========
PRODUCT REVENUE
We derive product revenue from sales by Genzyme General of therapeutic,
diagnostic and other products, including Cerezyme-Registered Trademark- enzyme
and Ceredase-Registered Trademark- enzyme, and sales by Genzyme Surgical
GCS-5
Products of cardiovascular and general surgery products, including Sepra
Film-Registered Trademark- bioresorbable membrane.
99/98 98/97
INCREASE/(DECREASE) INCREASE/(DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ------------------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Genzyme General:
Therapeutics................ $488,705 $413,645 $332,712 18% 24%
Diagnostic Products......... 57,971 65,683 66,288 (12)% (1)%
Other....................... 24,825 30,399 30,092 (18)% 1%
Genzyme Surgical Products..... 111,981 103,958 100,835 8% 3%
======== ======== ========
Total product revenues........ $683,482 $613,685 $529,927 11% 16%
======== ======== ========
1999 AS COMPARED TO 1998
Our increase in product revenue was largely due to:
- increased sales of Cerezyme-Registered Trademark- enzyme, which is a
therapy for the treatment of Gaucher disease; and
- increased sales of Sepra Film-Registered Trademark- bioresorbable membrane
and instruments for minimally invasive cardiac surgery.
The increase in sales of Cerezyme-Registered Trademark- enzyme in 1999 was
attributable to our identification of new Gaucher disease patients throughout
the world. We also sell Ceredase-Registered Trademark- enzyme for the treatment
of Gaucher disease, but we have successfully converted virtually all Gaucher
disease patients to a treatment regimen using Cerezyme-Registered Trademark-
enzyme. Our operations are highly dependent on sales of
Cerezyme-Registered Trademark- enzyme and a reduction in revenue from sale of
this product would adversely affect our results of operations. Revenue from
Cerezyme-Registered Trademark- enzyme would be impacted negatively if
competitors developed alternative treatments for Gaucher disease and the
alternative products gained commercial acceptance. We are aware of companies
that have initiated efforts to develop competitive products and other companies
may do so in the future. Information on the growth of sales of
Cerezyme-Registered Trademark- enzyme and Ceredase-Registered Trademark- enzyme
in 1999 and their relationship to our total product revenues for each year is
provided in the table below:
99/98
INCREASE/(DECREASE)
1999 1998 % CHANGE
-------- -------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Sales of Cerezyme-Registered Trademark- enzyme and
Ceredase-Registered Trademark- enzyme.............. $478,538 $411,060 16%
% of total product revenue........................... 70% 67%
Sales of Sepra Film-Registered Trademark- bioresorbable membrane, which is
used to limit the incidence and severity of postoperative adhesions, increased
43% to $13.3 million in 1999 as compared to $9.3 million in 1998.
1998 AS COMPARED TO 1997
Our increase in product revenue primarily due to:
- increased sales of Cerezyme-Registered Trademark- enzyme; and
- an 88% increase in sales of Sepra Film-Registered Trademark- bioresorbable
membrane from $4.9 million in 1997 to $9.3 million in 1998, primarily as a
result of increased market acceptance of the product.
GCS-6
For both 1998 and 1997, our product revenue consisted mainly of sales of
Cerezyme-Registered Trademark- enzyme and Ceredase-Registered Trademark- enzyme
as indicated in the table below:
98/97
INCREASE/(DECREASE)
1998 1997 % CHANGE
-------- -------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Sales of Cerezyme-Registered Trademark- enzyme and
Ceredase-Registered Trademark- enzyme.............. $411,060 $332,712 24%
% of total product revenue........................... 60% 54%
SERVICE REVENUE
We derive service revenue from four principal sources:
- genetic testing services performed by Genzyme General;
- Genzyme Tissue Repair's Carticel-Registered Trademark- chondrocytes for
the treatment of cartilage damage;
- Genzyme Tissue Repair's Epicel-TM- skin grafts for the treatment of severe
burns; and
- genomics services using Genzyme Molecular Oncology's SAGE-TM- gene
expression technology.
1999 AS COMPARED TO 1998
Our service revenue increased during 1999 as compared to 1998 as a result of
increases in the provision of genetic testing services as well as increased
sales of Carticel-Registered Trademark- chondrocytes and Epicel-TM- skin grafts.
The increase in sales of Carticel-Registered Trademark- chondrocytes was a
result of continued increases in the numbers of patients treated and surgeons
trained as well as an increase in the number of insurance reimbursement
approvals. Sales of genomics services decreased during this period.
1998 AS COMPARED TO 1997
Our service revenue during 1998 increased from 1997 as a result of increased
sales of Carticel-Registered Trademark- chondrocytes and Epicel-TM- skin grafts.
Sales of Carticel-Registered Trademark- chondrocytes increased in 1998 for the
same reasons they increased in 1999.
INTERNATIONAL PRODUCT AND SERVICE REVENUE
A substantial portion of our revenue was generated outside of the United
States, as described in the following table. Most of this revenue was
attributable to sales of Cerezyme-Registered Trademark- enzyme.
99/98 98/97
INCREASE/(DECREASE) INCREASE/(DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ------------------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
International product and
service revenue............. $311,080 $281,744 $220,592 10% 28%
% of total product and service
revenue..................... 41% 41% 37%
GCS-7
MARGINS
99/98 98/97
INCREASE/(DECREASE) INCREASE/(DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ------------------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Product margin................ $501,145 $402,609 $323,899 24% 24%
% of product revenue........ 73% 66% 61%
Service margin................ 30,004 26,205 19,869 14% 32%
% of service revenue........ 38% 35% 30%
Total gross margin............ 531,149 428,814 343,768 24% 25%
% of total product and
service revenues.......... 70% 62% 58%
We provide a broad range of healthcare products and services. As a result,
our gross margin varies significantly based on the category of product or
service. Sales of therapeutic products, including Cerezyme-Registered Trademark-
enzyme, result in higher margins than sales of surgical or diagnostic products.
During 1998, we recorded a $25.2 million charge to cost of products sold.
The components of this charge were:
- a $14.8 million charge allocated to Genzyme General to write down excess
inventory used to make Ceredase-Registered Trademark- enzyme. We took this
charge following our determination that, based on the status of our
efforts to convert Gaucher disease patients to a treatment regimen using
Cerezyme-Registered Trademark- enzyme, our existing supply of
Ceredase-Registered Trademark- enzyme was sufficient to meet estimated
patient needs.
- a $10.4 million charge allocated to Genzyme Surgical Products to write
down our inventory of Sepra products to net realizable value. The Sepra
products are our line of products and product candidates designed to limit
post-operative adhesions.
Without the effect of this charge, our product margin for 1998 would have been
70% and our total gross margin during that period would have been 66%.
Excluding the charge described above, the increases in product margin and
total gross margin during both periods were a result of increased efficiency and
process improvements in manufacturing as well as increased sales of
Cerezyme-Registered Trademark- enzyme.
Our service margin also increased during both periods. These increases were
attributable to:
- an increase in sales of DNA and cancer testing services;
- increased sales of Carticel-Registered Trademark- chondrocytes; and
- a reduction in labor, materials and production costs for
Carticel-Registered Trademark- chondrocytes and Epicel-TM- skin grafts.
OPERATING EXPENSES
1999 AS COMPARED TO 1998
The increase in selling, general and administrative expense in 1999 as
compared to 1998 was related to:
- increased 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;
GCS-8
- costs associated with the market introduction of
Thyrogen-Registered Trademark- hormone in January 1999; and
- an increase in professional service fees in connection with the creation
of Genzyme Surgical Products as a separate division of Genzyme.
The increase in research and development expense in 1999 as compared to 1998
was a result of:
- increased costs in connection with the results of ATIII LLC, our joint
venture with Genzyme Transgenics Corporation for the development and
commercialization of transgenic recombinant human antithrombin III; and
- increased spending on our 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.
The purchase of in-process research and development in 1999 consisted of
costs incurred when we acquired Peptimmune, Inc.
1998 AS COMPARED TO 1997
The increase in selling, general and administrative expense in 1998 as
compared to 1997 was related to:
- increased sales and marketing costs related to the product launch of
Thyrogen-Registered Trademark- hormone; 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 attributable to $12.0 million in additional costs resulting from the
consolidation of the results of ATIII LLC, for which there were no comparable
amounts in 1997.
OTHER INCOME AND EXPENSES
99/98 98/97
INCREASE/(DECREASE) INCREASE/(DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ------------------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Equity in net loss of
unconsolidated affiliates... $(42,696) $(29,006) $(12,258) 47% 137%
Gain on affiliate sale of
stock....................... 6,683 2,369 -- 182% N/A
Minority interest............. 3,674 4,285 -- (14)% N/A
Gain on sale of investments in
equity securities........... 1,963 3,391 -- (42)% N/A
Gain on sale of product
line........................ 8,018 31,202 -- (74)% N/A
Charge for impaired
investments................. (5,712) (3,397) -- 68% N/A
Other......................... 14,527 -- (2,000) N/A N/A
Investment income............. 36,158 25,055 11,409 44% 120%
Interest expense.............. (21,771) (22,593) (12,667) (4)% 78%
-------- -------- --------
Total other income (expense),
net......................... $ 844 $ 11,306 $(15,516) (93)% 173%
======== ======== ========
GCS-9
EQUITY IN NET LOSS OF UNCONSOLIDATED AFFILIATES
At December 31, 1999, we owned approximately 33% of the common stock of
Genzyme Transgenics and record in net loss of unconsolidated affiliates our
portion of its results. We also record the results of the following joint
ventures in net loss of unconsolidated affiliates:
JOINT VENTURE PARTNER(S) EFFECTIVE DATE PRODUCT/INDICATION GENZYME DIVISION
------------- ---------- -------------- ------------------ ----------------
RenaGel LLC GelTex Pharmaceuticals, June 1997 Renagel-Registered Trademark- Genzyme General
Inc. capsules for the reduction of
serum phosphorus in patients
with end-stage renal disease
BioMarin/ Genzyme LLC BioMarin Pharmaceutical September 1998 Aldvrazyme-TM- enzyme for the Genzyme General
Inc. treatment of
mucopolysaccharidosis-I
Pharming/ Genzyme LLC Pharming Group, N.V. October 1998 Human alpha-glucosidase for the Genzyme General
treatment of Pompe disease
Diacrin/Genzyme LLC Diacrin, Inc. October 1996 Products using porcine fetal cells Genzyme Tissue
for the treatment of Parkinson's Repair (until May
and Huntington's diseases 1999); Genzyme
General (after May
1999)
StressGen/ Genzyme StressGen July 1997 Stress gene therapies for the Genzyme Molecular
LLC(1) Biotechnologies Corp.; treatment of cancer Oncology
Canadian Medical
Discoveries Fund Inc.
(until October 1999)
- ------------------------------
(1) StressGen/Genzyme LLC was dissolved in December 1999.
Our equity in net loss of unconsolidated affiliates increased as a result
of:
- increased losses from our joint ventures with GelTex, BioMarin, Pharming
and Diacrin in both periods; and
- a $1.0 million charge incurred in connection with our repurchase of
one-half of the Canadian Medical Discoveries Fund's interest in
StressGen/Genzyme LLC in October 1999.
These increases were offset in part by decreased losses from Genzyme
Transgenics for both periods.
GAIN ON AFFILIATE SALE OF STOCK
In 1999 and 1998, we recorded gains on our investment in Genzyme Transgenics
as a result of its issuance of additional shares of common stock.
MINORITY INTEREST
We consolidate the results of ATIII LLC and record 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
We recorded gains of $2.0 million in January 1999 and $3.4 million in
December 1998 upon our sales of shares of Techne Corporation common stock that
we received when we sold our research products business to Techne.
GAIN ON SALE OF PRODUCT LINE
In July 1999, we recorded a gain of $0.5 million in connection with the sale
of our immunochemistry product lines to an operating unit of Sybron Laboratory
Products Corporation.
GCS-10
In June 1999, we recorded a gain of $7.5 million representing the payment of
a note receivable that we received as partial consideration for the sale of
Genetic Design, Inc. in 1996. We had previously fully reserved the amount of
this note because we considered the repayment of the note to be uncertain.
In July 1998, we recorded a gain of $31.2 million in connection with the
sale of our research products business to Techne.
CHARGE FOR IMPAIRED INVESTMENTS
In 1999, we recorded $5.7 million in charges in connection with strategic
investments in collaborators' common stock because we considered the decline in
the value of those securities to be other than temporary.
In 1998, we recorded a $3.4 million charge in connection with 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, we recorded a net gain of $14.4 million upon receipt of a
payment associated with the termination of our agreement to acquire Cell
Genesys, Inc.
INVESTMENT INCOME
Our investment income for both periods increased because our cash balances
were higher. The increase in cash balances was attributable to our issuance in
May 1998 of $250.0 million in principal amount of 5 1/4% convertible
subordinated notes and increased cash generated from operations.
INTEREST EXPENSE
Our interest expense increased in both periods primarily as a result of the
issuance of the 5 1/4% convertible subordinated notes.
GCS-11
TAX PROVISION AND ALLOCATED TAX BENEFITS
99/98 98/97
INCREASE/(DECREASE) INCREASE/(DECREASE)
1999 1998 1997 % CHANGE % CHANGE
-------- -------- -------- ------------------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Provision for income taxes.... $(46,947) $(39,870) $(12,100) 18% 230%
Net tax rate.................. 40% 39% 47%
Our tax rates for all periods vary from the U.S. statutory tax rate as a
result of our:
- provision for state income taxes;
- use of a foreign sales corporation;
- nondeductible amortization of intangibles;
- use of tax credits; and
- share of losses of unconsolidated affiliates.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, we had cash, cash-equivalents, and short- and
long-term investments of $653.0 million, an increase of $77.3 million from
December 31, 1998.
We generated $204.0 million in cash from our operations in 1999.
Our investing activities used $182.2 million in cash in 1999. These
activities generated:
- $5.0 million from the sale of our immunochemistry product lines;
- $11.1 million from the sale of Techne common stock; and
- $8.4 million from the payment of a note issued in connection with our sale
of Genetic Design.
These activities used:
- $70.6 million for net purchases of investments;
- $57.7 million to fund capital expenditures;
- $40.0 million to fund our investments in joint ventures;
- $6.5 million to fund our acquisition of Peptimmune;
- $10.0 million to 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 common stock; and
- $3.4 million to Genovo, Inc. for the purchase of preferred stock.
In 1999, we received $60.0 million in cash from employee stock plans and
borrowed $5.0 million under a bank credit facility. In 1999, we used
$85.1 million in cash to repay debt and capital lease obligations.
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In 1999, we refinanced our $225 million revolving credit facility with a
$50.0 million revolving credit facility that matures in November 2000 and a
$100.0 million revolving credit facility that matures in November 2002. At
December 31, 1999, $23.0 million was outstanding under the credit facility that
matures in 2002.
We believe that our available cash, investments and cash flow from
operations will be sufficient to fund our planned operations and capital
requirements for the foreseeable future. Although we currently have substantial
cash resources and positive cash flow, we intend to use substantial portions of
our available cash for:
- product development and marketing;
- expanding facilities; and
- working capital.
Our cash reserves will be further reduced to pay principal and interest on
the following debt:
- $250.0 million in principal under our 5 1/4% convertible subordinated
notes due June 2005, which are convertible into GENZ Stock, GZMO Stock and
GZSP Stock;
- $21.2 million in principal under our 5% convertible subordinated
debentures due August 2003, which are convertible into GENZ Stock; and
If we use cash to pay or redeem this debt, including the interest due on it,
our cash reserves will be diminished.
In March 2000, we entered into an agreement to acquire Biomatrix, Inc. The
consideration for the proposed acquisition consists of shares of a new series of
our common stock and up to approximately $245 million in cash, allocated at the
option of Biomatrix stockholders. To the extent we use cash to complete this
acquisition, our cash reserves will be diminished.
To satisfy these and other commitments, we may have to obtain additional
financing. We cannot guarantee that we will be able to obtain any additional
financing, extend any existing financing arrangement, or obtain either on
favorable terms.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133, as
amended by SFAS 137, is effective for our fiscal year beginning January 1, 2001.
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that we recognize all
derivative instruments as either assets or liabilities on our balance sheets and
measure those instruments at fair value. We are currently assessing the effects
of adopting SFAS 133 and have not yet made a determination of the impact
SFAS 133 will have on our consolidated financial statements.
EURO - THE NEW EUROPEAN CURRENCY
On January 1, 1999, eleven of the fifteen member countries of the European
Union established fixed conversion rates between their existing sovereign
currencies and the Euro and adopted the Euro as their common legal currency. The
Euro trades on currency exchanges and is available for non-cash transactions.
These participating countries now issue sovereign debt exclusively in Euros, and
have redenominated their outstanding sovereign debt. These countries no longer
control their own monetary policies by directing independent interest rates for
their legacy currencies. Instead, the authority to direct monetary policy,
including money supply and official interest rates for the Euro, is exercised by
the new European Central Bank.
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The legacy currencies of these 11 countries are scheduled to remain legal
tender in those countries as denominations of the Euro until January 1, 2002.
Until that date, public and private parties may pay for goods and services using
either the Euro or the participating country's legacy currency on a "no
compulsion, no prohibition" basis.
We have formed committees to address the business implications of the Euro
conversion, communicate information about the conversion throughout the
organization, create global coordination among functional areas and address
specific accounting, treasury and tax issues relating to the Euro. Our
management believes that the Euro conversion will not affect any of our
outstanding foreign exchange forward contracts, or any other material commercial
contracts. Similarly, our management does not foresee any increased currency
exchange rate risk as a result of the Euro conversion.
We are assessing whether there are any long term competitive implications of
the Euro conversion. While no material risks have been identified to date,
individual European governments may pressure us to have consistent European
pricing, and individual customers and distributors in Europe may choose to begin
purchasing products in the country where the Euro price is lowest.
Because the Internal Revenue Service has not yet issued final regulations
regarding the Euro, no assessment can be made as to the tax consequences of the
conversion at this time. If the temporary regulations currently in place are
adopted in their entirety, we believe that there will be no material tax
consequences of the conversion.
Because our existing accounting and finance software is currently able to
use Euro-based accounts, we believe that the cost of upgrading software and
other information systems for the conversion will be immaterial.
YEAR 2000
Many computer systems and other equipment with embedded chips or processors
experience problems handling dates beyond the year 1999. As a result, older
programs may experience operating difficulties that cause date-sensitive
transaction errors unless they are modified or upgraded to adequately address
the problem.
We conducted a Year 2000 compliance program intended to identify and
minimize our exposure to Year 2000 problems. The compliance program was a
coordinated effort conducted by each of our divisions, business units and
departments using our own MIS personnel. The program involved four phases:
- conducting an inventory of our Year 2000 issues;
- prioritizing identified systems, programs and equipment based on
materiality to our operations;
- assessing Year 2000 compliance; and
- resolving Year 2000 issues through upgrades, replacements or repairs.
As of the date of this annual report, we have not experienced any material
adverse effects on our business, results of operations or financial condition as
a result of the Year 2000 issue.
In 1999, we also conducted a survey of third parties that we consider
critical to our business about their Year 2000 readiness. Based on the results
of this survey, we believe that our critical suppliers and distributors have
successfully transitioned into the year 2000 and we are not presently aware of
any third party Year 2000 problems that could have a significant impact on our
business.
We will continue to monitor our operations and the operations of third
parties critical to our operations for potential Year 2000 problems. However, we
do not anticipate that we will discover any
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future Year 2000 issues that will have a material effect on our business,
results of operations or financial condition.
As of March 23, 2000, total costs incurred in connection with our Year 2000
compliance program were approximately $1.2 million and were funded through
operations.
MARKET RISK
We are exposed to potential loss from exposure to market risks represented
principally by changes in interest rates, foreign exchange rates, and equity
prices. At December 31, 1999 we held various derivative contracts in the form of
foreign exchange forwards. The derivatives contain no leverage or option
features. We also held a number of other financial instruments, including
investments in marketable securities, and had balances outstanding under several
debt securities.
INTEREST RATE RISK
We are exposed to potential loss due to changes in interest rates. The
principal interest rate exposure is to changes in domestic interest rates.
Investments with interest rate risk include short-term deposits with financial
institutions, and short-term and long-term investments in marketable securities.
Debt with interest rate risk includes fixed rate convertible debt and borrowings
under a credit facility.
To estimate the potential loss due to changes in interest rates we performed
a sensitivity analysis for a one-day horizon. In order to estimate the potential
loss, we used an adverse change in interest rates of 100 basis points across the
yield curve at year-end. We used the following assumptions in preparing the
sensitivity analysis:
- convertibles that are "in-the-money" at year end are considered equity
securities and are excluded;
- convertibles that are "out-of-the-money" at year end are treated as fixed
rate debt securities and we assumed we will repay the principal amount in
full at maturity and we ignored the exercise of embedded equity option;
and
- financial instruments contain no other call or leverage features material
to our analysis.
On this basis, we estimate the potential loss in fair value from changes in
interest rates to be $3.1 million, virtually all of which is attributable to
Genzyme General.
The estimate of potential loss does not include a separate determination of
potential losses due to changes in credit spreads. Our investments are
investment grade securities and deposits are with investment grade financial
institutions. We believe that the realization of losses due to changes in credit
spreads is unlikely. The potential loss estimated above on all market risk
sensitive instruments reflects a fair value loss on debt offset by a fair value
loss on assets. We expect to hold our debt to maturity or conversion, whichever
is sooner. Therefore, the realization of the potential loss on debt obligations
is unlikely.
FOREIGN EXCHANGE RISK
As a result of our worldwide operations, we face exposure to adverse
movements in foreign currency exchange rates, primarily to the Euro and its
component currencies, British pounds and Japanese yen. These exposures are
reflected in market risk sensitive instruments, including foreign currency
receivables and payables and foreign exchange forward contracts. During 1999,
our risk management strategy related to foreign exchange exposure periodically
included the use of forward contracts. As of December 31, 1999, we estimate the
potential loss in fair value of the forward contracts due to a 10% change in
exchange rates to be $2.1 million, virtually all of which is attributable to
Genzyme General.
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EQUITY PRICE RISK
We hold investments in a limited number of domestic and European equity
securities, substantially all of which are allocated to Genzyme General. We
estimate the potential loss in fair value due to a 10% decrease in equity prices
of each security held at year-end to be $8.9 million. This estimate assumes no
change in foreign exchange rates from year-end spot rates. The increase in
potential equity risk is largely explained by the fact that the size of our
portfolio has increased from a market value of $51 million to $96 million.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The future operating results of Genzyme Corporation and its subsidiaries
could differ materially from the results described above due to the following
risks and uncertainties, which relate to us generally and affect all of our
operating divisions.
A REDUCTION IN REVENUES FROM SALES OF PRODUCTS THAT TREAT GAUCHER DISEASE WOULD
HAVE AN ADVERSE EFFECT ON OUR BUSINESS.
We generate a majority of our product revenues from sales of
enzyme-replacement products for patients with Gaucher disease. We entered this
market in 1991 with Ceredase-Registered Trademark- enzyme. Because production of
Ceredase-Registered Trademark- enzyme was subject to supply constraints, we
developed Cerezyme-Registered Trademark- enzyme, a recombinant form of the
enzyme. Recombinant technology uses specially engineered cells to produce
enzymes, or other substances, by inserting into the cells of one organism the
genetic material of a different species. In the case of
Cerezyme-Registered Trademark- enzyme, Chinese hamster ovary cells are
engineered to produce human alpha glucocerebrosidase. We stopped producing
Ceredase-Registered Trademark- enzyme, except for small quantities, during 1998,
after substantially all the patients who previously used
Ceredase-Registered Trademark- enzyme converted to
Cerezyme-Registered Trademark- enzyme. Sales of Ceredase-Registered Trademark-
enzyme and Cerezyme-Registered Trademark- enzyme totaled $478.5 million for the
year ended December 31, 1999, representing approximately 70% of our product
revenues for that year.
Because our business is highly dependent on Cerezyme-Registered Trademark-
enzyme, a reduction in revenue from sales of this product would have an adverse
effect on our operations and may cause the value of our securities to decline
substantially. Revenues from Cerezyme-Registered Trademark- enzyme would be
impacted negatively if competitors develop alternative treatments for Gaucher
disease and these alternative products gained commercial acceptance. Some
companies have initiated efforts to develop competitive products, and other
companies may do so in the future. Cerezyme-Registered Trademark- enzyme has
orphan drug status, providing it with market exclusivity in the U.S. until
May 2001. We also have patents protecting its manufacturing method until 2010
and its composition until 2013. We cannot predict the effect that the expiration
of orphan drug status and market exclusivity will have on sales of
Cerezyme-Registered Trademark- enzyme after May 2001.
GOVERNMENT REGULATION IMPOSES SIGNIFICANT COSTS AND RESTRICTIONS ON THE
DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCTS AND SERVICES.
Our ability to successfully satisfy regulatory requirements will
significantly determine our future success. We cannot guarantee that any
required regulatory approvals will be granted or that they will be granted on a
timely basis. The production and sale of healthcare products and provision of
health care services are highly regulated. In particular, the U.S. Food and Drug
Administration (FDA) and comparable agencies in foreign countries must approve
human therapeutic and diagnostic products before they are marketed. This
approval process can involve lengthy and detailed laboratory and clinical
testing, sampling activities and other costly and time-consuming procedures.
This regulation may delay the time at which a product or service first can be
sold, limit how a product or service may be used, or adversely impact third
party reimbursement. In addition, therapies that have received, or in the future
receive, regulatory approval for commercial sale may still face subsequent
regulatory difficulties.
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The FDA and comparable foreign regulatory agencies, for example, may require
postmarketing clinical trials. In addition, a marketed therapy, its manufacturer
and the manufacturer's facilities are subject to continual review and periodic
inspections by regulatory agencies. The discovery of previously unknown problems
with a therapy, manufacturer or facility can result in restrictions on the
therapy or manufacturer, including withdrawal of the therapy from the market.
The failure to comply with applicable regulatory approval requirements can
result in, among other things:
- warning letters;
- fines and other civil penalties;
- suspended regulatory approvals;
- refusal to approve pending applications or supplements to approved
applications;
- suspension of product sales in the U.S. and/or exports from the U.S.;
- product recalls; and
- seizure of products.
LEGISLATIVE CHANGES MAY ADVERSELY IMPACT OUR BUSINESS.
Some of our products, including Cerezyme-Registered Trademark- enzyme, have
been designated as orphan drugs under the Orphan Drug Act. The Orphan Drug Act
provides incentives to manufacturers to develop and market drugs for rare
diseases, generally by entitling the first developer that receives FDA marketing
approval for an orphan drug to a seven-year exclusive marketing period in the
U.S. for that product. Legislation periodically has been introduced in recent
years to change the Orphan Drug Act to shorten the period of automatic market
exclusivity and to allow marketing rights to simultaneous developers of the
drug. We cannot be sure whether the Orphan Drug Act will be amended, or if
amended, what effect the changes may have on us.
We have also received orphan drug designation for some of our products that
are still in development, including Fabrazyme-TM- enzyme for the treatment of
Fabry disease. We are aware of other companies developing products for the
treatment of Fabry disease. If any of those companies receive FDA approval for
their Fabry disease therapy before we receive FDA approval for Fabrazyme-TM-
enzyme, the Orphan Drug Act will preclude us from selling Fabrazyme-TM- enzyme
in the U.S. for up to seven years.
In addition, healthcare reform is an area of significant government focus.
Any reform measures, if adopted, could adversely affect:
- the pricing of therapeutic products in the U.S. or internationally; and
- the amount of reimbursement available from governmental agencies or other
third party payers.
BECAUSE THE DEVELOPMENT OF OUR PRODUCTS INVOLVES A LENGTHY AND COMPLEX PROCESS,
IT IS UNCERTAIN WHETHER WE WILL BE ABLE TO COMMERCIALIZE ANY OF OUR PRODUCTS
CURRENTLY IN DEVELOPMENT.
Before we can commercialize our development-stage products, we will need to:
- conduct substantial research and development;
- undertake preclinical and clinical testing; and
- pursue regulatory approvals.
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This process involves a high degree of risk and takes several years. Our
product development efforts may fail for many reasons, including:
- the product fails in preclinical studies;
- clinical trials may not support the safety or effectiveness of the
product; or
- we fail to obtain the required regulatory approvals.
We cannot guarantee that we will successfully develop any particular product.
ANY MARKETABLE PRODUCTS THAT WE DEVELOP MAY NOT BE COMMERCIALLY SUCCESSFUL.
The commercial success of any marketable product that we develop will depend
on many factors, including:
- regulation by the FDA and other government authorities;
- market acceptance by doctors and hospital administrators;
- the effectiveness of our sales force;
- the effectiveness of our production and marketing capabilities;
- the success of competitive products; and
- the availability of third party reimbursement.
We cannot guarantee that any product we successfully develop will be
commercially successful.
WE MAY REQUIRE SIGNIFICANT ADDITIONAL FINANCING WHICH MAY NOT BE AVAILABLE ON
FAVORABLE TERMS, IF AT ALL.
As of December 31, 1999, we had approximately $653.0 million in cash, cash
equivalents and short-and long-term investments, excluding investments in equity
securities.
Although we currently have substantial cash resources and positive cash
flow, we intend to use substantial portions of our available cash for:
- product development and marketing;
- expanding facilities;
- working capital; and
- strategic business initiatives.
We will further reduce available cash reserves to pay principal and interest
on the following debt:
- In May 1998, we issued $250.0 million in convertible notes, the entire
principal amount of which is allocated to Genzyme General. These
convertible notes bear interest at an annual rate of 5.25% and mature on
June 1, 2005. However, the holders of these notes may exchange principal
on the notes for shares of GENZ Stock, GZMO Stock, and GZSP Stock.
- As of December 31, 1999, we owed approximately $23.0 million under a
revolving credit facility with a group of commercial banks. Of this
amount, we have allocated $18.0 million to Genzyme Tissue Repair and
$5.0 million to Genzyme Molecular Oncology. Amounts borrowed under this
revolving credit facility bear interest at a floating rate based upon an
applicable margin above either the prime rate announced by Fleet National
Bank or the London InterBank Offered Rate. We must repay all borrowings
under this facility no later than November 12, 2002.
- In August 1998, we issued $21.2 million in convertible debentures, the
entire principal amount of which is allocated to Genzyme General. These
convertible debentures bear interest at an annual rate of 5% and mature on
August 29, 2003, but the holders of these convertible debentures may
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exchange principal, and under some circumstances interest, on the
convertible debentures for shares of GENZ Stock.
If we use cash to pay or redeem this debt, including the principal and
interest due on it, our cash reserves will be diminished.
In March 2000, we entered into an agreement to acquire Biomatrix, Inc. The
consideration for the proposed acquisition consists of shares of a new series of
our common stock and up to approximately $245 million in cash, allocated at the
option of Biomatrix stockholders. To the extent we use cash to complete this
acquisition, our cash reserves will be diminished.
To satisfy these and other commitments, we may have to obtain additional
financing. We cannot guarantee that we will be able to obtain any additional
financing, extend any existing financing arrangement, or obtain either on
favorable terms.
WE MAY FAIL TO PROTECT ADEQUATELY OUR PROPRIETARY TECHNOLOGY, WHICH WOULD ALLOW
COMPETITORS TO TAKE ADVANTAGE OF OUR RESEARCH AND DEVELOPMENT EFFORTS.
Our long-term success largely depends on our ability to obtain and maintain
patent and other proprietary right protection for our technology and products.
If we fail to obtain or maintain these protections, we may not be able to
prevent third parties from using our proprietary rights.
Patents based on our currently pending or our future patent applications may
not issue. In addition, our issued patents may not contain claims sufficiently
broad to protect us against third parties with similar technologies or products,
or provide us with any competitive advantage. Further, our patents, our
collaborators' patents, and those patents for which we have license rights may
be challenged, narrowed, invalidated or circumvented.
The U.S. Patent and Trademark Office and the courts have not established a
consistent policy regarding the breadth of claims allowed in biotechnology
patents. The allowance of broader claims may increase the incidence and cost of
patent interference proceedings and the risk of infringement litigation. On the
other hand, the allowance of narrower claims may limit the value of our
proprietary rights. Any policies that are adopted may result in changes in or
interpretations of the patent laws that adversely affect our patent position.
We also rely upon trade secrets, proprietary know-how, and continuing
technological innovation to remain competitive. We have taken measures to
protect our trade secrets and know-how, including the use of confidentiality
agreements with our employees, consultants and corporate collaborators. It is
possible that these agreements may be breached and that any remedies for a
breach will not make us whole. We also cannot guarantee that other parties will
not independently develop our know-how or otherwise obtain access to our
technology.
WE MAY BE REQUIRED TO LICENSE TECHNOLOGY FROM COMPETITORS IN ORDER TO DEVELOP
AND COMMERCIALIZE SOME OF OUR PRODUCTS AND SERVICES, AND IT IS UNCERTAIN
WHETHER THESE LICENSES WILL BE AVAILABLE.
Third party patent rights and pending patent applications filed by third
parties, if issued, may cover some of the products that we or our strategic
collaborators are developing or testing. As a result, we or a strategic
collaborator may be required to obtain licenses from the holders of these
patents in order to use, manufacture or sell these products and services, and
payments under these licenses may reduce the profitability of the products.
Furthermore, we cannot be sure that these licenses would be available to us on
acceptable terms or at all. If these licenses are not available, our or our
strategic collaborators' ability to commercialize these products and services
may be impaired.
WE MAY INCUR SUBSTANTIAL COSTS AS A RESULT OF LITIGATION OR OTHER PROCEEDINGS
RELATING TO PATENT AND OTHER INTELLECTUAL PROPERTY RIGHTS.
If we or one of our strategic collaborators initiate litigation to enforce
our patent or license rights, or are required to defend these rights in response
to third party claims, it could consume a substantial
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portion of our resources. We cannot guarantee that we or our strategic
collaborator would prevail in such litigation. If we do not prevail, we or our
strategic collaborators may be required to:
- pay monetary damages;
- stop commercial activities relating to the affected products or services;
or
- obtain a license in order to continue manufacturing or marketing the
affected products or services.
If we are required to pay damages or if commercial activities are disrupted,
our business or financial position may be negatively impacted. In addition, if
we or our strategic collaborators are required to obtain a license, we cannot
guarantee that one would be made available to us or made available on acceptable
terms or at all.
WE MAY BE LIABLE FOR PRODUCT LIABILITY CLAIMS NOT COVERED BY INSURANCE.
Individuals who use our products or services may bring product liability
claims against us. While we have taken, and continue to take, what we believe
are appropriate precautions, we cannot guarantee that we will avoid significant
liability exposure. We have only limited amounts of product liability insurance,
and we cannot be sure that this insurance will provide sufficient coverage
against any product liability claims. If we attempt to obtain additional
insurance in the future, we may not be able to do so on acceptable terms, and
any additional insurance we do obtain may not provide adequate coverage against
any asserted claims. In addition, regardless of merit or eventual outcome,
product liability claims may result in:
- diversion of management time and attention;
- expenditure of large amounts of cash on legal fees, expenses and payment
of damages;
- decreased demand for our products and services; and
- injury to our reputation.
OUR COMPETITORS IN THE BIOTECHNOLOGY AND PHARMACEUTICAL INDUSTRIES MAY HAVE
SUPERIOR PRODUCTS, MANUFACTURING CAPABILITIES OR MARKETING EXPERTISE.
The human health care products and services industry is extremely
competitive. Our competitors include major pharmaceutical companies and other
biotechnology companies. Some of these competitors may have more extensive
research and development, marketing and production capabilities. Some
competitors also may have greater financial resources than us. Our future
success will depend on our ability to develop and market effectively our
products against those of our competitors.
IF WE ARE UNABLE TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGES, OUR PRODUCTS OR
SERVICES MAY BECOME OBSOLETE.
The field of biotechnology is characterized by significant and rapid
technological change. Although we attempt to expand our technological
capabilities in order to remain competitive, research and discoveries by others
may make our products or services obsolete. For example, some of our competitors
may develop a product to treat Gaucher disease that is more effective or less
expensive than Cerezyme-Registered Trademark- enzyme.
IF WE FAIL TO OBTAIN ADEQUATE LEVELS OF REIMBURSEMENT FOR OUR PRODUCTS FROM
THIRD PARTY PAYERS, THE COMMERCIAL POTENTIAL OF OUR PRODUCTS WILL BE
SIGNIFICANTLY LIMITED.
A substantial portion of our revenue comes from payments by third party
payers, including government health administration authorities and private
health insurers. Third party payers may not reimburse patients for newly
approved health care products. Increasingly, third party payers are attempting
to contain healthcare costs by:
- challenging the prices charged for healthcare products and services;
- limiting both coverage and the amount of reimbursement for new therapeutic
products;
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- denying or limiting coverage for products that are approved by the FDA,
but are considered experimental or investigational by third party payers;
and
- refusing, in some cases, to provide coverage when an approved product is
used for disease indications in a way that has not received FDA marketing
approval.
Government and other third party payers may not provide adequate insurance
coverage or reimbursement for our products and services, which could impair our
financial results.
In addition, Congress occasionally has discussed implementing broad-based
measures to contain healthcare costs. It is possible that Congress will enact
legislation specifically designed to contain healthcare costs. We cannot predict
the effect that legislation of this type would have on our business.
CHANGES IN THE ECONOMIC, POLITICAL, LEGAL AND BUSINESS ENVIRONMENTS IN THE
FOREIGN COUNTRIES IN WHICH WE DO BUSINESS COULD CAUSE OUR INTERNATIONAL SALES
AND OPERATIONS, WHICH ACCOUNT FOR A SIGNIFICANT PERCENTAGE OF OUR CONSOLIDATED
NET SALES, TO BE LIMITED OR DISRUPTED.
Our international operations accounted for 41% of our consolidated revenues
in 1999 and 1998, and we expect that international sales will continue to
account for a significant percentage of our revenues for the foreseeable future.
In addition, we have direct investments in a number of subsidiaries outside of
the U.S., primarily in Europe and Japan. Our international sales and operations
could be limited or disrupted, and the value of our direct investments may be
adversely affected, by any of the following:
- fluctuations in currency exchange rates;
- the imposition of government controls;
- less favorable intellectual property or other applicable laws;
- the inability to obtain any necessary foreign regulatory approvals of
products in a timely manner;
- import and export license requirements;
- political instability;
- trade restrictions;
- changes in tariffs;
- difficulties in staffing and managing international operations; and
- longer payment cycles.
A significant portion of our business is conducted in currencies other than
the U.S. dollar, which is our reporting currency. We recognize foreign currency
gains or losses arising from our operations in the period incurred. As a result,
currency fluctuations among the U.S. dollar and the currencies in which we do
business have caused foreign currency transaction gains and losses in the past
and will likely do so in the future. We cannot predict the effects of exchange
rate fluctuations upon our future operating results because of the number of
currencies involved, the variability of currency exposures and the potential
volatility of currency exchange rates.
SEVERAL ANTI-TAKEOVER PROVISIONS MAY DEPRIVE OUR STOCKHOLDERS OF THE OPPORTUNITY
TO RECEIVE A PREMIUM FOR THEIR SHARES UPON A CHANGE IN CONTROL.
Provisions of Massachusetts law and our charter, by-laws and shareholder
rights plan could delay or prevent a change in control of Genzyme or a change in
our management.
Our tracking stock structure may also deprive our stockholders of the
opportunity to receive a premium for their shares upon a change in control
because, in order to obtain control of a particular division, an acquiror would
have to obtain control of the entire corporation.
In addition, our board of directors may, in their sole discretion:
- exchange shares of GZMO Stock, GZSP Stock or GZTR Stock for GENZ Stock at
a 30% premium over the market value of the exchanged shares; and
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- issue shares of undesignated preferred stock from time to time in one or
more series.
Either of these board actions could increase the cost of an acquisition of
Genzyme and thus discourage a takeover attempt.
SUBSEQUENT EVENTS
In March 1999, we entered into an agreement to acquire Biomatrix, Inc. Upon
completion of the acquisition, we will form a new operating division called
Genzyme Biosurgery and create a new series of common stock to reflect its value
and track its performance. We refer to this stock as "GZBX Stock." In connection
with the merger, the assets of Genzyme Surgical Products and Genzyme Tissue
Repair will become part of Genzyme Biosurgery. In addition, GZSP Stock and GZTR
Stock will be exchanged for GZBX Stock. We will account for the acquisition of
Biomatrix as a purchase.
Biomatrix stockholders will have the option of receiving $37.00 in cash or
one share of GZBX Stock for each share of Biomatrix common stock they hold. The
merger agreement provides, however, that the cash component of the merger
consideration will be capped at 35% of the total consideration, or approximately
$245 million.
Holders of GZSP Stock will receive 0.6060 share of GZBX Stock for each share
of GZSP Stock they hold, and holders of GZTR Stock will receive 0.3352 share of
GZBX Stock for each share of GZTR Stock they hold.
The acquisition, which we expect to complete in the second quarter of 2000,
is subject to:
- approval by Biomatrix's shareholders;
- approval by our shareholders, including separate approvals of the holders
of GZSP Stock and GZTR Stock;
- clearance under federal antitrust laws; and
- other customary closing conditions.
GENZYME TRANSGENICS
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. We will recognize a gain on affiliate sale
of stock of approximately $20 million in the first quarter of 2000.
PUBLIC OFFERING OF GZMO STOCK
In March 2000, we announced a proposed public offering of 3,000,000 shares
of GZMO Stock.
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GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Revenues:
Net product sales......................................... $683,482 $613,685 $529,927
Net service sales......................................... 79,448 74,791 67,158
Revenue from research and development contracts:
Related parties......................................... 2,012 5,745 8,356
Other................................................... 7,346 15,114 3,400
-------- -------- --------
Total revenues........................................ 772,288 709,335 608,841
Operating costs and expenses:
Cost of products sold..................................... 182,337 211,076 206,028
Cost of services sold..................................... 49,444 48,586 47,289
Selling, general and administrative....................... 242,797 215,203 200,476
Research and development (including research and
development related to contracts)....................... 150,516 119,005 89,558
Amortization of intangibles............................... 24,674 24,334 17,245
Purchase of in-process research and development........... 5,436 -- 7,000
-------- -------- --------
Total operating costs and expenses.................... 655,204 618,204 567,596
-------- -------- --------
Operating income............................................ 117,084 91,131 41,245
Other income (expenses):
Equity in net loss of unconsolidated affiliates........... (42,696) (29,006) (12,258)
Gain on affiliate sale of stock........................... 6,683 2,369 --
Gain on sale of investments in equity securities.......... 1,963 3,391 --
Minority interest......................................... 3,674 4,285 --
Gain on sale of product line.............................. 8,018 31,202 --
Charge for impaired investments........................... (5,712) (3,397) --
Other..................................................... 14,527 -- (2,000)
Investment income......................................... 36,158 25,055 11,409
Interest expense.......................................... (21,771) (22,593) (12,667)
-------- -------- --------
Total other income (expenses)......................... 844 11,306 (15,516)
-------- -------- --------
Income before income taxes.................................. 117,928 102,437 25,729
Provision for income taxes.................................. (46,947) (39,870) (12,100)
-------- -------- --------
Net income.................................................. $ 70,981 $ 62,567 $ 13,629
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
GCS-23
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
ATTRIBUTABLE TO GENZYME GENERAL:
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
======== ======== ========
ATTRIBUTABLE TO GENZYME MOLECULAR ONCOLOGY:
Net loss.................................................. $(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
======== ========
Per GZMO pro forma basic and diluted common share:
Pro forma net loss...................................... $ (4.98)
========
Pro forma weighted average shares outstanding............. 3,929
========
ATTRIBUTABLE TO GENZYME SURGICAL PRODUCTS:
Net loss.................................................. $(48,037) $(49,856) $(29,740)
======== ======== ========
Per GZSP pro forma basic and diluted common share:
Pro forma net loss...................................... $ (3.25) $ (3.37) $ (2.01)
======== ======== ========
Pro forma weighted average shares outstanding............. 14,800 14,800 14,800
======== ======== ========
ATTRIBUTABLE TO GENZYME TISSUE REPAIR:
Net loss.................................................. $(30,040) $(40,386) $(45,984)
======== ======== ========
Per GZTR basic and diluted common share:
Net loss................................................ $ (1.26) $ (1.99) $ (3.07)
======== ======== ========
Weighted average shares outstanding....................... 23,807 20,277 14,976
======== ======== ========
COMPREHENSIVE INCOME:
Net income................................................ $ 70,981 $ 62,567 $ 13,629
Other comprehensive income (loss) net of tax:
Foreign currency translation adjustments................ (14,883) 7,681 (11,704)
Unrealized (gains) losses on securities:
Unrealized (gains) losses arising during the period... 24,946 (6,043) 817
Reclassification adjustment for gains (losses)
included in net income.............................. 2,092 2,100 --
-------- -------- --------
Unrealized gains (losses) on securities, net........ 27,038 (3,943) 817
-------- -------- --------
Other comprehensive income (loss)......................... 12,155 3,738 (10,887)
-------- -------- --------
Comprehensive income...................................... $ 83,136 $ 66,305 $ 2,742
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
GCS-24
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(AMOUNTS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 130,156 $ 118,612
Short-term investments.................................... 255,846 175,453
Accounts receivable, net.................................. 166,803 163,042
Inventories............................................... 117,269 109,833
Prepaid expenses and other current assets................. 18,918 31,467
Deferred tax assets--current.............................. 41,195 39,725
---------- ----------
Total current assets.................................... 730,187 638,132
Property, plant and equipment, net........................ 383,181 382,619
Long-term investments..................................... 266,988 281,664
Intangibles, net.......................................... 253,153 279,516
Deferred tax assets--noncurrent........................... 18,631 24,277
Investments in equity securities.......................... 97,859 51,977
Other noncurrent assets................................... 37,283 30,669
---------- ----------
Total assets............................................ $1,787,282 $1,688,854
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
GCS-25
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(AMOUNTS IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 27,853 $ 27,604
Accrued expenses.......................................... 73,359 72,370
Payable to joint venture.................................. -- 1,181
Income taxes payable...................................... 27,946 16,543
Deferred revenue.......................................... 3,700 2,731
Current portion of long-term debt and capital lease
obligations............................................. 5,080 100,568
---------- ----------
Total current liabilities............................... 137,938 220,997
Noncurrent liabilities:
Long-term debt.............................................. 18,000 3,087
Convertible notes and debentures............................ 272,622 284,138
Other noncurrent liabilities................................ 2,330 8,078
---------- ----------
Total liabilities....................................... 430,890 516,300
Commitments and contingencies (See Notes)
Stockholders' equity:
Preferred Stock, $0.01 par value, 10,000,000 shares
authorized; no shares issued and outstanding............ -- --
Preferred Stock, Series A Junior Participating, $0.01
par value, 2,000,000 shares authorized; no shares
issued and outstanding................................ -- --
Preferred Stock, Series B Junior Participating, $0.01
par value, 400,000 shares authorized; no shares issued
and outstanding....................................... -- --
Preferred Stock, Series C Junior Participating, $0.01
par value, 400,000 shares authorized; no shares issued
and outstanding....................................... -- --
Preferred Stock, Series D Junior Participating, $0.01
par value, 400,000 shares authorized; no shares issued
and outstanding....................................... -- --
Common Stock $0.01 par value, 390,000,000 shares
authorized; 141,000,483 issued and outstanding:
GENZ Stock, $0.01 par value, 200,000,000 shares
authorized; 84,351,662 shares issued and 84,245,304
shares outstanding at December 31, 1999 and 81,517,446
shares issued and 81,411,088 shares outstanding at
December 31, 1998..................................... 842 814
GZMO Stock, $0.01 par value, 40,000,000 shares
authorized; 13,421,018 shares issued and outstanding
at December 31, 1999 and 12,648,295 shares issued and
outstanding at December 31, 1998...................... 134 126
GZSP Stock, $0.01 par value, 60,000,000 shares
authorized; 14,835,161 shares issued and outstanding
at December 31,1999................................... 148 --
GZTR Stock, $0.01 par value, 40,000,000 shares
authorized; 28,503,728 shares issued and 28,498,729
shares outstanding at December 31, 1999 and 20,925,809
shares issued and 20,920,810 shares outstanding at
December 31, 1998..................................... 285 209
Treasury common stock, at cost:
GENZ Stock, 106,358 shares at both December 31, 1999 and
1998.................................................... (901) (901)
Additional paid-in capital--Genzyme General................. 469,776 593,042
GCS-26
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(AMOUNTS IN THOUSANDS)
Additional paid-in capital--Genzyme Molecular Oncology...... 67,672 63,427
Additional paid-in capital--Genzyme Surgical Products....... 542,343 365,785
Additional paid-in capital--Genzyme Tissue Repair........... 217,103 174,198
Retained earnings (accumulated deficit)..................... 57,202 (13,779)
Accumulated other comprehensive income (loss)............... 1,788 (10,367)
---------- ----------
Total stockholders' equity.................................. 1,356,392 1,172,554
---------- ----------
Total liabilities and stockholders' equity.................. $1,787,282 $1,688,854
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
GCS-27
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(AMOUNTS IN THOUSANDS)
OPERATING ACTIVITIES:
Net income.................................................. $ 70,981 $ 62,567 $ 13,629
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and amortization............................. 70,651 58,869 50,964
Loss on disposal of fixed assets.......................... 1,008 108 1,258
Non-cash compensation expense............................. 68 8,740 3,160
Equity in loss of unconsolidated affiliates............... 42,696 29,006 12,258
Accrued interest/amortization of marketable securities.... (493) (6,923) (900)
Provisions for bad debts and inventory.................... 18,599 11,990 14,580
Accretion of debt conversion feature...................... -- 3,025 2,028
Gain on affiliate sale of stock........................... (6,683) (2,369) --
Minority interest in net loss of subsidiary............... (3,674) (4,285) --
Gain on sale of product line.............................. (8,018) (31,202) --
Gain on sale of investments in equity securities.......... (1,963) (3,391) --
Charge for impaired investments........................... 5,712 3,397 --
Deferred income tax benefit............................... (6,061) (5,669) (5,061)
Charge for in-process research and development............ 5,436 -- 7,000
Other..................................................... 626 26 528
Increase (decrease) in cash from working capital:
Accounts receivable..................................... (18,682) (46,215) (11,076)
Inventories............................................. (15,258) 27,907 (29,299)
Prepaid expenses and other assets....................... 12,215 (11,987) (10,062)
Accounts payable, accrued expenses, income taxes payable
and deferred revenue.................................. 36,851 17,509 (9,333)
--------- --------- ---------
Net cash provided by operating activities............. 204,011 111,103 39,674
INVESTING ACTIVITIES:
Purchases of investments.................................... (509,177) (441,487) (147,897)
Sales and maturities of investments......................... 438,530 136,605 81,185
Proceeds from sale of investments in equity securities...... 11,090 9,564 --
Acquisitions of property, plant and equipment............... (57,724) (39,467) (29,309)
Sale of property, plant and equipment....................... 188 1,262 852
Proceeds from sale of product line.......................... 5,000 24,760 --
Acquisitions, net of acquired cash and assumed
liabilities............................................... (6,500) (9,949) 9
Purchase of technology rights............................... (11,400) (15,100) --
Purchase of investments in equity securities................ (17,700) (25,783) (13,993)
Investments in unconsolidated affiliates.................... (46,621) (21,974) --
Loans to affiliates......................................... -- (1,000) (4,601)
Proceeds from notes receivable.............................. 8,360 -- --
Repayment of loans by affiliates............................ -- 3,019 --
Final distribution from joint venture....................... 881 -- --
Other....................................................... 2,859 (5,592) (1,419)
--------- --------- ---------
Net cash used in investing activities................. (182,214) (385,142) (115,173)
The accompanying notes are an integral part of these consolidated financial
statements.
GCS-28
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED 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...................... 59,986 76,860 156,036
Proceeds from issuance of debt.............................. 5,000 250,000 32,127
Payments of debt............................................ (85,081) (38,833) (101,115)
Bank overdraft.............................................. 9,625 -- --
Other....................................................... 2,289 1,884 --
-------- -------- --------
Net cash (used in) provided by financing activities... (8,181) 289,911 87,048
Effect of exchange rate changes on cash..................... (2,072) 334 (2,275)
-------- -------- --------
Increase in cash and cash equivalents....................... 11,544 16,206 9,274
Cash and cash equivalents at beginning of period............ 118,612 102,406 93,132
-------- -------- --------
Cash and cash equivalents at end of period.................. $130,156 $118,612 $102,406
======== ======== ========
Supplemental disclosures of cash flows:
Cash paid during the year for:
Interest.................................................. $ 20,151 $ 17,385 $ 9,811
Income taxes.............................................. $ 30,992 $ 24,463 $ 18,887
Supplemental disclosures of non-cash transactions:
Other gains and charges--Note B.
Dispositions of assets--Note C.
Acquisitions--Note D.
Investment in unconsolidated affiliate--Note I.
Conversion of 5% convertible subordinated note--Note K.
Conversion of 6% convertible subordinated debentures into 5%
convertible subordinated debentures--Note K.
Warrant exercise--Note L.
Distributions of GZMO, GZSP and GZTR designated shares--
Note L.
The accompanying notes are an integral part of these consolidated financial
statements.
GCS-29
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SHARES IN THOUSANDS DOLLARS IN THOUSANDS
------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
COMMON STOCKS:
GENZ STOCK:
Balance at beginning of year........................ 81,395 77,693 75,537 $ 814 $ 777 $ 755
Issuance of GENZ Stock under stock plans............ 2,850 3,695 2,117 28 37 22
Exercise of warrants................................ -- 7 39 -- -- --
------ ------ ------ ----- ----- -----
Balance at end of year.............................. 84,245 81,395 77,693 $ 842 $ 814 $ 777
====== ====== ====== ===== ===== =====
GZMO STOCK:
Balance at beginning of year........................ 12,648 3,929 -- $ 126 $ 39 $ --
Issuance of GZMO Stock under stock plans............ 129 1 -- 2 -- --
Exercise of warrants................................ -- 1 -- -- -- --
Issuance of GZMO designated shares.................. 27 8,717 -- -- 87 --
Issuance of GZMO Stock in connection with the
purchase of joint venture interest................ 617 -- -- 6 -- --
Issuance of GZMO Stock in connection with the
acquisition of PharmaGenics....................... -- -- 3,929 -- -- 39
------ ------ ------ ----- ----- -----
Balance at end of year.............................. 13,421 12,648 3,929 $ 134 $ 126 $ 39
====== ====== ====== ===== ===== =====
GZSP STOCK:
Balance at beginning of year........................ -- -- -- $ -- $ -- $ --
Initial distribution of GZSP designated shares...... 14,792 -- -- 148 -- --
Issuance of GZSP Stock under stock plans............ 43 -- -- -- --
------ ------ ------ ----- ----- -----
Balance at end of year.............................. 14,835 -- -- $ 148 $ -- $ --
====== ====== ====== ===== ===== =====
GZTR STOCK:
Balance at beginning of year........................ 20,921 19,941 13,162 $ 209 $ 199 $ 132
Issuance of GZTR Stock under stock plans............ 320 756 487 3 8 4
Issuance of GZTR designated shares.................. -- 2,292 -- -- 23
Shares issued in public offering.................... -- -- 4,000 -- -- 40
Issuance of GZTR Stock in connection with conversion
of 6% convertible note............................ 7,258 224 -- 73 2 --
------ ------ ------ ----- ----- -----
Balance at end of year.............................. 28,499 20,921 19,941 $ 285 $ 209 $ 199
====== ====== ====== ===== ===== =====
TREASURY COMMON STOCK (AT COST):
GENZ Stock:
Balance at beginning of year.......................... (106) (106) (106) $(901) $(901) $(890)
Purchases............................................. -- -- -- -- -- (11)
------ ------ ------ ----- ----- -----
Balance at end of year................................ (106) (106) (106) $(901) $(901) $(901)
====== ====== ====== ===== ===== =====
The accompanying notes are an integral part of these consolidated financial
statements.
GCS-30
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
ADDITIONAL PAID-IN CAPITAL:
GENZYME GENERAL:
Balance at beginning of year............................ $593,035 $571,530 $572,879
Issuance of GENZ Stock under stock plans................ 59,587 74,323 35,888
Exercise of warrants.................................... -- 289 855
Allocation to Genzyme Tissue Repair for GZTR designated
shares................................................ (4,937) -- (14,892)
Tax benefit from disqualified dispositions.............. 24,238 18,561 4,127
Allocation of cash to Genzyme Molecular Oncology for
GZMO designated shares................................ -- (5,000) (2,886)
Allocation to Genzyme Surgical Products................. (176,706) (41,975) (25,669)
Exchange of 6% debentures convertible into shares of
GZMO Stock for 5% debentures convertible into shares
of GENZ Stock......................................... -- (19,802) --
Conversion of note receivable from Genzyme Molecular
Oncology into GZMO designated shares.................. -- (2,696) --
Transfer of interest in joint venture from Genzyme
Tissue Repair......................................... (25,000) -- --
Loss on purchase of facility from Genzyme Tissue
Repair................................................ -- (711) --
Payment to Genzyme Tissue Repair for research program... (100) (250) --
Stock compensation expense.............................. 58 48 1,218
Purchase of treasury stock.............................. -- -- 10
Other................................................... (399) (1,282) --
-------- -------- --------
Balance at end of year.................................. $469,776 $593,035 $571,530
======== ======== ========
GENZYME MOLECULAR ONCOLOGY:
Balance at beginning of year............................ $ 63,427 $ 34,517 $ --
Issuance of GZMO Stock under stock plans................ 306 7 --
Issuance of GZMO Stock in connection with declared
dividend of GZMO designated shares.................... -- (87) --
Conversion of note payable to Genzyme General into GZMO
designated shares..................................... -- 2,696 --
Issuance of GZMO Stock in connection with the
acquisition of PharmaGenics........................... -- -- 27,330
Sale of warrants........................................ -- -- 724
Value of debt conversion feature........................ -- -- 3,529
Exchange of 6% debentures convertible into shares of
GZMO Stock for 5% debentures convertible into shares
of GENZ Stock......................................... -- 19,802 --
Allocation from Genzyme General for GZMO designated
shares................................................ -- 5,000 2,886
Shares issued upon purchase of joint venture interest... 3,929 -- --
Stock compensation expense (unearned compensation),
net................................................... 10 113 (116)
Other................................................... -- 1,379 164
-------- -------- --------
Balance at end of year.................................. $ 67,672 $ 63,427 $ 34,517
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
GCS-31
GENZYME CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
GENZYME SURGICAL PRODUCTS:
Balance at beginning of year.............................. $365,785 $323,810 $298,141
Allocation from Genzyme General........................... 176,706 41,975 25,669
Initial distribution of GZSP designated shares............ (148) -- --
-------- -------- --------
Balance at end of year.................................... $542,343 $365,785 $323,810
======== ======== ========
GENZYME TISSUE REPAIR:
Balance at beginning of year.............................. $174,198 $170,430 $122,385
Issuance of GZTR Stock under stock plans.................. 458 2,101 2,434
Issuance of GZTR designated shares........................ -- -- (23)
Issuance of GZTR Stock in public offering................. -- -- 28,997
Issuance of GZTR Stock in connection with conversion of 6%
convertible note........................................ 12,410 598 --
Value of debt conversion feature.......................... -- -- 1,524
Gain on transfer of interest in joint venture to Genzyme
General................................................. 25,000 -- --
Gain on transfer of facility.............................. -- 711 --
Payment from Genzyme General for research program......... 100 250 --
Allocation from Genzyme General for GZTR designated
shares.................................................. 4,937 -- 14,892
Stock compensation expense (unearned compensation), net... -- 108 221
-------- -------- --------
Balance at end of year.................................... $217,103 $174,198 $170,430
======== ======== ========
RETAINED EARNINGS (ACCUMULATED DEFICIT):
Balance at beginning of year.............................. $(13,779) $(76,346) $(89,975)
Net income................................................ 70,981 62,567 13,629
-------- -------- --------
Balance at end of year.................................... $ 57,202 $(13,779) $(76,346)
======== ======== ========
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Balance at beginning of year.............................. $(10,367) $(12,005) $ (1,118)
Foreign currency translation adjustments.................. (14,883) 7,681 (11,704)
Unrealized gains (losses) on investments.................. 27,038 (6,043) 817
-------- -------- --------
Accumulated other comprehensive income (loss)............. $ 1,788 $(10,367) $(12,005)
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
GCS-32
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
We are a biotechnology company that develops innovative products and
services for significant unmet medical needs. We have four operating divisions:
- Genzyme General, which develops and markets:
- therapeutic products, with an expanding focus on products to treat
patients suffering from lysosomal storage disorders and other specialty
therapeutics;
- diagnostic products, with a focus on IN VITRO diagnostics; and
- other products and services, such as genetic testing services and
lipids and peptides for drug delivery.
- Genzyme Molecular Oncology, which is developing cancer products, with a
focus on therapeutic vaccines and angiogenesis inhibitors;
- Genzyme Surgical Products, which develops, manufactures and markets
surgical products for cardiovascular surgery and general surgery; and
- Genzyme Tissue Repair, which develops and markets biological products for
orthopedic injuries, such as cartilage damage, and severe burns.
We currently have four designated series of common stock. Each of these
series is intended to reflect the value and track the performance of one of our
divisions. We refer to our series of common stock by their Nasdaq trading
symbols:
- Genzyme General Division Common Stock = "GENZ Stock;"
- Genzyme Molecular Oncology Division Common Stock = "GZMO Stock;"
- Genzyme Surgical Products Division Common Stock = "GZSP Stock;" and
- Genzyme Tissue Repair Division Common Stock = "GZTR Stock."
In June 1999, we created Genzyme Surgical Products. The business of Genzyme
Surgical Products previously operated as a business unit of Genzyme General.
Upon the creation of Genzyme Surgical Products, we transferred $150.0 million in
cash, cash equivalents and investments, and certain other assets, from Genzyme
General to Genzyme Surgical Products. In exchange, 14.8 million shares of GZSP
Stock were distributed as a dividend to holders of GENZ Stock. We restated
Genzyme General's financial statements, including earnings per share
information, for all periods prior to the creation of Genzyme Surgical Products
to reflect the ongoing business of Genzyme General.
BASIS OF PRESENTATION; PRINCIPLES OF CONSOLIDATION
Our consolidated financial statements for each period include the balance
sheets, results of operations and cash flows of each of our divisions and
corporate operations taken as a whole. We eliminate all significant intracompany
items and transactions in consolidation. We have reclassified certain 1998 and
1997 data to conform with our 1999 presentation.
We use the equity method to account for our investments in entities in which
we have a substantial ownership interest (20% to 50%), or in which we
participate in policy decisions. Our consolidated net
GCS-33
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
income includes our share of the earnings of these entities. We report at fair
value our investments in entities in which our ownership interest is less than
20%.
FINANCIAL INFORMATION
For purposes of financial presentation, we allocate our programs, products,
assets and liabilities among our four operating divisions and prepare, in
addition to the accompanying consolidated financial statements, separate
financial statements for each division in accordance with generally accepted
accounting principles. Notwithstanding the allocation of assets and liabilities
among our divisions, Genzyme Corporation continues to hold title to all of the
assets and is responsible for all of the liabilities allocated to each division.
Holders of each series of our common stock are common stockholders of Genzyme
Corporation and have no specific rights to the assets to which each series of
common stock relates.
DIVIDEND POLICY
We have never paid a cash dividend on shares of our stock. We currently
intend to retain our earnings to finance future growth and do not anticipate
paying any cash dividends on our stock in the foreseeable future.
USE OF ESTIMATES
Under generally accepted accounting principles, we are required to make
certain estimates and assumptions that affect reported amounts of assets,
liabilities, revenues, expenses, and disclosure of contingent assets and
liabilities in our financial statements. Our actual results could differ from
these estimates.
FINANCIAL INSTRUMENTS
A number of financial instruments subject us to significant credit risk,
including cash and cash equivalents, current and non-current investments, and
accounts receivable. We generally invest our cash in investment-grade securities
to mitigate risk.
CASH AND CASH EQUIVALENTS
We value our cash and cash equivalents at cost plus accrued interest, which
we believe approximates their market value. Our cash equivalents consist
principally of money market funds and municipal notes with initial maturities of
three months or less.
INVESTMENTS
We classify our investments with remaining maturities of twelve months or
less as short-term investments. We classify our investments with remaining
maturities of greater than twelve months as long-term investments.
We classify our investments in debt securities as either held-to-maturity or
available-for-sale based on facts and circumstances present at the time we
purchase the securities. We report available-for-sale investments at fair value
as of each balance sheet date and include any unrealized holding gains and
GCS-34
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
losses (the adjustment to fair value) in stockholders' equity. If any adjustment
to fair value reflects a decline in the value of the investment, we consider all
available evidence to evaluate the extent to which the decline is "other than
temporary" and mark the investment to market through a charge to our statement
of operations. As of each balance sheet date presented, we classified all of our
investments in debt securities as available-for-sale.
We classify all of our equity investments as available-for-sale. If our
investment is in a publicly traded security, we calculate fair value based on
market quotations. Investments in equity securities for which fair value is not
readily determinable are carried at cost.
INVENTORIES
We value inventories at cost or, if lower, fair value. We determine cost
using the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT
We record property, plant and equipment at cost. When we dispose of these
assets, we remove the related cost and accumulated depreciation and amortization
from the related accounts on our balance sheet and include any resulting gain or
loss in our statement of operations.
We generally compute depreciation using the straight-line method over the
estimated useful lives of the assets. We compute useful lives as follows:
- plant and equipment--three to ten years
- furniture and fixtures--five to seven years
- buildings--20 to 40 years
We depreciate certain specialized manufacturing equipment and facilities
allocated to Genzyme General over their remaining useful lives using the
units-of-production method. We evaluate the remaining life and recoverability of
this equipment periodically based on the appropriate facts and circumstances.
We amortize leasehold improvements over their useful life or, if shorter,
the term of the applicable lease.
For products we expect to be commercialized, we capitalize, to
construction-in-progress, the costs we incur in validating and optimizing the
manufacturing process. We begin this capitalization when we consider the product
to have demonstrated technological feasibility and end this capitalization when
the asset is substantially complete and ready for its intended use. These
capitalized costs include incremental labor and direct material, and incremental
fixed overhead and interest. We generally depreciate these costs using the
units-of-production method.
INTANGIBLES
Our intangible assets consist of:
- goodwill;
GCS-35
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- covenants not to compete;
- customer lists; and
- patents, trademarks, trade names and other technology rights.
We amortize intangible assets using the straight-line method over useful
lives of three to 40 years. We evaluate the recoverability of our intangible and
other long-lived assets when the facts and circumstances suggest that these
assets may be impaired. When we conduct such an evaluation we consider several
factors including operating results, business plans, economic projections,
strategic plans and market emphasis. Our evaluations also compare expected
cumulative, undiscounted operating incomes or cash flows of these assets with
the net book values of the related intangible assets. We charge unrealizable
intangible and long-lived asset values to operations if our evaluations indicate
that the value of these assets are impaired.
TRANSLATION OF FOREIGN CURRENCIES
We translate the financial statements of our foreign subsidiaries from local
currency into U.S. dollars using:
- the current exchange rate at each balance sheet date for assets and
liabilities; and
- the average exchange rate prevailing during each period for revenues and
expenses.
We consider the local currency for all of our foreign subsidiaries to be the
functional currency for that subsidiary. As a result, we included translation
adjustments for these subsidiaries in stockholders' equity. We also record as a
charge or credit to stockholders' equity exchange gains and losses on
intercompany balances that are of a long-term investment nature. Our
stockholders' equity includes cumulative foreign currency adjustments of
$19.7 million at December 31, 1999 and $4.8 million at December 31, 1998.
Our gains and losses on all other foreign currency transactions are included
in our results of operations. We recorded a net gain of $0.1 million in 1999, a
net gain of $0.3 million in 1998 and a net loss of $0.3 million in 1997.
FOREIGN CURRENCY HEDGING
We periodically enter into forward contracts to reduce our foreign currency
exchange risk. On each balance sheet date, we revalue these contracts using the
exchange rates that are then in effect. We include in net income all gains and
losses resulting from these revaluations, although these amounts are not
material to our financial statements. We had $6.0 million outstanding in foreign
currency forward contracts at December 31, 1999. These forward contracts, which
were denominated in Euros, had a fair value of $0.7 million. We allocated these
contracts to Genzyme General. We had no forward contracts at December 31, 1998.
INTEREST RATE HEDGE AGREEMENTS
We use interest rate hedge agreements to mitigate the interest rate risks
and costs that are inherent in our debt portfolio. We enter into these
agreements primarily to change the fixed/variable interest rate mix of the
portfolio, which reduces our exposure to movements in interest rates. We do
GCS-36
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
not hold or issue derivative financial instruments for trading purposes. We
recognize in income any differential that we may receive or pay under contracts
designated as hedges. This recognition occurs over the life of the applicable
contract as an adjustment to interest expense. We estimate the fair value of
interest rate hedge agreements based on the amount it would cost to terminate
the agreements.
REVENUE RECOGNITION
We recognize revenue from product sales when we ship the product and title
has passed, net of any applicable third party contractual allowances and
rebates. We recognize revenue from service sales when we have finished providing
the service or when we have achieved an applicable milestone. We recognize
revenue from research and development contracts over the term of the applicable
contract and as we incur costs related to that contract. Up-front license fees
and milestone payments are recognized as revenue only if there are no remaining
performance obligations and the fees are non-refundable.
RESEARCH AND DEVELOPMENT
We expense research and development costs in the period incurred. We also
expense the cost of purchased technology in the period of purchase if we believe
that the technology has not demonstrated technological feasibility and that it
does not have an alternative future use.
ISSUANCE OF STOCK BY A SUBSIDIARY OR AN AFFILIATE
We include gains on the issuance of stock by our subsidiaries and affiliates
in net income unless that subsidiary or affiliate is a research and development,
start-up or development stage company or an entity whose viability as a going
concern is under consideration. In those situations, we account for the change
in our equity ownership of that subsidiary or affiliate as an equity
transaction.
INCOME TAXES
We use the asset and liability method of accounting for deferred income
taxes. Our provision for income taxes includes income taxes currently payable
and those deferred because of temporary differences between the financial
statement and tax bases of assets and liabilities.
We have not provided for possible U.S. taxes on the undistributed earnings
of foreign subsidiaries. We do not believe it is practicable to determine the
tax liability associated with the repatriation of our foreign earnings because
it is our policy to indefinitely reinvest these earnings in non-U.S. operations.
At December 31, 1999, these undistributed foreign earnings totaled approximately
$6.0 million.
NET INCOME (LOSS) PER SHARE
We calculate earnings per share of each of our operating divisions. To
calculate basic earnings per share for each division, we divide the earnings
attributable to that division by the weighted average number of outstanding
shares of that division's tracking 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 a particular division, we take that
division's net income or loss for the applicable period (determined in
GCS-37
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
accordance with generally accepted accounting principles) and adjust it for the
tax benefits allocated to or from that division in accordance with our
management and accounting policies.
The following tables set forth our computation of basic and diluted earnings
per share:
GENZYME GENERAL:
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.
GCS-38
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(5) We did not include the securities described in the following table in the
computation of Genzyme General's diluted earnings per share for each period
because these securities had an exercise price greater than the average
market price of GENZ Stock:
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.
GENZYME MOLECULAR ONCOLOGY:
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.
For all periods presented, 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 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, 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 a draw under an equity line of credit in 1998 will decrease
based on a formula set forth in our charter.
GCS-39
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GENZYME SURGICAL PRODUCTS:
We disclose PRO FORMA net loss per share for Genzyme Surgical Products for
all periods presented because GZSP Stock was not outstanding during the entirety
of each of these periods.
For all periods presented, basic and diluted net loss per GZSP common share
are the same. We did not include the securities described in the following table
in the computation of Genzyme Surgical Products' diluted net loss per share for
each period because these securities would have an anti-dilutive effect due to
Genzyme Surgical Products' net loss per share.
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
Shares of GZSP Stock issuable for options.............. 2,991 -- --
GZSP designated shares issuable upon conversion of
5 1/4% convertible subordinated notes allocated to
Genzyme General(1)................................... 1,130 -- --
----- ----- -----
Total shares excluded from the diluted pro forma net
loss per GZSP share calculation...................... 4,121 -- --
===== ===== =====
- ------------------------
(1) GZSP designated shares are shares of GZSP Stock that are not issued and
outstanding, but which our board of directors may issue, sell or distribute
without allocating the proceeds to Genzyme Surgical Products.
GENZYME TISSUE REPAIR:
For all periods presented, basic and diluted net loss per GZTR common share
are the same. We did not include the securities described in the following table
in the computation of Genzyme Tissue Repair's diluted net loss per share for
each period because these securities would have an anti-dilutive effect due to
Genzyme Tissue Repair's net loss per share.
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
Shares of GZTR Stock issuable for options................... 4,176 3,398 2,777
GZTR designated shares(1)................................... 2,238 716 885
Shares of GZTR Stock issuable upon conversion of 5%
convertible subordinated note............................. -- 7,810 1,772
----- ------ -----
Total shares excluded from the diluted net loss per GZTR
share calculation......................................... 6,414 11,924 5,434
===== ====== =====
- ------------------------
(1) 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.
GCS-40
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
As of January 1, 1998, we adopted SFAS 130, "Reporting Comprehensive
Income," which establishes standards for reporting comprehensive income, which
consists of net income and all changes in equity from non-shareholder sources.
ACCOUNTING FOR STOCK BASED COMPENSATION
As permitted under SFAS 123, we include PRO FORMA net income and PRO FORMA
earnings per share information (calculated using the fair value based method)
under the heading "Compensation Expense" in note L to these consolidated
financial statements.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133, as
amended by SFAS 137, is effective for our fiscal year beginning January 1, 2001.
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that we recognize all
derivative instruments as either assets or liabilities on our balance sheets and
measure those instruments at fair value. We are currently assessing the effects
of adopting SFAS 133 and have not yet made a determination of the impact SFAS
133 will have on our consolidated financial statements.
UNCERTAINTIES
We are subject to risks and uncertainties common to companies in the
biotechnology industry. These risks and uncertainties may affect our future
results, and include:
- our ability to successfully complete preclinical and clinical development
of our products and services;
- our ability to manufacture sufficient amounts of our products for
development and commercialization activities;
- our ability to obtain timely regulatory approval of our products and
services;
- our ability to obtain and maintain adequate patent and other proprietary
rights protection of our products and services;
- the content and timing of decisions made by the FDA and other regulatory
agencies regarding our products and services;
- the accuracy of our estimates of the size and characteristics of the
markets to be addressed by our products and services;
- market acceptance of our products and services;
- our ability to obtain reimbursement for our products and services by third
party payers;
- our ability to establish and maintain licenses, strategic collaborations
and distribution arrangements;
GCS-41
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- the continued funding of our joint ventures; and
- the accuracy of our information regarding the products and resources of
our competitors and potential competitors.
NOTE B. OTHER GAINS AND CHARGES
During the fourth quarter of 1999, we recorded a net gain of $14.4 million
upon receipt of a payment associated with the termination of our agreement to
acquire Cell Genesys, Inc. We recorded this gain as other income in our
statement of operations and allocated it to Genzyme General.
During the third quarter of 1998, we recorded a $25.2 million charge to cost
of products sold. The components of this charge are:
- a $14.8 million charge allocated to Genzyme General to write down excess
inventory used to make Ceredase-Registered Trademark- enzyme. We took this
charge following our determination that, based on the status of our
efforts to convert Gaucher disease patients to a treatment regimen using
Cerezyme-Registered Trademark- enzyme, our existing supply of
Ceredase-Registered Trademark- enzyme was sufficient to meet estimated
patient needs.
- a $10.4 million charge allocated to Genzyme Surgical Products to write
down our inventory of Sepra products to net realizable value. The Sepra
products are our line of products and product candidates designed to limit
post-operative adhesions.
We also recorded $29.1 million in other charges in the fourth quarter of
1997. The components of these charges are:
- an $18.1 million charge to cost of products sold to write down excess
inventory in our melatonin, bulk pharmaceuticals and fine chemical product
lines. We took this charge, which was allocated to Genzyme General, after
we discontinued these product lines.
- a $5.5 million charge to cost of products sold and a $3.5 million charge
to selling, general and administrative expense relating to the manufacture
and sale of Sepracoat-TM- coating solution. We took these charges, which
were allocated to Genzyme Surgical Products, after an FDA advisory panel
recommended against granting marketing approval for the product.
- a $2.0 million charge to other expense relating to our uncertainty in
collecting a note receivable that we issued when we sold Genetic
Design, Inc. This charge was allocated to Genzyme General.
NOTE C. DISPOSITIONS OF ASSETS
SYBRON LABORATORY PRODUCTS
In July 1999, we sold the assets of our immunochemistry product line to an
operating unit of Sybron Laboratory Products Corp. for $5.0 million in cash. We
recorded a gain of $0.5 million in connection with the sale of this product
line. The immunochemistry product line had been allocated to Genzyme General.
GCS-42
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C. DISPOSITIONS OF ASSETS (CONTINUED)
LABORATORY CORPORATION OF AMERICA
In 1996, we sold Genetic Design to Laboratory Corporation of America. A
portion of the purchase price was a note for which we previously had fully
reserved because of uncertainty regarding collection. In April 1999, we received
an $8.4 million payment on that note and recorded a $7.5 million gain in
connection with that payment. Genetic Design had been allocated to Genzyme
General.
TECHNE
In July 1998, we sold the assets of our research products business to Techne
Corporation in exchange for:
- $24.8 million in cash;
- approximately 987,000 shares of Techne common stock; and
- royalties on product sales by Techne's biotechnology group through
June 2003.
We will record royalty income as it is earned. In 1998, we recorded a
$31.2 million gain in connection with the sale of this business and an
additional $3.4 million gain upon the sale of a portion of our investment in
Techne common stock. We recorded these gains as gain on sale of equity
investments. In 1999, we recorded a gain of $2.0 million upon the sale of our
remaining shares of Techne common stock. The research products business had been
allocated to Genzyme General.
NOTE D. ACQUISITIONS
PEPTIMMUNE
In July 1999, we acquired Peptimmune, Inc., a privately-held company whose
lead development program focuses on a treatment for pemphigus vulgaris. We
allocated this acquisition to Genzyme General and accounted for it as a
purchase. We allocated the aggregate purchase price of $6.5 million and assumed
liabilities of $0.3 million to the tangible and intangible assets we acquired
from Peptimmune based on their respective fair values (amounts in thousands):
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. We recorded this amount as a
charge to operations.
PHARMAGENICS
In June 1997, we acquired PharmaGenics, Inc., a company engaged in the
research and development of products for the treatment of cancer and other
diseases. We 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
GCS-43
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D. ACQUISITIONS (CONTINUED)
$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)..................... 12,293
Deferred tax asset.......................................... 2,900
Deferred tax liability (to be amortized over 3 years)....... (7,600)
In-process technology....................................... 7,000
-------
Total..................................................... $34,851
=======
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' programs that were still in the development stage and
for which there was no alternative future use. We assigned values to all of
PharmaGenics' programs (both complete and in-process) by selecting the maximum
anticipated value of these programs and comparing them to the values of
comparable technologies. In 1997, we recorded a one-time charge to operations
for the amount of the purchase price allocated to in-process technology.
The deferred tax liability of $7.6 million results from the temporary
difference between the book and tax basis of the completed technology computed
at a 38.0% incremental tax rate.
NOTE E. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
We periodically enter into interest rate swap contracts to reduce borrowing
costs by effectively modifying the interest rate under our debt instruments. We
generally enter into these contracts concurrently with the issuance of the debt
they are intended to modify. The notional amount, interest payment and maturity
dates of these contracts generally match the principal, interest payment and
maturity dates of the related debt. As a result, any market risk or opportunity
associated with a swap contract is fully offset by the opposite market impact on
the related debt. We record payments that we make or receive under these
contracts as interest expense.
NOTE F. ACCOUNTS RECEIVABLE AND INTANGIBLE ASSETS
Our trade receivables primarily represent amounts due from distributors,
healthcare service providers, and companies and institutions engaged in
research, development or production of pharmaceutical and biopharmaceutical
products. We perform credit evaluations of our customers on an ongoing basis and
generally do not require collateral. We state accounts receivable at fair value
after reflecting an allowance for doubtful accounts. This allowance was
$19.3 million at December 31, 1999 and $13.9 million at December 31, 1998.
Our net intangible assets include $162.2 million in goodwill as of
December 31, 1999 and $178.0 million in goodwill as of December 31, 1998. This
goodwill is primarily a result of acquisitions.
Our accumulated amortization of intangible assets was $87.6 million as of
December 31, 1999 and $70.7 million as of December 31, 1998.
GCS-44
GENZYME CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G. INVENTORIES
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(AMOUNTS IN THOUSANDS)
Raw materials........................................... $ 39,958 $ 41,328
Work-in-process......................................... 44,559 27,474
Finished products....................................... 32,752 41,031
-------- --------
Total................................................. $117,269 $109,833
======== ========
NOTE H. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(AMOUNTS IN THOUSANDS)
Plant and equipment..................................... $246,068 $257,706
Land and buildings...................................... 188,892 156,067
Leasehold improvements.................................. 93,159 71,425
Furniture and fixtures.................................. 17,374 17,619
Construction-in-progress................................ 28,371 30,805
-------- --------
$573,864 $533,622
Less accumulated depreciation........................... (190,683) (151,003)
-------- --------
Property, plant and equipment, net...................... $383,181 $382,619
======== ========
Our depreciation expense was $40.7 million in 1999, $39.2 million in 1998,
and $33.5 million in 1997.
We attribute our fixed assets among our operating divisions based on use.
We have capitalized approximately $39.4 million, which represents the costs
we have incurred in validating and optimizing the manufacturing process for
products which have reached technological feasibility. We have capitalized the
following amounts of interest costs incurred in financing the construction of
our manufacturing facilities:
1999 1998 1997
- ------------ ------------ ------------
$ 1.0
million..... $0.7 million $0.5 million
GCS-45
NOTE I. INVESTMENTS
MARKETABLE SECURITIES
DECEMBER 31,
-------------------------------------------------
1999 1998
----------------------- -----------------------
COST MARKET VALUE COST MARKET VALUE
-------- ------------ -------- ------------
(AMOUNTS IN THOUSANDS)
Cash equivalents(1):
Corporate notes............................... $ 51,038 $ 51,023 $ 8,131 $ 8,129
Money market fund............................. 26,527 26,527 70,805 70,805
-------- -------- -------- --------
$ 77,565 $ 77,550 $ 78,936 $ 78,934
======== ======== ======== ========
Short-term:
Corporate notes............................... $252,711 $251,779 $175,002 $175,453
Federal....................................... 4,065 4,067 -- --
-------- -------- -------- --------
$256,776 $255,846 $175,002 $175,453
======== ======== ======== ========
Long-term:
Corporate notes............................... $175,080 $172,387 $226,002 $226,259
Federal....................................... 4,081 4,026 33,412 33,581
U.S. Treasury notes........................... 90,904 90,575 21,323 21,824
-------- -------- -------- --------
$270,065 $266,988 $280,737 $281,664
======== ======== ======== ========
Investments in equity securities.............. $ 63,983 $ 97,859 $ 62,244 $ 51,977
======== ======== ======== ========
- ------------------------
(1) Cash equivalents are included as part of cash and cash equivalents on our
balance sheet.
We attribute marketable securities among our operating divisions.
REALIZED AND UNREALIZED GAINS AND LOSSES ON MARKETABLE SECURITIES AND EQUITY
INVESTMENTS
We recorded gains of $2.0 million in 1999 and $3.4 million in 1998 upon the
sale of our investment in shares of Techne common stock. We also recorded
charges of $5.7 million in 1999 and $3.4 million in 1998 because we considered
the decline in the value of certain strategic investments in collaborators'
common stock to be other than temporary.
We record gross unrealized holding gains and losses in stockholders' equity.
The following table sets forth the amount we recorded:
DECEMBER 31,
-----------------------------
1999 1998
------------- -------------
Unrealized holding gains........................ $37.1 million $3.6 million
Unrealized holding losses....................... $6.9 million $12.5 million
GCS-46
NOTE I. INVESTMENTS (CONTINUED)
The following table contains information regarding the range of contractual
maturities of our investments in debt securities:
DECEMBER 31,
-------------------------------------------------
1999 1998
----------------------- -----------------------
COST MARKET VALUE COST MARKET VALUE
-------- ------------ -------- ------------
(AMOUNTS IN THOUSANDS)
Within 1 years.......................... $334,341 $333,396 $253,939 $254,387
1-2 years............................... 168,704 166,152 259,363 259,788
2-10 years.............................. 101,361 100,836 21,373 21,876
-------- -------- -------- --------
$604,406 $600,384 $534,675 $536,051
======== ======== ======== ========
We attribute strategic investments in equity securities of unconsolidated
entities among our operating divisions. We attribute all of the investments
included in the following table to Genzyme General except for our investment in
Focal, Inc., which we attribute to Genzyme Surgical Products.
DECEMBER 31, 1999
-------------------------------------
ADJUSTED UNREALIZED
COST MARKET VALUE GAIN/(LOSS)
-------- ------------ -----------
(AMOUNTS IN THOUSANDS)
Entity
Abiomed, Inc................................ $15,804 $42,404 $26,600
Aronex Pharmaceutical Inc................... 1,693 1,323 (370)
BioMarin Pharmaceutical Inc................. 18,000 24,705 6,705
Celtrix Pharmaceuticals, Inc. (1)........... 4,898 8,692 3,794
Dyax Corporation............................ 3,000 3,000 --
Focal, Inc.................................. 4,000 3,140 (860)
GelTex Pharmaceuticals, Inc................. 2,500 1,281 (1,219)
Genovo, Inc................................. 3,400 3,400 --
Integramed America, Inc. (2)................ 117 115 (2)
Pharming Group, N.V. (3).................... 7,886 7,723 (163)
Other....................................... 2,076 2,076 --
------- ------- -------
Total..................................... $63,374 $97,859 $34,485
======= ======= =======
DECEMBER 31, 1998
----------------------------------------------
ADJUSTED COST MARKET VALUE UNREALIZED LOSS
------------- ------------ ---------------
(AMOUNTS IN THOUSANDS)
Total................................. $62,244 $51,977 $10,267
======= ======= =======
- ------------------------
(1) In December 1998, we determined that a portion of the impairment in our
investment in Celtrix was other than temporary and recorded a charge to
operations of $3.4 million.
(2) In December 1999, we determined that a portion of the impairment in our
investment in Integramed America was other than temporary and recorded a
charge to operations of $0.2 million.
(3) Our investment in Pharming is denominated in Euros. We translated this
investment into U.S. dollars at the current exchange rate on December 31,
1999. In June 1999, we determined that a
GCS-47
NOTE I. INVESTMENTS (CONTINUED)
portion of the impairment in our investment in Pharming was other than
temporary and recorded a charge to operations of $5.5 million.
GENZYME TRANSGENICS CORPORATION
At December 31, 1999, we owned approximately 33% of the outstanding common
stock of GTC and record in net loss of unconsolidated affiliates our portion of
its results. We refer to Genzyme Transgenics in this note as "GTC." Our portion
of GTC's net losses was $7.1 million in 1999, $7.4 million in 1998, and
$2.9 million in 1997. The fair market value of our investment in GTC common
stock was $93.8 million on December 31, 1999 and $41.8 million on December 31,
1998.
In November 1999, we purchased $6.6 million in shares of Series B
convertible preferred stock of GTC. We can convert these shares into shares of
GTC common stock at any time at a price of $6.30 per share. We will receive an
escalating annual dividend of between 11% and 12% on amounts that we convert
into common stock.
Our Chairman and Chief Executive Officer is a director of GTC.
The following table contains condensed statement of operations and balance
sheet data for GTC:
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
Revenues....................................... $ 68,784 $ 62,412 $ 62,938
Operating loss................................. (2,666) (19,365) (8,352)
Net loss....................................... (18,761) (19,950) (9,343)
AT DECEMBER 31,
-------------------------
1999 1998
-------- --------
(AMOUNTS IN THOUSANDS)
Current assets........................................ $29,604 $32,417
Noncurrent assets..................................... 54,708 50,920
Current liabilities................................... 43,471 37,297
Noncurrent liabilities................................ 14,676 9,836
AGREEMENTS WITH GTC
We have a number of agreements with GTC, including the following:
- services agreement under which GTC pays us for services provided by us,
including treasury, data processing and laboratory support services.
- sublease agreement under which we sublease a portion of one of our
facilities in Framingham, Massachusetts; and
- research and development agreement under which each of the parties
performs research services for the other.
During 1999, we received approximately $2.2 million from GTC under these
agreements and we paid GTC approximately $1.2 million under the research and
development agreement. At December 31, 1999, GTC owed Genzyme $0.5 million under
these agreements.
We have guaranteed GTC's obligations under a $17.5 million revolving credit
facility and a $7.1 million term loan with a commercial bank. In exchange for
this guarantee, GTC issued us a
GCS-48
NOTE I. INVESTMENTS (CONTINUED)
warrant to purchase up to 288,000 shares of GTC common stock at an exercise
price of $4.875 per share. Of these shares, 192,000 are currently exercisable.
GTC also issued us a warrant to purchase 145,000 shares of GTC common stock at
an exercise price of $2.84375 per share in connection with our guarantee of
GTC's obligations under a prior credit facility. All of the shares subject to
this warrant are exercisable.
We have also made a $6.3 million line of credit available to GTC. No amounts
were outstanding under this credit line as of December 31, 1999. This credit
line expires in March 2000. Upon expiration, GTC may convert any outstanding
balance into a three-year term loan. The line of credit requires GTC to meet
financial covenants similar to those under GTC's bank credit facility.
ATIII LLC. In 1998, we formed ATIII LLC, a joint venture with GTC for the
development and commercialization of recombinant human transgenic antithrombin
III, which we refer to as ATIII. Both parties contributed applicable
intellectual property to the joint venture. We will fund 70% of the first
$33.0 million in development costs under the program and 50% of all development
costs thereafter. All profits from the sale of ATIII will be split equally. To
the extent that either party fails to fund its share of costs and expenses, the
profit sharing interests and the future funding obligations of the parties may
be proportionately adjusted. ATIII LLC has the right to commercialize ATIII
worldwide, excluding Asia. We are required to make milestone payments to GTC
upon the occurrence of certain events. GTC will manufacture ATIII in bulk form
and we will perform the finished processing work. As the exclusive distributor
for ATIII LLC, we will market and sell products for the joint venture in the
territory. We consolidate the results of ATIII LLC and record GTC's portion of
the losses of that joint venture as minority interest.
DYAX CORP.
In March 1996, we entered into two license agreements with Dyax Corp. and
Protein Engineering Corporation, a wholly-owned subsidiary of Dyax, for Dyax's
phage display technology. We pay annual license maintenance fees of $50,000 for
this license. We will also make milestone payments and pay royalties on net
sales of diagnostic and therapeutic products discovered, made or developed using
the licensed technology. In September 1996, we subleased office and laboratory
space in Cambridge, Massachusetts to Dyax. Current rent under this sublease is
$53,943 per month.
In October 1998, we entered into a collaboration agreement with Dyax to
develop and commercialize one of Dyax's proprietary compounds for the treatment
of chronic inflammatory diseases. Dyax will fund the first $6.0 million in
development costs, and the parties will split all subsequent development costs
equally. In connection with that agreement, we made an investment of
$3.0 million in the convertible preferred stock of Dyax and made a $3.0 million
line of credit available to help Dyax fund its operations. To date, Dyax has not
borrowed any money under the line of credit. We will make milestone payments to
Dyax upon FDA approval of products that arise out of the collaboration, and we
will share equally with Dyax all profits from the sale of these products.
One of our directors is chairman and chief executive officer of Dyax and
three of our directors are directors of Dyax.
GCS-49
NOTE I. INVESTMENTS (CONTINUED)
INVESTMENTS IN JOINT VENTURES
Except as described below, we own a 50% interest in the following joint
ventures:
JOINT VENTURE PARTNER(S) EFFECTIVE DATE PRODUCT/INDICATION GENZYME DIVISION
- ------------- ---------- -------------- ------------------ ----------------
RenaGel LLC GelTex Pharmaceuticals, June 1997 Renagel-Registered Trademark- Genzyme General
Inc.(1) capsules for the reduction of
serum phosphorus in patients
with end-stage renal disease
BioMarin/ Genzyme LLC BioMarin Pharmaceutical September 1998 Alpha-L-iduronidase for the Genzyme General
Inc. treatment of
mucopolysaccharidosis-I
Pharming/ Genzyme LLC Pharming Group, N.V. October 1998 Human alpha-glucosidase for the Genzyme General
treatment of Pompe disease
Diacrin/ Genzyme LLC Diacrin, Inc.(2) October 1996 Products using porcine fetal cells Genzyme Tissue
for the treatment of Parkinson's Repair (until May
and Huntington's diseases 1999); Genzyme
General (after May
1999)
StressGen/ Genzyme StressGen July 1997 Stress gene therapies for the Genzyme Molecular
LLC(3) Biotechnologies Corp.; treatment of cancer Oncology
Canadian Medical
Discoveries Fund Inc.
(until October 1999)
- ------------------------------
(1) Our Chairman and Chief Executive Officer is a director of GelTex and one of
our other directors is Chairman of GelTex.
(2) Our Chairman and Chief Executive Officer is a director of Diacrin.
(3) We owned a 33 1/3% interest in StressGen/Genzyme LLC until October 1999,
when we repurchased one-half of the Canadian Medical Discoveries Fund's
interest. Following that repurchase, we owned a 50% interest in
StressGen/Genzyme LLC. StressGen/Genzyme LLC was dissolved in
December 1999.
The following table describes:
- the amount of funding we have provided to each joint venture to date;
- our portion of the losses of each joint venture for the periods presented,
which we have recorded as charges to equity in net loss of unconsolidated
affiliates in our statement of operations; and
GCS-50
NOTE I. INVESTMENTS (CONTINUED)
- amounts due to us by each joint venture as of December 31, 1999 for
services we provided on behalf of the joint venture, which we have
recorded on our balance sheet as prepaids and other current assets.
NET LOSSES FROM RECEIVABLES
TOTAL FUNDING AS OF JOINT VENTURE FOR THE YEAR AS OF
JOINT VENTURE DECEMBER 31, 1999 ENDED DECEMBER 31 DECEMBER 31, 1999
- ------------- ------------------- ------------------------------------------- -----------------
1999 1998 1997
------------- ------------ ------------
RenaGel LLC(1)............. $29.1 million $ 8.1 million $7.5 million $2.3 million $2.1 million
BioMarin/
Genzyme LLC.............. $ 8.3 million $ 7.0 million $0.9 million -- $0.5 million
Pharming/ Genzyme
LLC...................... $14.9 million $10.3 million $4.0 million -- $0.4 million
Diacrin/Genzyme
LLC...................... $23.7 million $ 8.0 million $7.6 million $6.8 million $1.0 million
StressGen/
Genzyme LLC(2)........... $ 0.7 million $ 1.9 million $1.6 million $0.3 million --
- ------------------------
(1) As part of this joint venture, we made payments to GelTex of $10.0 million
in 1999 and $15.0 million in 1998 in exchange for certain technology access
rights. We capitalized these payments and are amortizing these amounts over
15 years.
(2) Because the Canadian Medical Discoveries Fund had the right to require us to
repurchase the fund's interest in the joint venture, we recorded 50% of the
losses incurred by the joint venture. When the fund exercised its repurchase
right in August 1999, we recorded a $1.0 million charge to our statement of
operations in connection with the repurchase.
Condensed financial information for our joint ventures, including the
allocation of losses, is summarized below:
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
(AMOUNTS IN THOUSANDS)
Revenue.......................................... $ 21,100 $ 226 $ --
Gross profit..................................... 13,738 153 --
Operating expenses............................... (59,981) (32,555) (12,109)
Net loss......................................... (52,453) (34,000) (11,830)
DECEMBER 31,
-----------------------
1999 1998
-------- --------
(AMOUNTS IN THOUSANDS)
Current assets.............................................. $28,293 $15,161
Noncurrent assets........................................... 8,157 7,429
Current liabilities......................................... 13,155 10,618
Noncurrent liabilities...................................... -- 4,574
GCS-51
NOTE J. ACCRUED EXPENSES
DECEMBER 31,
-------------------------
1999 1998
-------- --------
(AMOUNTS IN THOUSANDS)
Compensation.......................................... $25,909 $23,310
Technology access fee................................. -- 10,000
Professional fees..................................... 3,908 6,146
Royalties............................................. 7,667 6,895
Rebates............................................... 7,125 5,663
Other................................................. 28,650 20,375
------- -------
$73,359 $72,389
======= =======
NOTE K. LONG-TERM DEBT AND LEASES
LONG-TERM DEBT
While Genzyme Corporation is responsible for repaying all long-term debt
obligations, we allocate these obligations to our operating divisions for
financial reporting purposes based on the intended use of the funds.
Our long-term debt consists of the following:
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(AMOUNTS IN THOUSANDS)
5 1/4% convertible subordinated notes................... $250,000 $250,000
Revolving credit facility maturing in November 2002..... 23,000 --
Revolving credit facility maturing in November 1999..... -- 100,000
5% convertible subordinated debentures.................. 22,622 21,559
6% convertible subordinated note........................ -- 12,579
Mortgage notes.......................................... -- 3,167
-------- --------
295,622 387,305
-------- --------
Less current portion.................................... (5,000) (100,080)
-------- --------
$290,622 $287,225
======== ========
Over the next five years, we will be required to repay the following
principal amounts on our long-term debt (excluding capital leases):
2000 2001 2002 2003 2004 AFTER 2004
- ------------ ------------ ------------- ------------- ------------ --------------
$5.0 million $0.0 million $18.0 million $22.6 million $0.0 million $250.0 million
REVOLVING CREDIT FACILITY
In November 1999, our $225 million revolving credit facility matured. We
refinanced this facility with a $50.0 million revolving credit facility that
matures in November 2000 and a $100.0 million revolving credit facility that
matures in November 2002. When we refinanced the credit facility,
$100.0 million was outstanding. Of this amount, we:
- repaid the $82.0 million that was allocated to Genzyme General; and
GCS-52
NOTE K. LONG-TERM DEBT AND LEASES (CONTINUED)
- refinanced the $18.0 million that was allocated to Genzyme Tissue Repair
under the new credit facility.
Loans under the new credit facility bear interest at LIBOR plus an
applicable margin pursuant to the terms and conditions defined in the credit
agreement, and are collateralized by the stock of Genzyme Securities
Corporation. This facility requires us to satisfy a number of financial
covenants.
At December 31, 1999, $23.0 million was outstanding under the facility that
matures in November 2002. Of this amount, $5.0 million was allocated to Genzyme
Molecular Oncology and $18.0 million was allocated to Genzyme Tissue Repair. The
interest rate on these borrowings was approximately 6.8%.
5 1/4% CONVERTIBLE SUBORDINATED NOTES
In May 1998, we issued $250.0 million in principal of 5 1/4% convertible
subordinated notes due June 2005. After deducting the initial purchasers'
discount and offering costs, we received $243.0 million in proceeds from this
issuance.
We pay interest on the notes on June 1 and December 1 of each year and made
the first interest payment in December 1998. The notes are convertible into one
share of GENZ Stock, 0.10805 share of GZMO Stock and 0.17901 share of GZSP Stock
at a price of $39.60 and contain anti-dilution adjustments. We may redeem all or
part of the notes at our option after June 10, 2001 at the following prices
(expressed as a percentage of the principal amount), plus accrued interest:
ON OR BEFORE 5/31/02 6/1/02--5/31/03 6/1/03--5/31/04 ON OR AFTER 6/1/04
- -------------------- --------------- --------------- ------------------
102.63% 101.75% 100.88% 100.00%
The fair value of these notes at December 31, 1999 was $317.5 million.
6% CONVERTIBLE SUBORDINATED NOTE
In February 1997, we issued a 6% convertible subordinated note in a
principal amount of $13.0 million. This note was convertible into shares of GZTR
Stock at a discount to the market value of that stock. We recorded charges to
interest expense of $0.2 million in 1999, $0.5 million in 1998 and $1.1 million
in 1997, to reflect the accretion to fair value of the conversion feature of
this note.
In 1998, the holder of this note converted $0.6 million in principal amount
into 223,405 shares of GZTR Stock. We paid $1.1 million in accrued interest in
connection with these conversions. In 1999, the holder converted the remaining
$12.4 million in principal amount into 7,257,573 shares of GZTR Stock. We paid
$0.5 million in accrued interest in connection with these conversions. As of
December 31, 1999, there was no principal or interest remaining on this
convertible note.
5% CONVERTIBLE SUBORDINATED DEBENTURES
In August 1997, we issued $20.0 million in principal of 6% convertible
subordinated debentures. These debentures were convertible into shares of GZMO
Stock at a discount to the market value of that stock. We recorded charges to
interest expense of $1.9 million in 1998 and $0.9 million in 1997 to reflect the
accretion to fair value of the conversion feature of the 6% debentures. In
accordance with the terms of these debentures, they were exchanged in
August 1998 for $21.2 million in principal of 5% convertible subordinated
debentures due August 2003. These debentures are convertible into shares of 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.
GCS-53
NOTE K. LONG-TERM DEBT AND LEASES (CONTINUED)
MORTGAGE NOTES
In 1999, we repaid the remaining $3.1 million of principal and accrued
interest of $0.1 million under our mortgage note due in December 2000. This
obligation had been allocated to Genzyme General.
OPERATING LEASES
We lease facilities and personal property under operating leases with terms
in excess of one year. Our total expense under operating leases was:
1999 1998 1997
---- ---- ----
$22.2
million...... $18.4 million $16.3 million
Over the next five years, we will be required to repay the following amounts
under operating leases:
2000 2001 2002 2003 2004 AFTER 2004
- ------------- ------------- ------------- ------------- ------------- --------------
$17.5 million $17.0 million $15.7 million $13.6 million $13.1 million $119.9 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 were $1.5
million in 1999 and 1998 and $1.3 million in 1997. Our rent under this lease
increases every five years based on the Consumer Price Index or, if higher, 3%
per year.
NOTE L. STOCKHOLDERS' EQUITY
PREFERRED STOCK
Our charter permits us to issue shares of preferred stock at any time in one
or more series. Our board of directors will establish the preferences, voting
powers, qualifications, and special or relative rights or privileges of any
series of preferred stock before it is issued.
STOCK RIGHTS
Under our shareholder rights plan, each outstanding share of GENZ Stock,
GZMO Stock, GZSP Stock and GZTR Stock also represents one preferred stock
purchase right for that series of stock. When the stock purchase rights become
exercisable, the holders of our common stock will be entitled to purchase the
following:
- GENZ stock right: 0.01 share of Series A Junior Participating Preferred
Stock for $300.00;
- GZMO stock right: 0.01 share of Series C Junior Participating Preferred
Stock for $26.00;
- GZSP stock right: 0.01 share of Series D Junior Participating Preferred
Stock for $150.00; and
- GZTR stock right: 0.01 share of Series B Junior Participating Preferred
Stock for $26.00.
These stock purchase rights expire in March 2009.
STOCK OFFERINGS
In 1997, we sold 4,000,000 shares of GZTR Stock for net proceeds of
$29.0 million.
GCS-54
NOTE L. STOCKHOLDERS' EQUITY (CONTINUED)
DIRECTORS' DEFERRED COMPENSATION PLAN
Each member of our board of directors who is not also one of our officers or
employees may defer receipt of all or a portion of the cash compensation payable
to him or her as a director and receive either cash or stock in the future.
Under this plan, the director may defer his or her compensation until his or her
services as a director cease or until another date specified by the director. As
of December 31, 1999, one of the six eligible directors was participating in
this plan. We have reserved the following numbers of shares to cover
distributions credited to stock accounts under the plan:
- 50,000 shares of GENZ Stock;
- 50,000 shares of GZMO Stock;
- 50,000 shares of GZSP Stock; and
- 100,000 shares of GZTR Stock.
We had not made any distributions under this plan as of December 31, 1999.
EQUITY PLANS
At December 31, 1999, we had reserved the following numbers of shares for
issuance under our 1990 Equity Incentive Plan, 1997 Equity Plan, 1998 Director
Stock Option Plan, and 1999 Employee Stock Purchase Plan:
- 13,126,000 shares of GENZ Stock;
- 4,011,000 shares of GZMO Stock;
- 3,800,000 shares of GZSP Stock; and
- 5,544,000 shares of GZTR Stock.
STOCK OPTIONS
The following number of shares are currently authorized and available for
grant under our 1990 Equity Incentive Plan and 1997 Equity Plan:
- 24,500,000 shares of GENZ Stock;
- 3,500,000 shares of GZMO Stock;
- 3,200,000 shares of GZSP Stock; and
- 5,300,000 shares of GZTR Stock.
We grant stock options with exercise prices not less than fair market value
at date of grant. The plans provide for the grant of stock appreciation rights,
performance shares, restricted stock and stock units. Each of these instruments
has a maximum term of ten years and generally vest over four years.
The following number of shares are currently authorized and available for
grant under our director stock option plan:
- 340,000 shares of GENZ Stock;
- 140,000 shares of GZMO Stock;
- 100,000 shares of GZSP Stock; and
GCS-55
NOTE L. STOCKHOLDERS' EQUITY (CONTINUED)
- 200,000 shares of GZTR Stock.
Options under the director plan are automatically granted with an exercise
price at fair market value to members of our board of directors when they are
elected or re-elected as directors. These options expire ten years after the
initial grant date and generally vest over four years.
The following table depicts activity under our various stock option plans:
WEIGHTED
SHARES UNDER AVERAGE NUMBER
OPTION EXERCISE PRICE EXERCISABLE
------------ -------------- -----------
GENZ STOCK:
Outstanding at December 31, 1996................. 14,065,483 $20.48 6,505,835
Granted........................................ 2,083,936 29.86
Exercised...................................... (1,760,934) 16.25
Forfeited and cancelled........................ (1,041,218) 23.77
-----------
Outstanding at December 31, 1997................. 13,347,267 22.22 6,982,224
Granted........................................ 2,482,222 29.61
Exercised...................................... (3,319,203) 20.11
Forfeited and cancelled........................ (917,556) 27.21
-----------
Outstanding at December 31, 1998................. 11,592,730 24.00 5,579,267
Granted........................................ 1,647,719 43.43
Granted--premium price......................... 1,272,376 58.97
Exercised...................................... (2,526,838) 20.63
Forfeited and cancelled........................ (376,480) 30.22
-----------
Outstanding at December 31, 1999................. 11,609,507 $31.11 5,633,053
===========
GZMO STOCK:
Outstanding at June 18, 1997..................... --
Granted........................................ 826,334 $ 7.00
-----------
Outstanding at December 31, 1997................. 826,334 7.00 180,063
Granted........................................ 386,867 6.83
Exercised...................................... (886) 7.00
Forfeited and cancelled........................ (54,530) 7.00
-----------
Outstanding at December 31, 1998................. 1,157,785 6.96 391,044
Granted........................................ 286,363 3.46
Granted--premium price......................... 402,615 5.39
Exercised...................................... (362) 3.50
Forfeited and cancelled........................ (37,291) 6.67
-----------
Outstanding at December 31, 1999................. 1,809,110 $ 6.14 656,648
===========
GZSP STOCK:
Outstanding at June 28, 1999................... --
Granted........................................ 3,050,690 $ 6.65
Exercised...................................... 0 --
Forfeited and cancelled........................ (60,120) 6.69
-----------
Outstanding at December 31, 1999................. 2,990,570 $ 6.65 563,048
===========
GCS-56
NOTE L. STOCKHOLDERS' EQUITY (CONTINUED)
WEIGHTED
SHARES UNDER AVERAGE NUMBER
OPTION EXERCISE PRICE EXERCISABLE
------------ -------------- -----------
GZTR STOCK:
Outstanding at December 31, 1996................. 2,574,219 $10.73 739,421
Granted........................................ 636,605 9.84
Exercised...................................... (100,407) 5.21
Forfeited and cancelled........................ (333,655) 12.75
-----------
Outstanding at December 31, 1997................. 2,776,762 10.50 1,084,532
Granted........................................ 996,019 5.44
Exercised...................................... (71,491) 4.83
Forfeited and cancelled........................ (303,344) 10.47
-----------
Outstanding at December 31, 1998................. 3,397,946 9.13 1,464,732
Granted........................................ 667,120 2.22
Granted--premium price......................... 402,615 7.71
Exercised...................................... (357) 2.09
Forfeited and cancelled........................ (291,558) 7.49
-----------
Outstanding at December 31, 1999................. 4,175,766 $ 8.02 1,905,031
===========
In 1999, we granted the following stock options with exercise prices above
fair market value:
- 1,272,376 shares of GENZ Stock at 120% of fair market value on the date of
grant;
- 402,615 shares of GZMO Stock at 200% of fair market value on the date of
grant; and
- 402,615 shares of GZTR Stock at 200% of fair market value on the date of
grant.
The total exercise proceeds for all options outstanding at December 31, 1999
is:
- $361,260,000 for GENZ Stock;
- $11,106,000 for GZMO Stock;
- $19,897,000 for GZSP Stock, and
- $33,482,000 for GZTR Stock.
The following table contains information regarding the range of option
prices as of December 31, 1999:
GENZ STOCK:
WEIGHTED EXERCISABLE
AVERAGE -------------------------------
NUMBER REMAINING WEIGHTED WEIGHTED
RANGE OF OUTSTANDING CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES AS OF 12/31/99 LIFE EXERCISE PRICE AS OF 12/31/99 EXERCISE PRICE
- --------------------- -------------- ----------- -------------- -------------- --------------
$8.19--$19.44 2,710,664 3.94 $15.92 1,840,504 $16.48
19.50--27.56 2,456,522 6.80 26.06 1,342,620 25.30
27.63--28.00 829,734 6.09 27.96 761,791 27.97
28.06--58.06 4,325,198 8.03 35.81 1,688,138 31.73
58.88--62.33 1,287,389 9.08 58.98 0 0.00
---------- ---- ------ --------- ------
$8.19--$62.33 11,609,507 6.79 $31.11 5,633,053 $24.71
GCS-57
NOTE L. STOCKHOLDERS' EQUITY (CONTINUED)
GZMO STOCK:
WEIGHTED EXERCISABLE
AVERAGE -------------------------------
NUMBER REMAINING WEIGHTED WEIGHTED
RANGE OF OUTSTANDING CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES AS OF 12/31/99 LIFE EXERCISE PRICE AS OF 12/31/99 EXERCISE PRICE
- --------------------- -------------- ----------- -------------- -------------- --------------
$2.31--$5.75 658,396 9.18 $4.63 39,627 $3.48
7.00 1,150,714 7.97 7.00 617,021 7.00
--------- ---- ----- ------- -----
$2.31--$7.00 1,809,110 8.41 $6.14 656,648 $6.79
GZSP STOCK:
WEIGHTED EXERCISABLE
AVERAGE -------------------------------
NUMBER REMAINING WEIGHTED WEIGHTED
RANGE OF OUTSTANDING CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES AS OF 12/31/99 LIFE EXERCISE PRICE AS OF 12/31/99 EXERCISE PRICE
- --------------------- -------------- ----------- -------------- -------------- --------------
$4.63--$5.94 79,400 9.86 $5.33 0 $0.00
6.69--7.50 2,911,170 9.65 6.69 563,048 6.69
--------- ---- ----- ------- -----
$4.63--$7.50 2,990,570 9.66 $6.65 563,048 $6.69
GZTR STOCK:
WEIGHTED EXERCISABLE
AVERAGE -------------------------------
NUMBER REMAINING WEIGHTED WEIGHTED
RANGE OF OUTSTANDING CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES AS OF 12/31/99 LIFE EXERCISE PRICE AS OF 12/31/99 EXERCISE PRICE
--------------------- -------------- ----------- -------------- -------------- --------------
$1.63-$3.50 859,572 9.20 $2.41 83,128 $2.31
4.03-6.50 1,244,702 6.32 5.60 942,694 5.37
6.63-9.88 976,902 8.32 8.58 315,066 9.36
10.00-17.50 1,048,037 6.21 14.35 527,816 12.98
17.63-25.75 46,553 6.10 22.10 36,327 22.01
--------- ---- ----- --------- -----
$1.63-$25.75 4,175,766 7.35 $8.02 1,905,031 $8.32
GCS-58
EMPLOYEE STOCK PURCHASE PLAN
Our 1999 Employee Stock Purchase Plan is an amendment and replacement of our
1990 Employee Stock Purchase Plan. This plan allows employees to purchase our
stock at 85% of fair market value. The number of shares authorized for purchase
under the plan are:
- 589,299 shares of GENZ Stock;
- 500,000 shares of GZMO Stock;
- 500,000 shares of GZSP Stock; and
- 500,001 shares of GZTR Stock.
We place limitations on the number of shares of each series of stock that can be
purchased under the plan in a given year.
The following table shows the shares purchased by employees under both
plans:
SHARES ISSUED GENZ STOCK GZMO STOCK GZTR STOCK
- ------------- ---------- ---------- ----------
1997..................................... 366,922 0 280,819
1998..................................... 388,048 0 515,936
1999..................................... 313,180 126,066 208,375
Available for purchase as of
December 31, 1999...................... 351,472 373,934 345,744
As of December 31, 1999, we had not offered shares of GZSP Stock for sale to
employees.
STOCK COMPENSATION PLANS
We apply APB Opinion 25 and related interpretations in accounting for our
five stock-based compensation plans: the 1990 Equity Incentive Plan, the 1997
Equity Plan (both of which are stock option plans), the 1990 Employee Stock
Purchase Plan, the 1999 Employee Stock Purchase Plan, and the 1998 Director
Stock Option Plan. We do not recognize compensation expense for options granted
and shares purchased under the provisions of these plans for options granted to
employees with an exercise price greater than or equal to fair market value.
The following table sets forth net income (loss) and income (loss) per share
data 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 (in the
case of Genzyme Surgical Products, disclosure is presented only for the year
ended
GCS-59
December 31, 1999, because we had not granted options to purchase GZSP Stock
under these plans prior to 1999):
1999 1998 1997
--------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
CONSOLIDATED:
Net income (loss):
As reported............................................. $ 70,981 $ 62,567 $ 13,629
Pro forma............................................... $ 46,382 $ 43,986 $ (2,150)
GENZYME GENERAL
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
GENZYME MOLECULAR ONCOLOGY:
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)
GENZYME SURGICAL PRODUCTS:
Net loss:
As reported............................................. $(48,037) -- --
Pro forma............................................... $(50,583) -- --
Basic and diluted loss per share:
As reported............................................. $ (3.25) -- --
Pro forma............................................... $ (3.42) -- --
GENZYME TISSUE REPAIR:
Net loss:
As reported............................................. $(30,040) $(40,386) $(45,984)
Pro forma............................................... $(33,292) $(44,481) $(49,547)
Basic and diluted loss per share:
As reported............................................. $ (1.26) $ (1.99) $ (3.07)
Pro forma............................................... $ (1.40) $ (2.19) $ (3.31)
GCS-60
We estimate the fair value of each option grant using the Black-Scholes
option-pricing model. In computing these PRO FORMA amounts, we used the
following assumptions:
RISK-FREE DIVIDEND TERM OF GRANT
INTEREST RATE VOLATILITY YIELD (IN YEARS) AVERAGE FAIR VALUE
------------- ---------- -------- ------------- ------------------
GENZYME GENERAL:
1999.................................... 5.58% 45% 0 5 $20.31
1998.................................... 5.59% 44% 0 4 $12.87
1997.................................... 5.96% 42% 0 4 $12.21
GENZYME MOLECULAR ONCOLOGY:
1999.................................... 5.58% 70% 0 5 $ 2.16
1998.................................... 5.59% 70% 0 4 $ 3.92
1997.................................... 5.96% 45% 0 4 $ 2.97
GENZYME SURGICAL PRODUCTS:
1999.................................... 5.58% 42% 0 5 $ 2.99
GENZYME TISSUE REPAIR:
1999.................................... 5.58% 68% 0 5 $ 1.36
1998.................................... 5.59% 73% 0 4 $ 3.27
1997.................................... 5.96% 70% 0 4 $ 5.66
For stock options that were granted in 1999 at prices above fair market
value, we made the following assumptions:
RISK-FREE DIVIDEND TERM OF GRANT
INTEREST RATE VOLATILITY YIELD (IN YEARS) AVERAGE FAIR VALUE
------------- ---------- -------- ------------- ------------------
Genzyme General..................... 4.73% 45% 0 5 $15.26
Genzyme Molecular Oncology.......... 4.73% 70% 0 5 $ 2.03
Genzyme Tissue Repair............... 4.73% 68% 0 5 $ 1.05
WARRANTS
In 1997, we sold warrants to purchase a total of 120,000 shares of GENZ
Stock for an aggregate purchase price of $1.0 million (Canadian). All of these
warrants were cancelled in August 1999 when the Canadian Medical Discoveries
Fund exercised its right to require us to repurchase the fund's interest in
StressGen/Genzyme LLC.
In 1992 and 1995, we issued warrants which, if exercised between
December 16, 1994 and July 10, 1997, would have entitled the holders to purchase
two shares of GENZ Stock and .0675 share of GZTR Stock. If the holders had
exercised the warrants after July 10, 1997, they would have received two shares
of GENZ Stock and .0975 share of GZTR Stock. We granted these warrants in
exchange for the receipt of options to purchase the callable common stock of
Neozyme II Corporation and in connection with our acquisition of IG
Laboratories, Inc.
GCS-61
Activity for Genzyme General warrants is summarized below:
WARRANTS EXERCISE PRICE
-------- --------------------
Outstanding at December 31, 1996................... 35,319 $16.01--$44.20
Granted.......................................... 120,000 30.18
Exercised........................................ (19,340) 44.20
--------
Outstanding at December 31, 1997................... 135,979 16.01--44.20
--------
Exercised........................................ (13,019) 42.67--44.20
Expired.......................................... (2,960) 44.20
--------
Outstanding at December 31, 1998................... 120,000 30.18
Cancelled........................................ (120,000) 30.18
--------
Outstanding at December 31, 1999................... 0 --
========
When we acquired PharmaGenics in 1997, we assumed a warrant that expires in
2001. This warrant is exercisable into 9,563 shares of GZMO Stock at $8.04 per
share.
DESIGNATED SHARES
Designated shares are authorized shares of GZMO, GZSP and GZTR Stock that
are not issued and outstanding, but which our board of directors may issue, sell
or distribute without allocating the proceeds or benefits to the division that
the series of stock tracks. Designated shares are not eligible to receive
dividends and cannot be voted by Genzyme. We create designated shares when we
transfer cash or other assets from Genzyme General to Genzyme Molecular
Oncology, Genzyme Surgical Products or Genzyme Tissue Repair or from other
interdivision transactions. Our board of directors may issue designated shares:
- as a stock dividend to the holders of GENZ Stock;
- by selling the shares in a public or private sale and allocating all of
the proceeds to Genzyme General; and
- when convertible securities are converted, the proceeds of which will be
allocated to Genzyme General.
DISTRIBUTION OF DESIGNATED SHARES
We will distribute designated shares of GZMO, GZSP and GZTR Stock each year
to holders of GENZ Stock if the number of designated shares of a particular
series exceeds 10% of the number of shares of that series issued and outstanding
as of the following dates:
- November 30, 2000 for GZMO Stock;
- June 30, 2000 for GZSP Stock; and
- May 31, 2000 for GZTR Stock.
We will not distribute designated shares reserved for issuance upon the
exercise or conversion of Genzyme General convertible securities and the number
of designated shares our board of directors may reserve for sale not later than
six months after these dates. Any proceeds from the sale of designated shares
will be allocated to Genzyme General.
GCS-62
Designated share activity is summarized in the following table:
GZMO GZSP GZTR
DESIGNATED DESIGNATED DESIGNATED
SHARES SHARES SHARES
------------ ----------- ----------
Balance at December 31, 1996............ -- -- 1,793,592
Established at merger................. 6,000,000 -- --
Stock options exercised............... -- -- (103,729)
Stock warrants exercised.............. -- -- (2,617)
Exercise of Genzyme Tissue Repair
purchase option..................... -- -- 1,000,000
Increase from equity line............. -- -- 489,810
Dividend distribution................. -- -- (2,292,003)
------------ ----------
Balance at December 31, 1997............ 6,000,000 -- 885,053
Debenture exchange.................... 3,028,571 -- --
Credit facility exchange.............. 385,972 -- --
Increase from equity line (1)......... 714,286 -- --
Dividend distribution................. (8,717,485) -- --
Stock options exercised............... -- -- (167,064)
Stock warrants exercised.............. (1,352) -- (1,721)
------------ ----------
Balance at December 31, 1998............ 1,409,992 -- 716,268
Established........................... -- 16,000,000 --
Dividend distribution................. (14,835,161)
Debenture adjustment.................. 278,245 --
Increase from equity line............. -- -- 1,633,399
Stock options exercised............... -- -- (111,614)
------------ ----------- ----------
Balance at December 31, 1999............ 1,688,237 1,164,839 2,238,053
============ =========== ==========
- ------------------------
(1) 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 this transaction will decrease based on a formula set forth
in our charter.
In October 1999, we adjusted the number of GZMO designated shares reserved
in connection with the exchange in August 1998 of 6% debentures convertible into
GZMO Stock into 5% debentures convertible into GENZ Stock. We made this
adjustment based on the fair market value of GZMO Stock on October 16, 1999 in
accordance with the terms of the exchange established by our board.
In June 1999, we distributed GZSP designated shares to holders of GENZ
Stock.
In November 1998, we distributed GZMO designated shares to holders of GENZ
Stock.
Prior to our acquisition of PharmaGenics, we made a credit facility
available to fund PharmaGenics' operating costs pending completion of the
acquisition. When the acquisition was completed, the $2,450,000 drawn by
PharmaGenics under this facility became a liability allocated to Genzyme
Molecular Oncology. In September 1998, our board of directors approved the
exchange of that credit facility to Genzyme General, plus accrued interest of
$246,080, for GZMO designated shares based on the fair market value of the GZMO
Stock. We reclassified the amount of the note and the accrued interest to
division equity upon the exchange.
GCS-63
In July 1997, we distributed GZTR designated shares to holders of GENZ Stock
and reserved approximately 394,000 GZTR designated shares for issuance upon the
exercise of GENZ Stock options and warrants outstanding on the record date.
We had an option to allocate up to $30.0 million in cash from Genzyme
General to Genzyme Tissue Repair, at $10.00 per GZTR designated share. In
June 1997, our board of directors allocated $10.0 million in cash from Genzyme
General to Genzyme Tissue Repair in exchange for 1,000,000 GZTR designated
shares. This option has expired.
EQUITY LINES OF CREDIT
GENZYME MOLECULAR ONCOLOGY
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 Genzyme Molecular
Oncology issued $20.0 million in convertible 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 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.
GENZYME TISSUE REPAIR
In October 1996, our board of directors made $20.0 million on Genzyme
General's cash available to Genzyme Tissue Repair under an equity line of credit
in order for Genzyme Tissue Repair to fund its obligations under its joint
venture with Diacrin. Under this line, Genzyme Tissue Repair may draw down funds
as needed each quarter in exchange for GZTR designated shares based on the fair
market value of GZTR Stock (as defined in our charter) at the time of the draw.
Genzyme Tissue Repair made a $7.0 million draw under this line in 1997.
In May 1998, our board of directors increased the amount available under
this equity line from $13.0 million to $50.0 million. Genzyme Tissue Repair made
a $5.0 million draw under the line in February 1999. 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.
NOTE M. RESEARCH AND DEVELOPMENT AGREEMENTS
Our revenues from research and development agreements with related parties
include the following:
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS)
Genzyme Transgenics Corporation......................... $1,516 $3,568 $8,041
StressGen/Genzyme LLC................................... 496 2,177 315
------ ------ ------
$2,012 $5,745 $8,356
====== ====== ======
GCS-64
We allocate all of our research and development agreements with
unconsolidated affiliates to our operating divisions based on the business to
which the research relates.
AGREEMENTS ALLOCATED TO GENZYME GENERAL
GENZYME TRANSGENICS. Note I., "Investments," contains disclosure regarding
our relationship with Genzyme Transgenics.
JOINT VENTURES. Note I., "Investments," contains disclosure regarding the
following joint ventures:
- RenaGel LLC;
- BioMarin/Genzyme LLC;
- Pharming/Genzyme LLC;
- Diacrin/Genzyme LLC; and
- ATIII LLC.
AGREEMENT ALLOCATED TO GENZYME MOLECULAR ONCOLOGY
Note I., "Investments," contains disclosure regarding StressGen/Genzyme LLC.
AGREEMENTS ALLOCATED TO GENZYME SURGICAL PRODUCTS
Genzyme Development Partners, L.P. was formed in September 1989 to develop,
produce and derive income from the sale of the Sepra products. We refer to
Genzyme Development Partners as GDP. One of our wholly-owned subsidiaries is the
general partner of GDP. In September 1989, we also formed a joint venture with
GDP to manufacture and market the Sepra products in the United States and Canada
for use in human clinical trials or human clinical procedures. We refer to this
joint venture as GVII. We consolidate GVII for financial statement purposes and
allocate it to Genzyme Surgical Products.
We have the option to purchase all of the outstanding partnership interests
in GDP for approximately $26.0 million in cash, common stock or a combination of
both, plus future royalty payments on the sale of the Sepra products. We can
exercise this option during the 90-day period beginning on August 31, 2000. This
option will be accelerated if at any time prior to August 31, 2000 GDP receives
distributions from GVII of at least $5.5 million. While we had no obligation to
fund the research and development activities of GDP, we elected to fund the
following amounts:
1999 1998 1997
- ------------ ------------ ------------
$ 9.0
million..... $8.4 million $7.3 million
We have agreed to fund GDP's research and development programs and general
and administrative expenses during 2000. We believe, however, that additional
funds will be required to complete the development, clinical testing and
commercialization of GDP's products.
NOTE N. COMMITMENTS AND CONTINGENCIES
We periodically become subject to legal proceedings and claims arising in
connection with our business. We do not believe that there were any asserted
claims against us as of December 31, 1999 which, if adversely decided, would
have a material adverse effect on our results of operations, financial
condition, or liquidity.
GCS-65
NOTE O. INCOME TAXES
Our 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)
Domestic(1).................................... $101,548 $ 92,923 $16,907
Foreign........................................ 16,380 9,514 8,822
-------- -------- -------
Total...................................... $117,928 $102,437 $25,729
======== ======== =======
Currently payable:
Federal...................................... $ 41,638 $ 32,501 $11,344
State........................................ 2,990 6,375 1,754
Foreign...................................... 5,733 4,016 2,971
-------- -------- -------
Total...................................... $ 50,361 $ 42,892 $16,069
======== ======== =======
Deferred:
Federal...................................... $ (3,036) $ (2,180) $(3,723)
State........................................ (378) (842) (246)
-------- -------- -------
Total...................................... (3,414) $ (3,022) $(3,969)
======== ======== =======
Provision for income taxes................... $ 46,947 $ 39,870 $12,100
======== ======== =======
- ------------------------
(1) Includes $5.4 million in charges for purchased research and development and
acquisition expenses in 1999 and $7.0 million in similar charges in 1997 as
well as $5.7 million in charges for impaired investments in 1999.
Our 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 less than 80% owned subsidiaries with no
current tax benefit.................................. 0.2 1.7 3.1
State taxes, net....................................... 1.3 3.5 3.0
Foreign sales corporation.............................. (4.0) (3.2) (6.7)
Nondeductible amortization............................. 3.3 4.2 10.6
Benefit of tax credits................................. (3.3) (3.9) (7.7)
Nondeductible interest and other....................... 3.9 1.6 (0.4)
---- ---- -----
Effective tax rate before certain charges.............. 36.4% 38.9% 36.9%
---- ---- -----
Charge for impaired investment......................... 1.7%
Charge for purchased research and development net of
related tax benefit.................................. 1.7% -- 10.1%
---- ---- -----
Effective tax rate..................................... 39.8% 38.9% 47.0%
==== ==== =====
GCS-66
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...................... $ 5,568 $ 6,853
Tax credits........................................... 10,648 3,714
Deferred loss......................................... -- 2,002
Intangible amortization............................... 38,757 42,717
Investments in unconsolidated subsidiaries............ 3,396 3,108
Realized and unrealized capital losses................ 11,405 10,139
Reserves, accruals and other.......................... 48,531 44,509
-------- --------
Gross deferred tax asset................................ $118,305 $113,042
Valuation allowance..................................... (18,963) (16,700)
-------- --------
$ 99,342 $ 96,342
Deferred tax liabilities:
Depreciable assets.................................... (24,736) (28,479)
Realized and unrealized capital gains................. (12,686) --
Deferred gain......................................... (878) --
Intangible amortization............................... (1,213) (3,861)
-------- --------
Net deferred tax asset................................ $ 59,829 $ 64,002
======== ========
As a result of uncertainty surrounding our ability to realize certain
favorable tax attributes that primarily relate to capital losses from the
purchase of in-process research and development, we placed valuation allowances
of $19.0 million in 1999 and $16.7 million in 1998 against otherwise
recognizable deferred tax assets.
Our ability to realize the benefit of net deferred tax assets is dependent
on our generating sufficient taxable income before loss carryforwards expire.
While it is not assured, we believe that it is more likely than not that we will
be able to realize all of our net deferred tax assets. The amount we can
realize, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
For U.S. income tax purposes, we had net operating loss carryforwards of
$15.9 million in 1999 and $19.6 million in 1998. Our net operating loss
carryforwards expire between 2003 and 2019. Prior to expiration, our ability to
use these carryforwards may be limited under U.S. tax laws, specifically
Section 382 of the Internal Revenue Code.
Approximately, $10.6 million of the tax carryforwards we have available for
federal income tax purposes relate to exercises of non-qualified stock options
and disqualifying dispositions of incentive stock options. The tax benefits from
stock exercises under these plans, if realized, will be credited to additional
paid-in capital.
NOTE P. BENEFIT PLANS
We have a 401(k) plan that covers nearly all of our employees. We also
maintain a separate 401(k) plan for the former employees of Deknatel Snowden
Pencer, Inc., which we acquired in 1996. These plans permit qualifying employees
to make contributions up to a specified percentage of their
GCS-67
compensation, and we match a portion of those contributions. We contributed the
following amounts to the 401(k) plans:
1999 1998 1997
------------ ------------ ------------
Allocated to Genzyme General.......... $3.9 million $3.0 million $1.1 million
Allocated to Genzyme Surgical 0.8 million
Products............................ 0.8 million 0.8 million
Allocated to Genzyme Tissue Repair.... 0.1 million 0.1 million 0.2 million
------------ ------------ ------------
$4.8 million $3.9 million $2.1 million
============ ============ ============
We also maintain defined-benefit pension plans for qualifying employees of a
number of our foreign subsidiaries and qualifying former employees of Deknatel
Snowden Pencer. We fund pension costs as they are accrued. Our expense related
to these plans was:
1999 1998 1997
------------ ------------ ------------
Allocated to Genzyme General.......... $1.3 million $0.8 million $0.8 million
Allocated to Genzyme Surgical 0.5 million
Products............................ 0.3 million 0.3 million
------------ ------------ ------------
$1.8 million $1.1 million $1.1 million
============ ============ ============
We do not present actuarial and other disclosures for these plans because we
do not consider them to be material.
NOTE Q. SEGMENT INFORMATION
In accordance with SFAS 131, "Disclosures about Segments of an Enterprise
and Related Information." We present segment information in a manner consistent
with the method we use to report this information to our management. Applying
SFAS 131, we have five reportable segments:
- Therapeutics, which develops, manufactures and distributes human
therapeutic products for significant unmet medical needs. The business
derives substantially all of its revenue from sales of
Cerezyme-Registered Trademark- enzyme.
- Diagnostic Products, which provides diagnostic products to niche markets,
focusing on in vitro diagnostics.
- Genzyme Molecular Oncology, which is developing cancer products, with a
focus on therapeutic vaccines and angiogenesis inhibitors.
- Genzyme Surgical Products, which develops, manufactures and markets
surgical products for cardiovascular surgery and general surgery.
- Genzyme Tissue Repair, which develops and markets biological products for
orthopedic injuries, such as cartilage repair, and severe burns.
GCS-68
We have provided information concerning the operations in these reportable
segments in the following table:
DECEMBER 31,
-------------------------------
1999 1998 1997
--------- -------- --------
(AMOUNTS IN THOUSANDS)
Revenues:
Genzyme General:
Therapeutics............................................ $ 488,705 $413,645 $332,712
Diagnostic Products..................................... 57,971 65,683 66,288
Other................................................... 86,409 85,846 86,927
Genzyme Molecular Oncology................................ 4,619 19,407 782
Genzyme Surgical Products................................. 111,981 103,958 100,835
Genzyme Tissue Repair..................................... 20,402 17,117 10,856
Eliminations/Adjustments.................................. 2,201 3,679 10,441
--------- -------- --------
Total....................................................... $ 772,288 $$709,335 $608,841
========= ======== ========
Depreciation and Amortization Expense:
Genzyme General:
Therapeutics............................................ 21,068 $ 10,862 $ 10,054
Diagnostic Products..................................... 1,909 4,715 4,540
Other................................................... 6,422 11,470 7,410
Genzyme Molecular Oncology................................ 12,057 12,354 5,245
Genzyme Surgical Products................................. 8,181 8,449 8,220
Genzyme Tissue Repair..................................... 1,186 1,757 2,482
Eliminations/Adjustments.................................. 19,828 9,262 13,013
--------- -------- --------
Total....................................................... $ 70,651 $ 58,869 $ 50,964
========= ======== ========
Equity in Net Loss of Unconsolidated Affiliates:
Genzyme General:
Therapeutics............................................ $ (30,094) $(12,480) $ (2,310)
Diagnostic Products..................................... -- -- --
Other................................................... 56 (107) (71)
Genzyme Molecular Oncology................................ (1,870) (1,647) (258)
Genzyme Surgical Products................................. (35) -- --
Genzyme Tissue Repair..................................... (3,368) (7,674) (6,719)
Eliminations/Adjustments.................................. (7,385) (7,098) (2,900)
--------- -------- --------
Total....................................................... $ (42,696) $(29,006) $(12,258)
========= ======== ========
Income Tax (Expense) Benefits:
Genzyme General:
Therapeutics............................................ $ (84,859) $(76,606) $(61,389)
Diagnostic Products..................................... (2,485) (13,755) (1,409)
Other................................................... 2,963 2,134 8,658
Genzyme Molecular Oncology................................ 2,647 2,647 1,092
Genzyme Surgical Products................................. -- -- --
Genzyme Tissue Repair..................................... -- -- --
Eliminations/Adjustments.................................. 34,787 45,710 40,948
--------- -------- --------
Total....................................................... $ (46,947) $(39,870) $(12,100)
========= ======== ========
GCS-69
DECEMBER 31,
-------------------------------
1999 1998 1997
--------- -------- --------
(AMOUNTS IN THOUSANDS)
Net Income:
Genzyme General:
Therapeutics (1)........................................ $ 133,854 $120,832 $104,527
Diagnostic Products(2).................................. 3,915 21,694 2,400
Other (3)............................................... (4,661) (3,367) (14,741)
Genzyme Molecular Oncology................................ (28,832) (19,107) (19,578)
Genzyme Surgical Products(4).............................. (48,037) (31,000) (17,384)
Genzyme Tissue Repair..................................... (30,040) (40,386) (45,984)
Eliminations/Adjustments(5)............................... 44,782 13,901 4,389
--------- -------- --------
Total....................................................... $ 70,981 $ 62,567 $ 13,629
========= ======== ========
- ------------------------
(1) Therapeutics' net income for 1998 includes a $14.8 million charge to write
down excess inventory used to make Ceredase 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) Other net income for 1999 includes a $7.5 million gain on the sale of a
product line.
(4) In 1998, Genzyme Surgical Products recorded a $10.4 million charge to cost
of goods sold to reduce Sepra products inventory to net realizable value.
(5) Includes a $14.4 million gain upon receipt of a payment associated with the
termination of the agreement to acquire Cell Genesys.
Segment Assets:
Genzyme General:
Therapeutics............................................ $ 338,960 $ 326,305
Diagnostic Products..................................... 40,266 49,430
Other................................................... 83,088 94,930
Genzyme Molecular Oncology................................ 9,692 35,952
Genzyme Surgical Products................................. 370,924 277,578
Genzyme Tissue Repair..................................... 19,648 18,954
Eliminations/Adjustments.................................. 924,704 887,405
---------- ----------
Total....................................................... $1,787,282 $1,690,554
========== ==========
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.
GCS-70
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 $575,729
Intangibles, net............................................ 33,871 40,079
Property, plant and equipment, net.......................... 172,165 133,995
Investment in equity securities............................. 94,719 51,977
Other....................................................... 110,044 85,625
-------- --------
Total Eliminations / Adjustments............................ $924,704 $887,405
======== ========
We operate in the healthcare industry and we manufacture and market our
products primarily in the United States and Europe. Our principal manufacturing
facilities are located in the United States, United Kingdom, Switzerland and
Germany. We purchase products from our English and Swiss subsidiaries for sale
to customers in the United States. We set transfer prices from our foreign
subsidiaries to allow us to produce profit margins commensurate with our sales
and marketing effort. Our Dutch subsidiary is our primary distributor of
therapeutic products in Europe.
The following table contains certain financial information by geographic
area:
DECEMBER 31,
----------------------------------
1999 1998 1997
---------- ---------- --------
(AMOUNTS IN THOUSANDS)
Revenues:
U.S...................................................... $ 512,304 $ 485,864 $446,991
Other.................................................... 259,984 223,471 161,850
---------- ---------- --------
Total.................................................. $ 772,288 $ 709,335 $608,841
========== ========== ========
Long-lived assets:
U.S...................................................... $ 732,771 $ 970,898 $755,040
Other.................................................... 52,540 57,247 54,349
---------- ---------- --------
Total.................................................. $ 785,311 $1,028,145 $809,389
========== ========== ========
Our results of operations are highly dependent on sales of
Ceredase-Registered Trademark- and Cerezyme-Registered Trademark- enzymes. Sales
of these products represented 70% of product revenue in 1999, 67% of product
revenue in 1998, and 63% of product revenue in 1997. We sell these products
directly to physicians, hospitals and treatment centers as well as through
unaffiliated distributors. Sales to one distributor represented 20% of
Ceredase-Registered Trademark- and Cerezyme-Registered Trademark- enzyme
revenues in 1999, 19% of these revenues in 1998, and 18% of these revenues in
1997. We believe that our credit risk associated with trade receivables is
mitigated as a result of the fact that we sell these products to a large number
of customers in a number of different industries and over a broad geographic
area.
GCS-71
NOTE R. QUARTERLY RESULTS (UNAUDITED)
1ST QUARTER 2ST QUARTER 3RD QUARTER 4(TH) QUARTER
1999 1999 1999 1999
----------- ----------- ----------- -------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Net revenue...................................... $183,744 $186,684 $191,415 $210,445
Gross profit..................................... 126,526 128,683 133,404 142,536
Net income....................................... 16,057 6,291 13,778 34,855
Income per share:
Attributable to GENZ Stock:
Basic.......................................... $ 0.53 $ 0.49 $ 0.46 $ 0.66
Diluted........................................ $ 0.49 $ 0.46 $ 0.43 $ 0.62
Attributable to GZMO Stock:
Basic and diluted.............................. $ (0.56) $ (0.64) $ (0.60) $ (0.46)
Attributable to GZSP Stock
Basic and diluted.............................. N/A N/A $ (0.74) $ (0.59)
Pro forma basic and diluted.................... $ (0.73) $ (1.19) N/A N/A
Attributable to GZTR Stock:
Basic and diluted.............................. $ (0.44) $ (0.37) $ (0.25) $ (0.22)
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
1998 1998 1998 1998
----------- ----------- ----------- -----------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Net revenue..................................... $160,551 $174,874 $173,394 $200,516
Gross profit.................................... 99,434 111,436 87,142 130,802
Net income...................................... 7,784 13,096 14,967 26,720
Income per share:
Attributable to GENZ Stock:
Basic....................................... $ 0.43 $ 0.52 $ 0.68 $ 0.52
Diluted..................................... $ 0.42 $ 0.50 $ 0.64 0.49
Attributable to GZMO Stock:
Basic......................................... $ (1.66) $ (1.90) $ (2.06) $ 0.36
Diluted....................................... $ (1.66) $ (1.90) $ (2.06) $ 0.22
Attributable to GZSP Stock
Pro forma basic and diluted................... $ (0.62) $ (0.67) $ (1.45) $ (0.63)
Attributable to GZTR Stock:
Basic and diluted............................. $ (0.57) $ (0.52) $ (0.47) $ (0.44)
NOTE S. SUBSEQUENT EVENTS
ACQUISITION OF BIOMATRIX
In March 1999, we entered into an agreement to acquire Biomatrix, Inc. Upon
completion of the acquisition, we will form a new operating division called
Genzyme Biosurgery and create a new series of common stock to reflect its value
and track its performance. We refer to this stock as "GZBX Stock." In connection
with the merger, the assets of Genzyme Surgical Products and Genzyme Tissue
Repair will become part of Genzyme Biosurgery. In addition, GZSP Stock and GZTR
Stock will be exchanged for GZBX Stock. We will account for the acquisition of
Biomatrix as a purchase.
Biomatrix stockholders will have the option of receiving $37.00 in cash or
one share of GZBX Stock for each share of Biomatrix common stock they hold. The
merger agreement provides, however, that the cash component of the merger
consideration will be capped at 35% of the total consideration, or approximately
$245 million.
GCS-72
Holders of GZSP Stock will receive 0.6060 share of GZBX Stock for each share
of GZSP Stock they hold, and holders of GZTR Stock will receive 0.3352 share of
GZBX Stock for each share of GZTR Stock they hold.
The acquisition, which we expect to complete in the second quarter of 2000,
is subject to:
- approval by Biomatrix's shareholders;
- approval by our shareholders, including separate approvals of the holders
of GZSP Stock and GZTR Stock;
- clearance under federal antitrust laws; and
- other customary closing conditions.
GENZYME TRANSGENICS
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. We will recognize a gain on affiliate sale
of stock of approximately $20 million in the first quarter of 2000.
PUBLIC OFFERING OF GZMO STOCK
In March 2000, we announced a proposed public offering of 3,000,000 shares
of GZMO Stock.
GCS-73
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF GENZYME CORPORATION:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Genzyme
Corporation and its subsidiaries at December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. In addition, in our opinion, the
financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States 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.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
February 23, 2000
GCS-74
GENZYME CORPORATION
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............... $11,299,100 $12,775,200 $ -- $ 3,789,400 $20,284,900
Inventory reserve........ $40,410,100 $ 5,568,400 $ -- $ 8,378,400 $37,600,100
Year ended December 31,
1998:
Allowance for doubtful
accounts............... $ 9,730,700 $ 5,482,000 $ -- $ 3,913,600 $11,299,100
Inventory reserve........ $27,518,300 $31,664,000 $ -- $18,772,200 $40,410,100
Year ended December 31,
1997:
Allowance for doubtful
accounts............... $13,292,900 $ 2,835,000 $ -- $ 6,397,200(1) $ 9,730,700
Inventory reserve........ $10,912,300 $19,505,000 $ -- $ 2,899,000 $27,518,300
- ------------------------
(1) Uncollectible accounts written off, net of recoveries.
GCS-75